[G.R. No. 147402.

January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON
AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and
EMMANUEL M. DALMAN, and Regional Director of COA Region VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari1[1] to annul the Commission on Audits (COA) Resolution dated 3
January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration.
The COA denied petitioner Ranulfo C. Felicianos request for COA to cease all audit services,
and to stop charging auditing fees, to Leyte Metropolitan Water District (LMWD). The COA
also denied petitioners request for COA to refund all auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD.
Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of
auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COAs Regional Director that the water district could not pay the auditing fees.
Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 (PD 198)2[2],
as well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred
petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of
all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3
January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March
2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions
of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water
Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COAs audit jurisdiction over local water
districts in Davao City Water District v. Civil Service Commission and Commission on
Audit,3[3] as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the Board of Directors belong to the
local executives of the local subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private corporation are elected from
among members or stockholders thereof. It would not be amiss at this point to emphasize that a
private corporation is created for the private purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders should be given a free hand to choose
who will compose the governing body of their corporation. But this is not the case here and this
clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as
petitioners request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess
of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the
following issues for resolution:
1.

Whether a Local Water District (LWD) created under PD 198, as amended, is a

government-owned or controlled corporation subject to the audit jurisdiction of
COA;

2.

Whether Section 20 of PD 198, as amended, prohibits COAs certified public

accountants from auditing local water districts; and

3.

Whether Section 18 of RA 6758 prohibits the COA from charging governmentowned and controlled corporations auditing fees.

The Ruling of the Court

The petition lacks merit.
The Constitution and existing laws4[4] mandate COA to audit all government agencies, including
government-owned and controlled corporations (GOCCs) with original charters. An LWD is a
GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for
COAs audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures
or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any
of its subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers and other supporting papers pertaining
thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government agencies or instrumentalities, but
also to government-owned and controlled corporations with original charters as well as other
government-owned or controlled corporations without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine
backed by a long line of cases culminating in Davao City Water District v. Civil Service
Commission5[5] and just recently reiterated in De Jesus v. Commission on Audit.6[6] Petitioner
maintains that LWDs are not government-owned and controlled corporations with original
charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would give a new perspective to the
issue of the true character of water districts.7[7]
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration
(LWUA) and not the LWDs. Petitioner claims that LWDs are created pursuant to and not created
directly by PD 198. Thus, petitioner concludes that PD 198 is not an original charter that would
place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the
Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not expressly
direct the creation of such entities, but only provides for their formation on an optional or

voluntary basis. 8[8] Petitioner adds that the operative act that creates an LWD is the approval of
the Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The Constitution
recognizes two classes of corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled corporations created by
special charters. Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a general
law applicable to all citizens. 9[9] The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave certain individuals, families or
groups special privileges denied to other citizens. 10[10]
In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If
the corporation is private, it must necessarily exist under a general law. Stated differently, only
corporations created under a general law can qualify as private corporations. Under existing
laws, that general law is the Corporation Code,11[11] except that the Cooperative Code governs
the incorporation of cooperatives. 12[12]
The Constitution authorizes Congress to create government-owned or controlled corporations
through special charters. Since private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such corporations are governmentowned or controlled.
Obviously, LWDs are not private corporations because they are not created under the
Corporation Code. LWDs are not registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that [A]ll corporations organized under this code shall
file with the Securities and Exchange Commission articles of incorporation x x x. LWDs have no

articles of incorporation, no incorporators and no stockholders or members. There are no

stockholders or members to elect the board directors of LWDs as in the case of all corporations
registered with the Securities and Exchange Commission. The local mayor or the provincial
governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that
LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision.13[13] (Emphasis
supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the
Constitution only government-owned or controlled corporations may have special charters,
LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs
are private corporations with a special charter is to admit that their existence is constitutionally
infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation
Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD
19814[14] provide:
Section 6.
Formation of District. This Act is the source of authorization and power to
form and maintain a district. For purposes of this Act, a district shall be considered as a
quasi-public corporation performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private corporations under
existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city,
municipality, or province, or region thereof, served by said system, followed by the words Water
District.
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or
more municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is formed, which shall include
those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of
office for each.
(f)
A statement that the district may only be dissolved on the grounds and under the
conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36
of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a
single district, a similar resolution shall be adopted in each city, municipality and province.
xxx
Sec. 25.
Authorization. The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on
LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall exercise the powers,
rights and privileges given to private corporations under existing laws. Without PD 198, LWDs
would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of
LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled
corporations with a special charter.
The phrase government-owned and controlled corporations with original charters means GOCCs
created under special laws and not under the general incorporation law. There is no difference
between the term original charters and special charters. The Court clarified this in National
Service Corporation v. NLRC15[15] by citing the deliberations in the Constitutional Commission,
as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.

MR. ROMULO.
Mr. Presiding Officer, I am amending my original proposed amendment to
now read as follows: including government-owned or controlled corporations WITH ORIGINAL
CHARTERS. The purpose of this amendment is to indicate that government corporations such as
the GSIS and SSS, which have original charters, fall within the ambit of the civil service.
However, corporations which are subsidiaries of these chartered agencies such as the Philippine
Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ.
Just one question, Mr. Presiding Officer. By the term original charters, what
exactly do we mean?
MR. ROMULO.
special law.
MR. FOZ.

And not under the general corporation law.

MR. ROMULO.
MR. FOZ.

We mean that they were created by law, by an act of Congress, or by

That is correct. Mr. Presiding Officer.

With that understanding and clarification, the Committee accepts the amendment.

MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are
out.
MR. ROMULO.

That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission,16[16] the Court reiterated the
meaning of the phrase government-owned and controlled corporations with original charters in
this wise:
By government-owned or controlled corporation with original charter, We mean
government owned or controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service Corporation (NASECO) v. National Labor Relations
Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively from
the deliberations of the 1986 Constitutional Commission in respect of the intent and
meaning of the new phrase with original charter, in effect held that government-owned and
controlled corporations with original charter refer to corporations chartered by special law
as distinguished from corporations organized under our general incorporation statute the
Corporation Code. In NASECO, the company involved had been organized under the general
incorporation statute and was a subsidiary of the National Investment Development Corporation

(NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered by a
special statute. Thus, government-owned or controlled corporations like NASECO are
effectively, excluded from the scope of the Civil Service. (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption.
The Local Government Code17[17] does not vest in the Sangguniang Bayan the power to create
corporations.18[18] What the Local Government Code empowers the Sangguniang Bayan to do is
to provide for the establishment of a waterworks system subject to existing laws. Thus, Section
447(5)(vii) of the Local Government Code provides:
SECTION 447.
Powers, Duties, Functions and Compensation. (a) The sangguniang bayan,
as the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as
provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and
repair of an efficient waterworks system to supply water for the inhabitants; regulate the
construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the
purity and quantity of the water supply of the municipality and, for this purpose, extend the
coverage of appropriate ordinances over all territory within the drainage area of said water
supply and within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping
station, or watershed used in connection with the water service; and regulate the consumption,
use or wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that will
operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling
laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake
of argument that the Sangguniang Bayan has the power to create corporations, the LWDs would
remain government-owned or controlled corporations subject to COAs audit jurisdiction. The
resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the
LWD a government-owned and controlled corporation with an original charter. In any event, the
Court has already ruled in Baguio Water District v. Trajano19[19] that the Sangguniang Bayan
resolution is not the special charter of LWDs, thus:

While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it
may have an original charter. In short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the
Constitution mandates that Congress shall not, except by general law,20[20] provide for the
creation of private corporations. Thus, the Constitution prohibits one special law to create one
private corporation, requiring instead a general law to create private corporations. In contrast, the
same Section 16 states that Government-owned or controlled corporations may be created or
established by special charters. Thus, the Constitution permits Congress to create a GOCC with
a special charter. There is, however, no prohibition on Congress to create several GOCCs of the
same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not
apply to GOCCs. There is no danger of creating special privileges to certain individuals, families
or groups if there is one special law creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special enabling law creates several GOCCs.
Thus, Congress may create GOCCs either by special charters specific to each GOCC, or by one
special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to
LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 19821[21]
declares that LWDs shall be considered quasi-public in nature. Petitioners rationale is that only
private corporations may be deemed quasi-public and not public corporations. Put differently,
petitioner rationalizes that a public corporation cannot be deemed quasi-public because such
corporation is already public. Petitioner concludes that the term quasi-public can only apply to
private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction
depends on the governments ownership or control of a corporation. The nature of the
corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and controlled
corporations with original charters, as well as government-owned or controlled corporations
without original charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs without original
charters refer to corporations created under the Corporation Code but are owned or controlled by
the government. The nature or purpose of the corporation is not material in determining COAs
audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or
special law.

The determining factor of COAs audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans
Bank,22[22] the Court even ruled that the criterion of ownership and control is more important
than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that
the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters. As
the Bank is not owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518,23[23] it clearly does not fall under the Civil Service and
should be regarded as an ordinary commercial corporation. Section 28 of the said law so
provides. The consequence is that the relations of the Bank with its employees should be
governed by the labor laws, under which in fact they have already been paid some of their
claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in
accordance with a specific law, PD 198. There is no private party involved as co-owner in the
creation of an LWD. Just prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because under PD 198 the
municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD
for a fixed term of six years. 24[24] The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors and other personnel of
LWDs are government employees subject to civil service laws 25[25] and anti-graft laws. 26[26]
While Section 8 of PD 198 states that [N]o public official shall serve as director of an LWD, it
only means that the appointees to the board of directors of LWDs shall come from the private
sector. Once such private sector representatives assume office as directors, they become public
officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198
would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service
includes government-owned or controlled corporations with original charters.
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then
they would fall under the term agencies or instrumentalities of the government and thus still
subject to COAs audit jurisdiction. However, the stark and undeniable fact is that the government
owns LWDs. Section 45 27[27] of PD 198 recognizes government ownership of LWDs when

Section 45 states that the board of directors may dissolve an LWD only on the condition that
another public entity has acquired the assets of the district and has assumed all obligations and
liabilities attached thereto. The implication is clear that an LWD is a public and not a private
entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs.
Instead, petitioner advances the theory that the Water Districts owner is the District itself. 28[28]
Assuming for the sake of argument that an LWD is self-owned,29[29] as petitioner describes an
LWD, the government in any event controls all LWDs. First, government officials appoint all
LWD directors to a fixed term of office. Second, any per diem of LWD directors in excess of
P50 is subject to the approval of the Local Water Utilities Administration, and directors can
receive no other compensation for their services to the LWD. 30[30] Third, the Local Water
Utilities Administration can require LWDs to merge or consolidate their facilities or
operations. 31[31] This element of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the
transfer of ownership of water facilities from local government units to their respective water
districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves the
transfer of government assets to a private entity. Petitioner concedes that the owner of the assets
transferred under Section 6 (c) of PD 198 is no other than the LWD itself. 32[32] The transfer of
assets mandated by PD 198 is a transfer of the water systems facilities managed, operated by or
under the control of such city, municipality or province to such (water) district. 33[33] In short, the
transfer is from one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls
LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. 34[34] Section 20 of PD 198
provides:
Sec. 20.
System of Business Administration. The Board shall, as soon as practicable,
prescribe and define by resolution a system of business administration and accounting for the
district, which shall be patterned upon and conform to the standards established by the
Administration. Auditing shall be performed by a certified public accountant not in the

government service. The Administration may, however, conduct annual audits of the fiscal
operations of the district to be performed by an auditor retained by the Administration. Expenses
incurred in connection therewith shall be borne equally by the water district concerned and the
Administration.35[35] (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for
that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence
of Section 20 of PD 198 when it states that [A]uditing shall be performed by a certified public
accountant not in the government service. 36[36]
PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude
GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the Constitution
outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the Commission on
Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to
annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs
from COA audit. The following exchange in the deliberations of the Constitutional Commission
elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding corporation by itself, and
strictly on its own account. Its funds were not very impressive in quantity but underneath that
shell there were billions of pesos in a multiplicity of companies. The PNOC the empty shell
under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the
billions of pesos invested in different corporations underneath it were exempted from the
coverage of the Commission on Audit.

Another example is the United Coconut Planters Bank. The Commission on Audit has
determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed
to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the
basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the
shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential
decree, exempted it from the jurisdiction of the Commission on Audit, it being a private
organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING
ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION
OF THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment
of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we
will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: (c) government-owned or controlled
corporations and their subsidiaries? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD:
Madam President, since this has been accepted, we would like to reply to
the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD:
I think the Commissioner is trying to avoid the situation that happened in
the past, because the same provision was in the 1973 Constitution and yet somehow a law or a
decree was passed where certain institutions were exempted from audit. We are just reaffirming,

emphasizing, the role of the Commission on Audit so that this problem will never arise in the
future.37[37]
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198
prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the
Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of
Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the
Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the
prohibition in Section 18 of RA 6758, 38[38] which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In
order to preserve the independence and integrity of the Commission on Audit (COA), its officials
and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, government-owned or
controlled corporations, and government financial institutions, except those compensation paid
directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including financial
institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part
of their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no doubt,39[39] petitioner asks COA to
discontinue its practice of charging auditing fees to LWDs since such practice allegedly violates
the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from
any government entity except compensation paid directly by COA out of its appropriations

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

WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the
Decision dated 30 January 2001 denying petitioners Motion for Reconsideration are
AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared
VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No
costs.
SO ORDERED.

G.R. No. 155650

July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF
PARAAQUE, and CITY TREASURER OF PARAAQUE, respondents.
DECISION
CARPIO, J.:
The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Paraaque City under Executive Order No. 903,
otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA
Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E.
Marcos. Subsequently, Executive Order Nos. 9091 and 2982 amended the MIAA Charter.
As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately
600 hectares of land,3 including the runways and buildings ("Airport Lands and Buildings") then
under the Bureau of Air Transportation. 4 The MIAA Charter further provides that no portion of
the land transferred to MIAA shall be disposed of through sale or any other mode unless
specifically approved by the President of the Philippines. 5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion
No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption
from real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Paraaque to pay the real estate tax imposed by the City.
MIAA then paid some of the real estate tax already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken
down as follows:
TAX
DECLARATION
E-016-01370
E-016-01374
E-016-01375
E-016-01376
E-016-01377

TAXABLE
YEAR
1992-2001
1992-2001
1992-2001
1992-2001
1992-2001

TAX DUE
19,558,160.00
111,689,424.90
20,276,058.00
58,144,028.00
18,134,614.65

PENALTY
11,201,083.20
68,149,479.59
12,371,832.00
35,477,712.00
11,065,188.59

TOTAL
30,789,243.20
179,838,904.49
32,647,890.00
93,621,740.00
29,199,803.24

E-016-01378
E-016-01379
E-016-01380
*E-016-013-85
*E-016-01387
*E-016-01396
GRAND TOTAL

1992-2001
1992-2001
1992-2001
1998-2001
1998-2001
1998-2001

111,107,950.40 67,794,681.59 178,902,631.99

4,322,340.00
2,637,360.00
6,959,700.00
7,776,436.00
4,744,944.00
12,521,380.00
6,444,810.00
2,900,164.50
9,344,974.50
34,876,800.00
5,694,560.00
50,571,360.00
75,240.00
33,858.00
109,098.00
P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006
On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA
Charter is the proof that MIAA is exempt from real estate tax.
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition
and injunction, with prayer for preliminary injunction or temporary restraining order. The
petition sought to restrain the City of Paraaque from imposing real estate tax on, levying
against, and auctioning for public sale the Airport Lands and Buildings. The petition was
docketed as CA-G.R. SP No. 66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond
the 60-day reglementary period. The Court of Appeals also denied on 27 September 2002
MIAA's motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA
filed on 5 December 2002 the present petition for review. 7
Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the
Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public
market of Barangay La Huerta; and in the main lobby of the Paraaque City Hall. The City of
Paraaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily
Inquirer, a newspaper of general circulation in the Philippines. The notices announced the public
auction sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003, 10:00
a.m., at the Legislative Session Hall Building of Paraaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this
Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents the City of Paraaque, City Mayor of
Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the City
Assessor of Paraaque ("respondents") from auctioning the Airport Lands and Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public auction
the Airport Lands and Buildings. Respondents received the TRO on the same day that the Court
issued it. However, respondents received the TRO only at 1:25 p.m. or three hours after the
conclusion of the public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Paraaque, and the Solicitor
General subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in
the name of MIAA. However, MIAA points out that it cannot claim ownership over these
properties since the real owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for
the benefit of the general public. Since the Airport Lands and Buildings are devoted to public use
and public service, the ownership of these properties remains with the State. The Airport Lands
and Buildings are thus inalienable and are not subject to real estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section
234 of the Local Government Code because the Airport Lands and Buildings are owned by the
Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax
itself. MIAA points out that the reason for tax exemption of public property is that its taxation
would not inure to any public advantage, since in such a case the tax debtor is also the tax
creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the
tax exemption privileges of "government-owned and-controlled corporations" upon the
effectivity of the Local Government Code. Respondents also argue that a basic rule of statutory
construction is that the express mention of one person, thing, or act excludes all others. An
international airport is not among the exceptions mentioned in Section 193 of the Local
Government Code. Thus, respondents assert that MIAA cannot claim that the Airport Lands and
Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where
we held that the Local Government Code has withdrawn the exemption from real estate tax
granted to international airports. Respondents further argue that since MIAA has already paid

some of the real estate tax assessments, it is now estopped from claiming that the Airport Lands
and Buildings are exempt from real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Paraaque, and all proceedings taken pursuant to such assessments, are
void. In such event, the other issues raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the
National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is not
exempt from real estate tax. Respondents claim that the deletion of the phrase "any governmentowned or controlled so exempt by its charter" in Section 234(e) of the Local Government Code
withdrew the real estate tax exemption of government-owned or controlled corporations. The
deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the
entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13)
of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned
or controlled corporation as follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a
stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x.
(Emphasis supplied)
A government-owned or controlled corporation must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter 9 provides:

SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00)
Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:
(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission
on Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986
to be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided
in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must
have members. Even if we assume that the Government is considered as the sole member of
MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of the MIAA Charter mandates
MIAA to remit 20% of its annual gross operating income to the National Treasury. 11 This
prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers."
MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate
an international and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference
is that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or nonstock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, 12
police authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all
the powers of a corporation under the Corporation Law, insofar as these powers are not
inconsistent with the provisions of this Executive Order."15
Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with
the department framework. The MIAA Charter expressly states that transforming MIAA into a
"separate and autonomous body"16 will make its operation more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the Administrative Code. These government
instrumentalities are sometimes loosely called government corporate entities. However, they are
not government-owned or controlled corporations in the strict sense as understood under the
Administrative Code, which is the governing law defining the legal relationship and status of
government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local Government
Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While
the 1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18
When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed
and there must be clear language in the law imposing the tax. Any doubt whether a person,
article or activity is taxable is resolved against taxation. This rule applies with greater force when
local governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of
the government itself or its agencies. In such case the practical effect of an exemption is
merely to reduce the amount of money that has to be handled by government in the
course of its operations. For these reasons, provisions granting exemptions to government
agencies may be construed liberally, in favor of non tax-liability of such agencies.19
There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to
another.
There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery
of essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held in
Basco v. Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of
the very entity which has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public use or
for public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport

Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil
Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned
by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by the public
for international and domestic travel and transportation. The fact that the MIAA collects
terminal fees and other charges from the public does not remove the character of the Airport
Lands and Buildings as properties for public use. The operation by the government of a tollway
does not change the character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they pay the government,
or only those among the public who actually use the road through the toll fees they pay upon
using the road. The tollway system is even a more efficient and equitable manner of taxing the
public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is
of public dominion or not. Article 420 of the Civil Code defines property of public dominion as
one "intended for public use." Even if the government collects toll fees, the road is still "intended
for public use" if anyone can use the road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles that can use the road, the
speed restrictions and other conditions for the use of the road do not affect the public character of
the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed user's tax. This means taxing those among the public who actually use a public
facility instead of taxing all the public including those who never use the particular public
facility. A user's tax is more equitable a principle of taxation mandated in the 1987
Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are
outside the commerce of man. The Court has ruled repeatedly that properties of public
dominion are outside the commerce of man. As early as 1915, this Court already ruled in
Municipality of Cavite v. Rojas that properties devoted to public use are outside the commerce
of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces and in
towns comprises the provincial and town roads, the squares, streets, fountains, and public

waters, the promenades, and public works of general service supported by said towns or
provinces."
The said Plaza Soledad being a promenade for public use, the municipal council of
Cavite could not in 1907 withdraw or exclude from public use a portion thereof in order
to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said
plaza or public place to the defendant for private use the plaintiff municipality exceeded
its authority in the exercise of its powers by executing a contract over a thing of which it
could not dispose, nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are outside of
this commerce, as was decided by the supreme court of Spain in its decision of February
12, 1895, which says: "Communal things that cannot be sold because they are by
their very nature outside of commerce are those for public use, such as the plazas,
streets, common lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion
are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and to
be made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case
of war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when
the emergency has ceased, said temporary occupation or use must also cease, and the
town officials should see to it that the town plazas should ever be kept open to the public
and free from encumbrances or illegal private constructions. 24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale. 25
Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of
any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and
auction sale. This will happen if the City of Paraaque can foreclose and compel the auction sale
of the 600-hectare runway of the MIAA for non-payment of real estate tax.
Before MIAA can encumber26 the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public
Land Law or Commonwealth Act No. 141, which "remains to this day the existing general law
governing the classification and disposition of lands of the public domain other than timber and
mineral lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of
its branches, or of the inhabitants thereof, in accordance with regulations prescribed for
this purposes, or for quasi-public uses or purposes when the public interest requires it,
including reservations for highways, rights of way for railroads, hydraulic power sites,
irrigation systems, communal pastures or lequas communales, public parks, public
quarries, public fishponds, working men's village and other improvements for the public
benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation, entry,
sale, lease, or other disposition until again declared alienable under the provisions of
this Act or by proclamation of the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable.
Since the Airport Lands and Buildings are inalienable in their present status as properties of
public dominion, they are not subject to levy on execution or foreclosure sale. As long as the
Airport Lands and Buildings are reserved for public use, their ownership remains with the State
or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
(1) The President shall have the power to reserve for settlement or public use,
and for specific public purposes, any of the lands of the public domain, the use of
which is not otherwise directed by law. The reserved land shall thereafter remain
subject to the specific public purpose indicated until otherwise provided by law or
proclamation;
x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by
law or presidential proclamation from public use, they are properties of public dominion, owned
by the Republic and outside the commerce of man.
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.
Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like
MIAA to hold title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be
executed in behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the Philippines, by
the President, unless the authority therefor is expressly vested by law in another officer.
(2) For property belonging to the Republic of the Philippines but titled in the name
of any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance. 28
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. x x x x
The land where the Airport is presently located as well as the surrounding land area
of approximately six hundred hectares, are hereby transferred, conveyed and
assigned to the ownership and administration of the Authority, subject to existing
rights, if any. The Bureau of Lands and other appropriate government agencies shall
undertake an actual survey of the area transferred within one year from the promulgation
of this Executive Order and the corresponding title to be issued in the name of the
Authority. Any portion thereof shall not be disposed through sale or through any
other mode unless specifically approved by the President of the Philippines.
(Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing
public airport facilities, runways, lands, buildings and other property, movable or
immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or
air operations, including all equipment which are necessary for the operation of crash fire
and rescue facilities, are hereby transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau
of Air Transportation and Transitory Provisions. The Manila International Airport
including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.
x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines
for both international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to
be upgraded to meet the current and future air traffic and other demands of aviation in
Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities,
agencies and instrumentalities of the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The
purpose was merely to reorganize a division in the Bureau of Air Transportation into a
separate and autonomous body. The Republic remains the beneficial owner of the Airport
Lands and Buildings. MIAA itself is owned solely by the Republic. No party claims any
ownership rights over MIAA's assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be
disposed through sale or through any other mode unless specifically approved by the
President of the Philippines." This only means that the Republic retained the beneficial
ownership of the Airport Lands and Buildings because under Article 428 of the Civil Code, only
the "owner has the right to x x x dispose of a thing." Since MIAA cannot dispose of the Airport
Lands and Buildings, MIAA does not own the Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can authorize the sale or disposition of the Airport
Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the
Republic.
e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing "[t]axes, fees or charges of any kind on the National
Government, its agencies and instrumentalities x x x." The real properties owned by the
Republic are titled either in the name of the Republic itself or in the name of agencies or
instrumentalities of the National Government. The Administrative Code allows real property
owned by the Republic to be titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and continue to be exempt from
real estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption only if
the "beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person." MIAA, as a government instrumentality, is not a taxable person under Section 133(o)
of the Local Government Code. Thus, even if we assume that the Republic has granted to MIAA
the beneficial use of the Airport Lands and Buildings, such fact does not make these real
properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the
beneficial use of such land area for a consideration to a taxable person and therefore such land
area is subject to real estate tax. In Lung Center of the Philippines v. Quezon City, the Court
ruled:
Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such taxes.
On the other hand, the portions of the land occupied by the hospital and portions of the
hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.29
3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural
or juridical" upon the effectivity of the Code. Section 193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions are hereby withdrawn upon
effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues that since
the Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is
not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized under
our laws, natural and juridical persons. Obviously, MIAA is not a natural person.
Thus, the determinative test is not just whether MIAA is a GOCC, but whether
MIAA is a juridical person at all. (Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local taxation is
its status whether MIAA is a juridical person or not. The minority also insists that "Sections
193 and 234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of
exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in
this Code." Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)

By express mandate of the Local Government Code, local governments cannot impose any kind
of tax on national government instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and instrumentalities. The taxing powers of
local governments do not extend to the national government, its agencies and instrumentalities,
"[u]nless otherwise provided in this Code" as stated in the saving clause of Section 133. The
saving clause refers to Section 234(a) on the exception to the exemption from real estate tax of
real property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons
are subject to tax by local governments. The minority insists that the juridical persons exempt
from local taxation are limited to the three classes of entities specifically enumerated as exempt
in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and nonprofit hospitals and educational institutions. It would be belaboring the obvious why the
MIAA does not fall within any of the exempt entities under Section 193. (Emphasis
supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193. Under
this theory, local governments can impose any kind of local tax, and not only real estate tax, on
the national government.
Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some of
the national government instrumentalities vested by law with juridical personalities are: Bangko
Sentral ng Pilipinas,30 Philippine Rice Research Institute,31 Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development
Authority,34 Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish,
courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether MIAA is
exempt from local taxation is not whether MIAA is a juridical person, but whether it is a national
government instrumentality under Section 133(o) of the Local Government Code. Section 133(o)
is the specific provision of law prohibiting local governments from imposing any kind of tax on
the national government, its agencies and instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments
may tax the national government, its agencies and instrumentalities only if the Local
Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of
the Code, which makes the national government subject to real estate tax when it gives the
beneficial use of its real properties to a taxable entity. Section 234(a) of the Local Government
Code provides:
SEC. 234. Exemptions from Real Property Tax The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property
to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to any other
tax. The justification for the exception to the exemption is that the real property, although owned
by the Republic, is not devoted to public use or public service but devoted to the private gain of a
taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on one hand,
and Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less
has any one presenteda persuasive argument that there is such a conflict. The minority's

assumption of an irreconcilable conflict in the statutory provisions is an egregious error for two
reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193 states
"[u]nless otherwise provided in this Code." By its own words, Section 193 admits the superiority
of other provisions of the Local Government Code that limit the exercise of the taxing power in
Section 193. When a provision of law grants a power but withholds such power on certain
matters, there is no conflict between the grant of power and the withholding of power. The
grantee of the power simply cannot exercise the power on matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to tax, and
not merely the exercise of a delegated power to tax. Section 133 states that the taxing powers of
local governments "shall not extend to the levy" of any kind of tax on the national government,
its agencies and instrumentalities. There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local governments
such taxing powers. By their very meaning and purpose, the "common limitations" on the taxing
power prevail over the grant or exercise of the taxing power. If the taxing power of local
governments in Section 193 prevails over the limitations on such taxing power in Section 133,
then local governments can impose any kind of tax on the national government, its agencies and
instrumentalities a gross absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such
property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points out that
Section 2 of the Introductory Provisions of the Administrative Code admits that its definitions
are not controlling when it provides:
SEC. 2. General Terms Defined. Unless the specific words of the text, or the context
as a whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the Administrative
Code. However, this does not automatically mean that the definition in the Administrative Code
does not apply to the Local Government Code. Section 2 of the Administrative Code clearly
states that "unless the specific words x x x of a particular statute shall require a different
meaning," the definition in Section 2 of the Administrative Code shall apply. Thus, unless there
is specific language in the Local Government Code defining the phrase "government-owned or
controlled corporation" differently from the definition in the Administrative Code, the definition
in the Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase "government-owned or controlled corporation." The Administrative
Code, however, expressly defines the phrase "government-owned or controlled corporation." The
inescapable conclusion is that the Administrative Code definition of the phrase "governmentowned or controlled corporation" applies to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in a
unified document the major structural, functional and procedural principles and rules of
governance." Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities. Unless
a statute expressly provides for a different status and relationship for a specific government unit
or entity, the provisions of the Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled corporation"
should apply only to corporations organized under the Corporation Code, the general
incorporation law, and not to corporations created by special charters. The minority sees no
reason why government corporations with special charters should have a capital stock. Thus, the
minority declares:
I submit that the definition of "government-owned or controlled corporations" under the
Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital structure
for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled

corporation" does not distinguish between one incorporated under the Corporation Code or under
a special charter. Where the law does not distinguish, courts should not distinguish.
Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter 40 of the Land Bank of the Philippines
provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion
pesos, divided into seven hundred and eighty million common shares with a par value of
ten pesos each, which shall be fully subscribed by the Government, and one hundred and
twenty million preferred shares with a par value of ten pesos each, which shall be issued
in accordance with the provisions of Sections seventy-seven and eighty-three of this
Code. (Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank
shall be Five Billion Pesos to be divided into Fifty Million common shares with par value
of P100 per share. These shares are available for subscription by the National
Government. Upon the effectivity of this Charter, the National Government shall
subscribe to Twenty-Five Million common shares of stock worth Two Billion Five
Hundred Million which shall be deemed paid for by the Government with the net asset
values of the Bank remaining after the transfer of assets and liabilities as provided in
Section 30 hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their special
charters are the Philippine Crop Insurance Corporation, 42 Philippine International Trading
Corporation,43 and the Philippine National Bank44 before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations organized
under special charters as stock corporations are subject to real estate tax on real properties owned
by them. To rule that they are not government-owned or controlled corporations because they are
not registered with the Securities and Exchange Commission would remove them from the reach
of Section 234 of the Local Government Code, thus exempting them from real estate tax.
Third, the government-owned or controlled corporations created through special charters are
those that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The
first condition is that the government-owned or controlled corporation must be established for
the common good. The second condition is that the government-owned or controlled corporation
must meet the test of economic viability. Section 16, Article XII of the 1987 Constitution
provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the

common good and subject to the test of economic viability. (Emphasis and underscoring
supplied)
The Constitution expressly authorizes the legislature to create "government-owned or controlled
corporations" through special charters only if these entities are required to meet the twin
conditions of common good and economic viability. In other words, Congress has no power to
create government-owned or controlled corporations with special charters unless they are made
to comply with the two conditions of common good and economic viability. The test of
economic viability applies only to government-owned or controlled corporations that perform
economic or commercial activities and need to compete in the market place. Being essentially
economic vehicles of the State for the common good meaning for economic development
purposes these government-owned or controlled corporations with special charters are usually
organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing
governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are not
the "government-owned or controlled corporations" referred to in Section 16, Article XII of the
1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special charters corporations that
perform economic or commercial activities, such entities known as "government-owned or
controlled corporations" must meet the test of economic viability because they compete in the
market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their income
to meet operating expenses solely from commercial transactions in competition with the private
sector. The intent of the Constitution is to prevent the creation of government-owned or
controlled corporations that cannot survive on their own in the market place and thus merely
drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If a
government corporation loses, then it makes its claim upon the taxpayers' money through
new equity infusions from the government and what is always invoked is the common

good. That is the reason why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been
relocated to agrarian reform, to social services like health and education, to augment the
salaries of grossly underpaid public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they become
viable. And so, Madam President, I reiterate, for the committee's consideration and I am
glad that I am joined in this proposal by Commissioner Foz, the insertion of the standard
of "ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common
good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the
test of economic viability." The addition includes the ideas that they must show capacity
to function efficiently in business and that they should not go into activities which the
private sector can do better. Moreover, economic viability is more than financial viability
but also includes capability to make profit and generate benefits not quantifiable in
financial terms.46 (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The noneconomic viability of rendering such essential public service does not excuse the State from
withholding such essential services from the public.
However, government-owned or controlled corporations with special charters, organized
essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized under
their special charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because
there is no competing international airport operated by the private sector. MIAA performs an
essential public service as the primary domestic and international airport of the Philippines. The
operation of an international airport requires the presence of personnel from the following
government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;
3. The quarantine office of the Department of Health, to enforce health measures against
the spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the entry
of terrorists and the escape of criminals, as well as to secure the airport premises from
terrorist attack or seizure;
6. The Air Traffic Office of the Department of Transportation and Communications, to
authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off
from, the airport; and
7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.
All these agencies of government perform government functions essential to the operation of an
international airport.
MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes on
passengers and airlines. The terminal fees that MIAA charges every passenger are regulatory or
administrative fees47 and not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure, MIAA
remains a government instrumentality under Section 2(10) of the Introductory Provisions of the
Administrative Code. More importantly, as long as MIAA renders essential public services, it

need not comply with the test of economic viability. Thus, MIAA is outside the scope of the
phrase "government-owned or controlled corporations" under Section 16, Article XII of the 1987
Constitution.
The minority belittles the use in the Local Government Code of the phrase "government-owned
or controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987
Constitution prescribes explicit conditions for the creation of "government-owned or controlled
corporations." The Administrative Code defines what constitutes a "government-owned or
controlled corporation." To belittle this phrase as "clarificatory or illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)
of the Introductory Provisions of the Administrative Code because it is not organized as a stock
or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of
tax by local governments under Section 133(o) of the Local Government Code. The exception to
the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity
under the Local Government Code. Such exception applies only if the beneficial use of real
property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings are
properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are owned by the Republic and thus exempt from real estate tax under Section 234(a)
of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or

controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or
charges of any kind" by local governments. The only exception is when MIAA leases its real
property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like private parties are
subject to real estate tax by the City of Paraaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted
to public use, are properties of public dominion and thus owned by the State or the Republic of
the Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which
includes public airports and seaports, as properties of public dominion and owned by the
Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever
that the Airport Lands and Buildings are expressly exempt from real estate tax under Section
234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of
public dominion are not subject to execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the
Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We
DECLARE the Airport Lands and Buildings of the Manila International Airport Authority
EXEMPT from the real estate tax imposed by the City of Paraaque. We declare VOID all the
real estate tax assessments, including the final notices of real estate tax delinquencies, issued by
the City of Paraaque on the Airport Lands and Buildings of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased to
private parties. We also declare VOID the assailed auction sale, and all its effects, of the Airport
Lands and Buildings of the Manila International Airport Authority.
No costs.
SO ORDERED.
Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,
Corona, Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr., J.J.,
concur.

x-------------------------------------------------------------------------------x
DISSENTING OPINION
TINGA, J. :
The legally correct resolution of this petition would have had the added benefit of an utterly fair
and equitable result a recognition of the constitutional and statutory power of the City of
Paraaque to impose real property taxes on the Manila International Airport Authority (MIAA),

but at the same time, upholding a statutory limitation that prevents the City of Paraaque from
seizing and conducting an execution sale over the real properties of MIAA. In the end, all that
the City of Paraaque would hold over the MIAA is a limited lien, unenforceable as it is through
the sale or disposition of MIAA properties. Not only is this the legal effect of all the relevant
constitutional and statutory provisions applied to this case, it also leaves the room for negotiation
for a mutually acceptable resolution between the City of Paraaque and MIAA.
Instead, with blind but measured rage, the majority today veers wildly off-course, shattering
statutes and judicial precedents left and right in order to protect the precious Ming vase that is
the Manila International Airport Authority (MIAA). While the MIAA is left unscathed, it is
surrounded by the wreckage that once was the constitutional policy, duly enacted into law, that
was local autonomy. Make no mistake, the majority has virtually declared war on the seventy
nine (79) provinces, one hundred seventeen (117) cities, and one thousand five hundred (1,500)
municipalities of the Philippines.1
The icing on this inedible cake is the strained and purposely vague rationale used to justify the
majority opinion. Decisions of the Supreme Court are expected to provide clarity to the parties
and to students of jurisprudence, as to what the law of the case is, especially when the doctrines
of long standing are modified or clarified. With all due respect, the decision in this case is plainly
so, so wrong on many levels. More egregious, in the majority's resolve to spare the Manila
International Airport Authority (MIAA) from liability for real estate taxes, no clear-cut rule
emerges on the important question of the power of local government units (LGUs) to tax
government corporations, instrumentalities or agencies.
The majority would overturn sub silencio, among others, at least one dozen precedents
enumerated below:
1) Mactan-Cebu International Airport Authority v. Hon. Marcos,2 the leading case penned in
1997 by recently retired Chief Justice Davide, which held that the express withdrawal by the
Local Government Code of previously granted exemptions from realty taxes applied to
instrumentalities and government-owned or controlled corporations (GOCCs) such as the
Mactan-Cebu International Airport Authority (MCIAA). The majority invokes the ruling in
Basco v. Pagcor,3 a precedent discredited in Mactan, and a vanguard of a doctrine so noxious to
the concept of local government rule that the Local Government Code was drafted precisely to
counter such philosophy. The efficacy of several rulings that expressly rely on Mactan, such as
PHILRECA v. DILG Secretary,4 City Government of San Pablo v. Hon. Reyes5 is now put in
question.
2) The rulings in National Power Corporation v. City of Cabanatuan,6 wherein the Court, through
Justice Puno, declared that the National Power Corporation, a GOCC, is liable for franchise taxes
under the Local Government Code, and succeeding cases that have relied on it such as Batangas
Power Corp. v. Batangas City7 The majority now states that deems instrumentalities as defined
under the Administrative Code of 1987 as purportedly beyond the reach of any form of taxation
by LGUs, stating "[l]ocal governments are devoid of power to tax the national government, its
agencies and instrumentalities."8 Unfortunately, using the definition employed by the majority,
as provided by Section 2(d) of the Administrative Code, GOCCs are also considered as

instrumentalities, thus leading to the astounding conclusion that GOCCs may not be taxed by
LGUs under the Local Government Code.
3) Lung Center of the Philippines v. Quezon City, 9 wherein a unanimous en banc Court held that
the Lung Center of the Philippines may be liable for real property taxes. Using the majority's
reasoning, the Lung Center would be properly classified as an instrumentality which the majority
now holds as exempt from all forms of local taxation.10
4) City of Davao v. RTC,11 where the Court held that the Government Service Insurance System
(GSIS) was liable for real property taxes for the years 1992 to 1994, its previous exemption
having been withdrawn by the enactment of the Local Government Code. 12 This decision, which
expressly relied on Mactan, would be directly though silently overruled by the majority.
5) The common essence of the Court's rulings in the two Philippine Ports Authority v. City of
Iloilo,13 cases penned by Justices Callejo and Azcuna respectively, which relied in part on
Mactan in holding the Philippine Ports Authority (PPA) liable for realty taxes, notwithstanding
the fact that it is a GOCC. Based on the reasoning of the majority, the PPA cannot be considered
a GOCC. The reliance of these cases on Mactan, and its rationale for holding governmental
entities like the PPA liable for local government taxation is mooted by the majority.
6) The 1963 precedent of Social Security System Employees Association v. Soriano, 14 which
declared the Social Security Commission (SSC) as a GOCC performing proprietary functions.
Based on the rationale employed by the majority, the Social Security System is not a GOCC. Or
perhaps more accurately, "no longer" a GOCC.
7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit Authority
v. Central Board of Assessment. 15 The characterization therein of the Light Rail Transit
Authority (LRTA) as a "service-oriented commercial endeavor" whose patrimonial property is
subject to local taxation is now rendered inconsequential, owing to the majority's thinking that an
entity such as the LRTA is itself exempt from local government taxation16, irrespective of the
functions it performs. Moreover, based on the majority's criteria, LRTA is not a GOCC.
8) The cases of Teodoro v. National Airports Corporation17 and Civil Aeronautics
Administration v. Court of Appeals. 18 wherein the Court held that the predecessor agency of the
MIAA, which was similarly engaged in the operation, administration and management of the
Manila International Agency, was engaged in the exercise of proprietary, as opposed to
sovereign functions. The majority would hold otherwise that the property maintained by MIAA
is actually patrimonial, thus implying that MIAA is actually engaged in sovereign functions.
9) My own majority in Phividec Industrial Authority v. Capitol Steel, 19 wherein the Court held
that the Phividec Industrial Authority, a GOCC, was required to secure the services of the Office
of the Government Corporate Counsel for legal representation.20 Based on the reasoning of the
majority, Phividec would not be a GOCC, and the mandate of the Office of the Government
Corporate Counsel extends only to GOCCs.

10) Two decisions promulgated by the Court just last month (June 2006), National Power
Corporation v. Province of Isabela21 and GSIS v. City Assessor of Iloilo City. 22 In the former, the
Court pronounced that "[a]lthough as a general rule, LGUs cannot impose taxes, fees, or charges
of any kind on the National Government, its agencies and instrumentalities, this rule admits of an
exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities." Yet the majority now rules that the exceptions in the
LGC no longer hold, since "local governments are devoid of power to tax the national
government, its agencies and instrumentalities."23 The ruling in the latter case, which held the
GSIS as liable for real property taxes, is now put in jeopardy by the majority's ruling.
There are certainly many other precedents affected, perhaps all previous jurisprudence regarding
local government taxation vis-a-vis government entities, as well as any previous definitions of
GOCCs, and previous distinctions between the exercise of governmental and proprietary
functions (a distinction laid down by this Court as far back as 1916 24). What is the reason offered
by the majority for overturning or modifying all these precedents and doctrines? None is given,
for the majority takes comfort instead in the pretense that these precedents never existed. Only
children should be permitted to subscribe to the theory that something bad will go away if you
pretend hard enough that it does not exist.
I.
Case Should Have Been Decided
Following Mactan Precedent
The core issue in this case, whether the MIAA is liable to the City of Paraaque for real property
taxes under the Local Government Code, has already been decided by this Court in the Mactan
case, and should have been resolved by simply applying precedent.
Mactan Explained
A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority
(MCIAA) claimed that it was exempt from payment of real property taxes to the City of Cebu,
invoking the specific exemption granted in Section 14 of its charter, Republic Act No. 6958, and
its status as an instrumentality of the government performing governmental functions. 25
Particularly, MCIAA invoked Section 133 of the Local Government Code, precisely the same
provision utilized by the majority as the basis for MIAA's exemption. Section 133 reads:
Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
xxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. (emphasis and underscoring supplied).

However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless
otherwise provided herein." It then considered the other relevant provisions of the Local
Government Code, particularly the following:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code,
tax exemption or incentives granted to, or enjoyed by all persons, whether natural or juridical,
including government-owned and controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code. 26
SECTION 232. Power to Levy Real Property Tax. A province or city or a municipality within
the Metropolitan Manila area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvements not hereafter specifically exempted. 27
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person:
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned and controlled corporations engaged in the distribution of water
and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;
and
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or juridical, including all governmentowned or controlled corporations are hereby withdrawn upon the effectivity of this Code.28
Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to
tax the National Government, its agencies and instrumentalities, as evidenced by these cited
provisions which "otherwise provided." But what was the extent of the limitation under Section
133? This is how the Court, correctly to my mind, defined the parameters in Mactan:
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and

the exceptions thereto. The use of exceptions or provisos in these sections, as shown by the
following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in Section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause
in Section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided
herein," with the "herein" to mean, of course, the section, it should have used the clause "unless
otherwise provided in this Code." The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local government units and, where exceptions
were intended, the exceptions are explicitly indicated in the next. For instance, in item (a) which
excepts income taxes "when levied on banks and other financial institutions"; item (d) which
excepts "wharfage on wharves constructed and maintained by the local government unit
concerned"; and item (1) which excepts taxes, fees and charges for the registration and issuance
of licenses or permits for the driving of "tricycles." It may also be observed that within the body
itself of the section, there are exceptions which can be found only in other parts of the LGC, but
the section interchangeably uses therein the clause, "except as otherwise provided herein" as in
items (c) and (i), or the clause "except as provided in this Code" in item (j). These clauses would
be obviously unnecessary or mere surplusages if the opening clause of the section were "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein." In any event,
even if the latter is used, since under Section 232 local government units have the power to levy
real property tax, except those exempted therefrom under Section 234, then Section 232 must be
deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133, the taxing powers of local government units cannot extend to
the levy of, inter alia, "taxes, fees and charges of any kind on the National Government, its
agencies and instrumentalities, and local government units"; however, pursuant to Section 232,
provinces, cities, and municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person," as provided in item (a) of the first paragraph of
Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or judicial persons,
including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to
local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise provided in the LGC. The latter
proviso could refer to Section 234 which enumerates the properties exempt from real property

tax. But the last paragraph of Section 234 further qualifies the retention of the exemption insofar
as real property taxes are concerned by limiting the retention only to those enumerated therein;
all others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as to real property owned by the Republic of the Philippines or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a taxable person for
consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under
any of the exceptions provided in Section 234, but not under Section 133, as it now asserts,
since, as shown above, the said section is qualified by Sections 232 and 234.29
The Court in Mactan acknowledged that under Section 133, instrumentalities were generally
exempt from all forms of local government taxation, unless otherwise provided in the Code. On
the other hand, Section 232 "otherwise provided" insofar as it allowed LGUs to levy an ad
valorem real property tax, irrespective of who owned the property. At the same time, the
imposition of real property taxes under Section 232 is in turn qualified by the phrase "not
hereinafter specifically exempted." The exemptions from real property taxes are enumerated in
Section 234, which specifically states that only real properties owned "by the Republic of the
Philippines or any of its political subdivisions" are exempted from the payment of the tax.
Clearly, instrumentalities or GOCCs do not fall within the exceptions under Section 234. 30
Mactan Overturned the
Precedents Now Relied
Upon by the Majority
But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR, 31 decided
before the enactment of the Local Government Code. The Court in Basco declared the PAGCOR
as exempt from local taxes, justifying the exemption in this wise:
Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original charter, PD 1869.
All of its shares of stocks are owned by the National Government. In addition to its corporate
powers (Sec. 3, Title II, PD 1869) it also exercises regulatory powers xxx
PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from

local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a
mere Local government.
"The states have no power by taxation or otherwise, to retard impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government." (McCulloch v. Marland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the
United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activates or enterprise using the power to tax as
"a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it.32
Basco is as strident a reiteration of the old guard view that frowned on the principle of local
autonomy, especially as it interfered with the prerogatives and privileges of the national
government. Also consider the following citation from Maceda v. Macaraig, 33 decided the same
year as Basco. Discussing the rule of construction of tax exemptions on government
instrumentalities, the sentiments are of a similar vein.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the
case of exemptions in favor of a government political subdivision or instrumentality.
The basis for applying the rule of strict construction to statutory provisions granting tax
exemptions or deductions, even more obvious than with reference to the affirmative or levying
provisions of tax statutes, is to minimize differential treatment and foster impartiality, fairness,
and equality of treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its operations.
For these reasons, provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.

In the case of property owned by the state or a city or other public corporations, the express
exemption should not be construed with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property "exemption is the rule and taxation
the exception."34
Strikingly, the majority cites these two very cases and the stodgy rationale provided therein. This
evinces the perspective from which the majority is coming from. It is admittedly a viewpoint
once shared by this Court, and en vogue prior to the enactment of the Local Government Code of
1991.
However, the Local Government Code of 1991 ushered in a new ethos on how the art of
governance should be practiced in the Philippines, conceding greater powers once held in the
private reserve of the national government to LGUs. The majority might have private qualms
about the wisdom of the policy of local autonomy, but the members of the Court are not expected
to substitute their personal biases for the legislative will, especially when the 1987 Constitution
itself promotes the principle of local autonomy.
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among
the different local government units their powers, responsibilities, and resources, and provide for
the qualifications, election, appointment and removal, term, salaries, powers and functions and
duties of local officials, and all other matters relating to the organization and operation of the
local units.
xxx
Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.
xxx

The Court in Mactan recognized that a new day had dawned with the enactment of the 1987
Constitution and the Local Government Code of 1991. Thus, it expressly rejected the contention
of the MCIAA that Basco was applicable to them. In doing so, the language of the Court was
dramatic, if only to emphasize how monumental the shift in philosophy was with the enactment
of the Local Government Code:
Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of
the [Local Government Code]. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental functions may be
subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy,
no one can doubt its wisdom.35 (emphasis supplied)
The Court Has Repeatedly
Reaffirmed Mactan Over the
Precedents Now Relied Upon
By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead.
The notion that instrumentalities may be subjected to local taxation by LGUs was again affirmed
in National Power Corporation v. City of Cabanatuan, 36 which was penned by Justice Puno. NPC
or Napocor, invoking its continued exemption from payment of franchise taxes to the City of
Cabanatuan, alleged that it was an instrumentality of the National Government which could not
be taxed by a city government. To that end, Basco was cited by NPC. The Court had this to say
about Basco.
xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation relied upon by
the petitioner to support its claim no longer applies. To emphasize, the Basco case was decided
prior to the effectivity of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However, as this Court ruled in the
case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos, nothing prevents
Congress from decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax. In enacting the LGC, Congress exercised its
prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after
reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax.37
In the 2003 case of Philippine Ports Authority v. City of Iloilo, 38 the Court, in the able ponencia
of Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes were
assessed under the old Real Property Tax Code and not the Local Government Code, the Court
again cited Mactan to refute PPA's invocation of Basco as the basis of its exemption.

[Basco] did not absolutely prohibit local governments from taxing government instrumentalities.
In fact we stated therein:
The power of local government to "impose taxes and fees" is always subject to "limitations"
which Congress may provide by law. Since P.D. 1869 remains an "operative" law until
"amended, repealed or revoked". . . its "exemption clause" remains an exemption to the exercise
of the power of local governments to impose taxes and fees.
Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos,
where the Basco case was similarly invoked for tax exemption, we stated: "[N]othing can
prevent Congress from decreeing that even instrumentalities or agencies of the Government
performing governmental functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom." The fact that tax
exemptions of government-owned or controlled corporations have been expressly withdrawn by
the present Local Government Code clearly attests against petitioner's claim of absolute
exemption of government instrumentalities from local taxation. 39
Just last month, the Court in National Power Corporation v. Province of Isabela 40 again rejected
Basco in emphatic terms. Held the Court, through Justice Callejo, Sr.:
Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case, the
Court noted primarily that the Basco case was decided prior to the effectivity of the LGC, when
no law empowering the local government units to tax instrumentalities of the National
Government was in effect. It further explained that in enacting the LGC, Congress empowered
the LGUs to impose certain taxes even on instrumentalities of the National Government. 41
The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo 42
case, a decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's
properties at public auction for failure to pay realty taxes. The Court again reiterated that "it was
the intention of Congress to withdraw the tax exemptions granted to or presently enjoyed by all
persons, including government-owned or controlled corporations, upon the effectivity" of the
Code.43 The Court in the second Public Ports Authority case likewise cited Mactan as providing
the "raison d'etre for the withdrawal of the exemption," namely, "the State policy to ensure
autonomy to local governments and the objective of the [Local Government Code] that they
enjoy genuine and meaningful local autonomy to enable them to attain their fullest development
as self-reliant communities. . . . "44
Last year, the Court, in City of Davao v. RTC, 45 affirmed that the legislated exemption from real
property taxes of the Government Service Insurance System (GSIS) was removed under the
Local Government Code. Again, Mactan was relied upon as the governing precedent. The
removal of the tax exemption stood even though the then GSIS law 46 prohibited the removal of
GSIS' tax exemptions unless the exemption was specifically repealed, "and a provision is enacted
to substitute the declared policy of exemption from any and all taxes as an essential factor for the
solvency of the fund."47 The Court, citing established doctrines in statutory construction and
Duarte v. Dade48 ruled that such proscription on future legislation was itself prohibited, as "the
legislature cannot bind a future legislature to a particular mode of repeal." 49

And most recently, just less than one month ago, the Court, through Justice Corona in
Government Service Insurance System v. City Assessor of Iloilo 50 again affirmed that the Local
Government Code removed the previous exemption from real property taxes of the GSIS. Again
Mactan was cited as having "expressly withdrawn the [tax] exemption of the [GOCC]. 51
Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule
employed by the Court since its adoption, the doctrine therein consistent with the Local
Government Code. Corollarily, Basco, the polar opposite of Mactan has been emphatically
rejected and declared inconsistent with the Local Government Code.
II.
Majority, in Effectively Overturning Mactan,
Refuses to Say Why Mactan Is Wrong
The majority cites Basco in support. It does not cite Mactan, other than an incidental reference
that it is relied upon by the respondents. 52 However, the ineluctable conclusion is that the
majority rejects the rationale and ruling in Mactan. The majority provides for a wildly different
interpretation of Section 133, 193 and 234 of the Local Government Code than that employed by
the Court in Mactan. Moreover, the parties in Mactan and in this case are similarly situated, as
can be obviously deducted from the fact that both petitioners are airport authorities operating
under similarly worded charters. And the fact that the majority cites doctrines contrapuntal to the
Local Government Code as in Basco and Maceda evinces an intent to go against the Court's
jurisprudential trend adopting the philosophy of expanded local government rule under the Local
Government Code.
Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the
majority's studied murkiness vis--vis the Mactan precedent. The majority is obviously
inconsistent with Mactan and there is no way these two rulings can stand together. Following
basic principles in statutory construction, Mactan will be deemed as giving way to this new
ruling.
However, the majority does not bother to explain why Mactan is wrong. The interpretation in
Mactan of the relevant provisions of the Local Government Code is elegant and rational, yet the
majority refuses to explain why this reasoning of the Court in Mactan is erroneous. In fact, the
majority does not even engage Mactan in any meaningful way. If the majority believes that
Mactan may still stand despite this ruling, it remains silent as to the viable distinctions between
these two cases.
The majority's silence on Mactan is baffling, considering how different this new ruling is with
the ostensible precedent. Perhaps the majority does not simply know how to dispense with the
ruling in Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more
honorable end than death by amnesia or ignonominous disregard. The majority could have
devoted its discussion in explaining why it thinks Mactan is wrong, instead of pretending that
Mactan never existed at all. Such an approach might not have won the votes of the minority, but

at least it would provide some degree of intellectual clarity for the parties, LGUs and the national
government, students of jurisprudence and practitioners. A more meaningful debate on the matter
would have been possible, enriching the study of law and the intellectual dynamic of this Court.
There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the
MIAA are similarly situated. They are both, as will be demonstrated, GOCCs, commonly
engaged in the business of operating an airport. They are the owners of airport properties they
respectively maintain and hold title over these properties in their name. 53 These entities are both
owned by the State, and denied by their respective charters the absolute right to dispose of their
properties without prior approval elsewhere. 54 Both of them are
not empowered to obtain loans or encumber their properties without prior approval the prior
approval of the President.55
III.
Instrumentalities, Agencies
And GOCCs Generally
Liable for Real Property Tax
I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my
position lies with Mactan, which will further demonstrate why the majority has found it
inconvenient to even grapple with the precedent that is Mactan in the first place.
Mactan held that the prohibition on taxing the national government, its agencies and
instrumentalities under Section 133 is qualified by Section 232 and Section 234, and
accordingly, the only relevant exemption now applicable to these bodies is as provided under
Section 234(o), or on "real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person."
It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a
governmental entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all
persons, including [GOCCs]", thus encompassing the two classes of persons recognized under
our laws, natural persons56 and juridical persons.57
The fact that the Local Government Code mandates the withdrawal of previously granted
exemptions evinces certain key points. If an entity was previously granted an express exemption
from real property taxes in the first place, the obvious conclusion would be that such entity
would ordinarily be liable for such taxes without the exemption. If such entities were already
deemed exempt due to some overarching principle of law, then it would be a redundancy or
surplusage to grant an exemption to an already exempt entity. This fact militates against the

claim that MIAA is preternaturally exempt from realty taxes, since it required the enactment of
an express exemption from such taxes in its charter.
Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person.
The general rule laid down in Section 232 is given short shrift. In arriving at this conclusion,
several leaps in reasoning are committed.
Majority's Flawed Definition
of GOCCs.
The majority takes pains to assert that the MIAA is not a GOCC, but rather an instrumentality.
However, and quite grievously, the supposed foundation of this assertion is an adulteration.
The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation.58 Most tellingly, the majority selectively cites a portion of Section 2(10)
of the Administrative Code of 1987, as follows:
Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. xxx59 (emphasis omitted)
However, Section 2(10) of the Administrative Code, when read in full, makes an important
clarification which the majority does not show. The portions omitted by the majority are
highlighted below:
(10)Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. This term includes regulatory agencies, chartered institutions and
governmentowned or controlled corporations.60
Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is
also worth citing in full:
(4) Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a
local government or a distinct unit therein. (emphasis supplied)61
Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an
agency of the National Government. Thus, there actually is no point in the majority's assertion
that MIAA is not a GOCC, since based on the majority's premise of Section 133 as the key
provision, the material question is whether MIAA is either an instrumentality, an agency, or the
National Government itself. The very provisions of the Administrative Code provide that a

GOCC can be either an instrumentality or an agency, so why even bother to extensively discuss
whether or not MIAA is a GOCC?
Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer,62 the
Supreme Court already noted that a corporation of which the government is the majority
stockholder "remains an agency or instrumentality of government."63
Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal.
However, the entire discussion of the majority on the definition of a GOCC, obiter as it may
ultimately be, deserves emphatic refutation. The views of the majority on this matter are very
dangerous, and would lead to absurdities, perhaps unforeseen by the majority. For in fact, the
majority effectively declassifies many entities created and recognized as GOCCs and would give
primacy to the Administrative Code of 1987 rather than their respective charters as to the
definition of these entities.
Majority Ignores the Power
Of Congress to Legislate and
Define Chartered Corporations
First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must
be "organized as a stock or non-stock corporation," as defined under the Corporation Code. To
insist on this as an absolute rule fails on bare theory. Congress has the undeniable power to
create a corporation by legislative charter, and has been doing so throughout legislative history.
There is no constitutional prohibition on Congress as to what structure these chartered
corporations should take on. Clearly, Congress has the prerogative to create a corporation in
whatever form it chooses, and it is not bound by any traditional format. Even if there is a
definition of what a corporation is under the Corporation Code or the Administrative Code, these
laws are by no means sacrosanct. It should be remembered that these two statutes fall within the
same level of hierarchy as a congressional charter, since they all are legislative enactments.
Certainly, Congress can choose to disregard either the Corporation Code or the Administrative
Code in defining the corporate structure of a GOCC, utilizing the same extent of legislative
powers similarly vesting it the putative ability to amend or abolish the Corporation Code or the
Administrative Code.
These principles are actually recognized by both the Administrative Code and the Corporation
Code. The definition of GOCCs, agencies and instrumentalities under the Administrative Code
are laid down in the section entitled "General Terms Defined," which qualifies:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole,
or a particular statute, shall require a different meaning: (emphasis supplied)
xxx
Similar in vein is Section 6 of the Corporation Code which provides:

SEC. 4. Corporations created by special laws or charters. Corporations created by special laws
or charters shall be governed primarily by the provisions of the special law or charter creating
them or applicable to them, supplemented by the provisions of this Code, insofar as they are
applicable. (emphasis supplied)
Thus, the clear doctrine emerges the law that governs the definition of a corporation or entity
created by Congress is its legislative charter. If the legislative enactment defines an entity as a
corporation, then it is a corporation, no matter if the Corporation Code or the Administrative
Code seemingly provides otherwise. In case of conflict between the legislative charter of a
government corporation, on one hand, and the Corporate Code and the Administrative Code, on
the other, the former always prevails.
Majority, in Ignoring the
Legislative Charters, Effectively
Classifies Duly Established GOCCs,
With Disastrous and Far Reaching
Legal Consequences
Second, the majority claims that MIAA does not qualify either as a stock or non-stock
corporation, as defined under the Corporation Code. It explains that the MIAA is not a stock
corporation because it does not have any capital stock divided into shares. Neither can it be
considered as a non-stock corporation because it has no members, and under Section 87, a nonstock corporation is one where no part of its income is distributable as dividends to its members,
trustees or officers.
This formulation of course ignores Section 4 of the Corporation Code, which again provides that
corporations created by special laws or charters shall be governed primarily by the provisions of
the special law or charter, and not the Corporation Code.
That the MIAA cannot be considered a stock corporation if only because it does not have a stock
structure is hardly a plausible proposition. Indeed, there is no point in requiring a capital stock
structure for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.
Admittedly, there are GOCCs established in such a manner, such as the National Power
Corporation (NPC), which is provided with authorized capital stock wholly subscribed and paid
for by the Government of the Philippines, divided into shares but at the same time, is prohibited
from transferring, negotiating, pledging, mortgaging or otherwise giving these shares as security
for payment of any obligation.64 However, based on the Corporation Code definition relied upon
by the majority, even the NPC cannot be considered as a stock corporation. Under Section 3 of
the Corporation Code, stock corporations are defined as being "authorized to distribute to the
holders of its shares dividends or allotments of the surplus profits on the basis of the shares

held."65 On the other hand, Section 13 of the NPC's charter states that "the Corporation shall be
non-profit and shall devote all its returns from its capital investment, as well as excess revenues
from its operation, for expansion."66 Can the holder of the shares of NPC, the National
Government, receive its surplus profits on the basis of its shares held? It cannot, according to the
NPC charter, and hence, following Section 3 of the Corporation Code, the NPC is not a stock
corporation, if the majority is to be believed.
The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income
as dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of
its gross operating income to the national government. How about the Philippine Health
Insurance Corporation, created with the "status of a tax-exempt government corporation attached
to the Department of Health" under Rep. Act No. 7875. 67 It too cannot be considered as a stock
corporation because it has no capital stock structure. But using the criteria of the majority, it is
doubtful if it would pass muster as a non-stock corporation, since the PHIC or Philhealth, as it is
commonly known, is expressly empowered "to collect, deposit, invest, administer and disburse"
the National Health Insurance Fund. 68 Or how about the Social Security System, which under its
revised charter, Republic Act No. 8282, is denominated as a "corporate body." 69 The SSS has no
capital stock structure, but has capital comprised of contributions by its members, which are
eventually remitted back to its members. Does this disqualify the SSS from classification as a
GOCC, notwithstanding this Court's previous pronouncement in Social Security System
Employees Association v. Soriano?70
In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or nonstock,71 declare and remit at least fifty percent (50%) of their annual net earnings as cash, stock
or property dividends to the National Government. 72 But according to the majority, non-stock
corporations are prohibited from declaring any part of its income as dividends. But if Republic
Act No. 7656 requires even non-stock corporations to declare dividends from income, should it
not follow that the prohibition against declaration of dividends by non-stock corporations under
the Corporation Code does not apply to government-owned or controlled corporations? For if
not, and the majority's illogic is pursued, Republic Act No. 7656, passed in 1993, would be
fatally flawed, as it would contravene the Administrative Code of 1987 and the Corporation
Code.
In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be illustrated
by Republic Act No. 7656. Following the majority's definition of a GOCC and in accordance
with Republic Act No. 7656, here are but a few entities which are not obliged to remit fifty
(50%) of its annual net earnings to the National Government as they are excluded from the scope
of Republic Act No. 7656:
1) Philippine Ports Authority73 has no capital stock74, no members, and obliged to apply the
balance of its income or revenue at the end of each year in a general reserve. 75
2) Bases Conversion Development Authority76 - has no capital stock,77 no members.

3) Philippine Economic Zone Authority78 - no capital stock,79 no members.

4) Light Rail Transit Authority80 - no capital stock,81 no members.
5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to remit fifty percent
(50%) of its net profits to the National Treasury. 84
6) National Power Corporation85 - has capital stock but is prohibited from "distributing to the
holders of its shares dividends or allotments of the surplus profits on the basis of the shares
held;"86 no members.
7) Manila International Airport Authority no capital stock87, no members88, mandated to remit
twenty percent (20%) of its annual gross operating income to the National Treasury.89
Thus, for the majority, the MIAA, among many others, cannot be considered as within the
coverage of Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else
then could Executive Order No. 483, signed in 1998 by President Ramos, be explained? The
issuance provides:
WHEREAS, Section 1 of Republic Act No. 7656 provides that:
"Section 1. Declaration of Policy. - It is hereby declared the policy of the State that in order for
the National Government to realize additional revenues, government-owned and/or controlled
corporations, without impairing their viability and the purposes for which they have been
established, shall share a substantial amount of their net earnings to the National Government."
WHEREAS, to support the viability and mandate of government-owned and/or controlled
corporations [GOCCs], the liquidity, retained earnings position and medium-term plans and
programs of these GOCCs were considered in the determination of the reasonable dividend rates
of such corporations on their 1997 net earnings.
WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended the
adjustment on the percentage of annual net earnings that shall be declared by the Manila
International Airport Authority [MIAA] and Phividec Industrial Authority [PIA] in the interest of
national economy and general welfare.
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the
powers vested in me by law, do hereby order:
SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA and PIA
as dividends to the National Government as provided for under Section 3 of Republic Act No.
7656 is adjusted from at least fifty percent [50%] to the rates specified hereunder:
1. Manila International Airport Authority - 35% [cash]
2. Phividec Industrial Authority - 25% [cash]

SECTION 2. The adjusted dividend rates provided for under Section 1 are only applicable on
1997 net earnings of the concerned government-owned and/or controlled corporations.
Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a
GOCC, for how else could it have come under the coverage of Republic Act No. 7656, a law
applicable only to GOCCs? But, the majority apparently disagrees, and resultantly holds that
MIAA is not obliged to remit even the reduced rate of thirty five percent (35%) of its net
earnings to the national government, since it cannot be covered by Republic Act No. 7656.
All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I
stated earlier, I find it illogical that chartered corporations are compelled to comply with the
templates of the Corporation Code, especially when the Corporation Code itself states that these
corporations are to be governed by their own charters. This is especially true considering that the
very provision cited by the majority, Section 87 of the Corporation Code, expressly says that the
definition provided therein is laid down "for the purposes of this [Corporation] Code." Read in
conjunction with Section 4 of the Corporation Code which mandates that corporations created by
charter be governed by the law creating them, it is clear that contrary to the majority, MIAA is
not disqualified from classification as a non-stock corporation by reason of Section 87, the
provision not being applicable to corporations created by special laws or charters. In fact, I see
no real impediment why the MIAA and similarly situated corporations such as the PHIC, the
SSS, the Philippine Deposit Insurance Commission, or maybe even the NPC could at the very
least, be deemed as no stock corporations (as differentiated from non-stock corporations).
The point, stripped to bare simplicity, is that entity created by legislative enactment is a
corporation if the legislature says so. After all, it is the legislature that dictates what a corporation
is in the first place. This is better illustrated by another set of entities created before martial law.
These include the Mindanao Development Authority, 90 the Northern Samar Development
Authority,91 the Ilocos Sur Development Authority, 92 the Southeastern Samar Development
Authority93 and the Mountain Province Development Authority. 94 An examination of the first
section of the statutes creating these entities reveal that they were established "to foster
accelerated and balanced growth" of their respective regions, and towards such end, the charters
commonly provide that "it is recognized that a government corporation should be created for the
purpose," and accordingly, these charters "hereby created a body corporate." 95 However, these
corporations do not have capital stock nor members, and are obliged to return the unexpended
balances of their appropriations and earnings to a revolving fund in the National Treasury. The
majority effectively declassifies these entities as GOCCs, never mind the fact that their very
charters declare them to be GOCCs.
I mention these entities not to bring an element of obscurantism into the fray. I cite them as
examples to emphasize my fundamental pointthat it is the legislative charters of these entities,
and not the Administrative Code, which define the class of personality of these entities created
by Congress. To adopt the view of the majority would be, in effect, to sanction an implied repeal
of numerous congressional charters for the purpose of declassifying GOCCs. Certainly, this
could not have been the intent of the crafters of the Administrative Code when they drafted the
"Definition of Terms" incorporated therein.

MIAA Is Without
Doubt, A GOCC
Following the charters of government corporations, there are two kinds of GOCCs, namely:
GOCCs which are stock corporations and GOCCs which are no stock corporations (as
distinguished from non-stock corporation). Stock GOCCs are simply those which have capital
stock while no stock GOCCs are those which have no capital stock. Obviously these definitions
are different from the definitions of the terms in the Corporation Code. Verily, GOCCs which are
not incorporated with the Securities and Exchange Commission are not governed by the
Corporation Code but by their respective charters.
For the MIAA's part, its charter is replete with provisions that indubitably classify it as a GOCC.
Observe the following provisions from MIAA's charter:
SECTION 3. Creation of the Manila International Airport Authority.There is hereby
established a body corporate to be known as the Manila International Airport Authority which
shall be attached to the Ministry of Transportation and Communications. The principal office of
the Authority shall be located at the New Manila International Airport. The Authority may
establish such offices, branches, agencies or subsidiaries as it may deem proper and necessary;
Provided, That any subsidiary that may be organized shall have the prior approval of the
President.
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau of
Lands and other appropriate government agencies shall undertake an actual survey of the area
transferred within one year from the promulgation of this Executive Order and the corresponding
title to be issued in the name of the Authority. Any portion thereof shall not be disposed through
sale or through any other mode unless specifically approved by the President of the Philippines.
xxx
SECTION 5. Functions, Powers, and Duties. The Authority shall have the following
functions, powers and duties:
xxx
(d) To sue and be sued in its corporate name;
(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend or repeal the same from time to time;

(h) To execute or enter into contracts of any kind or nature;

(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever kind and nature, whether movable or
immovable, or any interest therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;
xxx
(o) To exercise all the powers of a corporation under the Corporation Law, insofar as these
powers are not inconsistent with the provisions of this Executive Order.
xxx
SECTION 16. Borrowing Power. The Authority may, after consultation with the Minister of
Finance and with the approval of the President of the Philippines, as recommended by the
Minister of Transportation and Communications, raise funds, either from local or international
sources, by way of loans, credits or securities, and other borrowing instruments, with the power
to create pledges, mortgages and other voluntary liens or encumbrances on any of its assets or
properties.
All loans contracted by the Authority under this Section, together with all interests and other
sums payable in respect thereof, shall constitute a charge upon all the revenues and assets of the
Authority and shall rank equally with one another, but shall have priority over any other claim or
charge on the revenue and assets of the Authority: Provided, That this provision shall not be
construed as a prohibition or restriction on the power of the Authority to create pledges,
mortgages, and other voluntary liens or encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total outstanding
indebtedness of the Authority in the principal amount, in local and foreign currency, shall not at
any time exceed the net worth of the Authority at any given time.
xxx
The President or his duly authorized representative after consultation with the Minister of
Finance may guarantee, in the name and on behalf of the Republic of the Philippines, the
payment of the loans or other indebtedness of the Authority up to the amount herein authorized.
These cited provisions establish the fitness of MIAA to be the subject of legal relations. 96 MIAA
under its charter may acquire and possess property, incur obligations, and bring civil or criminal
actions. It has the power to contract in its own name, and to acquire title to real or personal
property. It likewise may exercise a panoply of corporate powers and possesses all the trappings
of corporate personality, such as a corporate name, a corporate seal and by-laws. All these are
contained in MIAA's charter which, as conceded by the Corporation Code and even the

Administrative Code, is the primary law that governs the definition and organization of the
MIAA.
In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in the
very first paragraph of the present petition before this Court.97 So does, apparently, the
Department of Budget and Management, which classifies MIAA as a "government owned &
controlled corporation" on its internet website.98 There is also the matter of Executive Order No.
483, which evinces the belief of the then-president of the Philippines that MIAA is a GOCC.
And the Court before had similarly characterized MIAA as a government-owned and controlled
corporation in the earlier MIAA case, Manila International Airport Authority v. Commission on
Audit.99
Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is
because MIAA is actually an instrumentality. But the very definition relied upon by the majority
of an instrumentality under the Administrative Code clearly states that a GOCC is likewise an
instrumentality or an agency. The question of whether MIAA is a GOCC might not even be
determinative of this Petition, but the effect of the majority's disquisition on that matter may
even be more destructive than the ruling that MIAA is exempt from realty taxes. Is the majority
ready to live up to the momentous consequences of its flawed reasoning?
Novel Proviso in 1987 Constitution
Prescribing Standards in the
Creation of GOCCs Necessarily
Applies only to GOCCs Created
After 1987.
One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to
Section 16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs
through special charters be "in the interest of the common good and subject to the test of
economic viability." For the majority, the test of economic viability does not apply to
government entities vested with corporate powers and performing essential public services. But
this test of "economic viability" is new to the constitutional framework. No such test was
imposed in previous Constitutions, including the 1973 Constitution which was the fundamental
law in force when the MIAA was created. How then could the MIAA, or any GOCC created
before 1987 be expected to meet this new precondition to the creation of a GOCC? Does the
dissent seriously suggest that GOCCs created before 1987 may be declassified on account of
their failure to meet this "economic viability test"?
Instrumentalities and Agencies
Also Generally Liable For

Real Property Taxes

Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then
argues that MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of
Section 2(10) of the Administrative Code. A more convincing view offered during deliberations,
but which was not adopted by the ponencia, argued that MIAA is not an instrumentality but an
agency, considering the fact that under the Administrative Code, the MIAA is attached within the
department framework of the Department of Transportation and Communications. 100
Interestingly, Executive Order No. 341, enacted by President Arroyo in 2004, similarly calls
MIAA an agency. Since instrumentalities are expressly defined as "an agency not integrated
within the department framework," that view concluded that MIAA cannot be deemed an
instrumentality.
Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative Code
considers GOCCs as agencies,101 so the fact that MIAA is an agency does not exclude it from
classification as a GOCC. On the other hand, the majority justifies MIAA's purported exemption
on Section 133 of the Local Government Code, which similarly situates "agencies and
instrumentalities" as generally exempt from the taxation powers of LGUs. And on this point, the
majority again evades Mactan and somehow concludes that Section 133 is the general rule,
notwithstanding Sections 232 and 234(a) of the Local Government Code. And the majority's
ultimate conclusion? "By express mandate of the Local Government Code, local governments
cannot impose any kind of tax on national government instrumentalities like the MIAA. Local
governments are devoid of power to tax the national government, its agencies and
instrumentalities."102
The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and
LGUs. Sections 133 and 234(a) ensure that the Republic of the Philippines or its political
subdivisions shall not be subjected to any form of local government taxation, except realty taxes
if the beneficial use of the property owned has been granted for consideration to a taxable entity
or person. On the other hand, Section 133 likewise assures that government instrumentalities
such as GOCCs may not be arbitrarily taxed by LGUs, since they could be subjected to local
taxation if there is a specific proviso thereon in the Code. One such proviso is Section 137,
which as the Court found in National Power Corporation, 103 permits the imposition of a franchise
tax on businesses enjoying a franchise, even if it be a GOCC such as NPC. And, as the Court
acknowledged in Mactan, Section 232 provides another exception on the taxability of
instrumentalities.
The majority abjectly refuses to engage Section 232 of the Local Government Code although it
provides the indubitable general rule that LGUs "may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvements not hereafter specifically
exempted." The specific exemptions are provided by Section 234. Section 232 comes
sequentially after Section 133(o), 104 and even if the sequencing is irrelevant, Section 232 would
fall under the qualifying phrase of Section 133, "Unless otherwise provided herein." It is sad, but
not surprising that the majority is not willing to consider or even discuss the general rule, but

only the exemptions under Section 133 and Section 234. After all, if the majority is dead set in
ruling for MIAA no matter what the law says, why bother citing what the law does say.
Constitution, Laws and
Jurisprudence Have Long
Explained the Rationale
Behind the Local Taxation
Of GOCCs.
This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more
evident than in the succeeding discussion of the majority, which asserts that the power of local
governments to tax national government instrumentalities be construed strictly against local
governments. The Maceda case, decided before the Local Government Code, is cited, as is
Basco. This section of the majority employs deliberate pretense that the Code never existed, or
that the fundamentals of local autonomy are of limited effect in our country. Why is it that the
Local Government Code is barely mentioned in this section of the majority? Because Section 5
of the Code, purposely omitted by the majority provides for a different rule of interpretation than
that asserted:
Section 5. Rules of Interpretation. In the interpretation of the provisions of this Code, the
following rules shall apply:
(a) Any provision on a power of a local government unit shall be liberally interpreted in its favor,
and in case of doubt, any question thereon shall be resolved in favor of devolution of powers and
of the lower local government unit. Any fair and reasonable doubt as to the existence of the
power shall be interpreted in favor of the local government unit concerned;
(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the
local government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption,
incentive or relief granted by any local government unit pursuant to the provisions of this Code
shall be construed strictly against the person claiming it; xxx
Yet the majority insists that "there is no point in national and local governments taxing each
other, unless a sound and compelling policy requires such transfer of public funds from one
government pocket to another."105 I wonder whether the Constitution satisfies the majority's
desire for "a sound and compelling policy." To repeat:
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
xxx
Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.
Or how about the Local Government Code, presumably an expression of sound and compelling
policy considering that it was enacted by the legislature, that veritable source of all statutes:
SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its
power to create its own sources of revenue and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local government units.
Justice Puno, in National Power Corporation v. City of Cabanatuan, 106 provides a more "sound
and compelling policy considerations" that would warrant sustaining the taxability of
government-owned entities by local government units under the Local Government Code.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance
and support myriad activities of the local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. As this Court observed in the Mactan case, "the original reasons for the
withdrawal of tax exemption privileges granted to government-owned or controlled corporations
and all other units of government were that such privilege resulted in serious tax base erosion
and distortions in the tax treatment of similarly situated enterprises." With the added burden of
devolution, it is even more imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due from them. 107
I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential
shift brought about the acceptance of the principles of local autonomy:
In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives. Taxation assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to
Article X, section 5 of the 1987 Constitution, viz:

"Section 5. Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only
by strengthening local autonomy and promoting decentralization of governance. For a long time,
the country's highly centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also "dampened the spirit of
initiative, innovation and imaginative resilience in matters of local development on the part of
local government leaders." 35 The only way to shatter this culture of dependence is to give the
LGUs a wider role in the delivery of basic services, and confer them sufficient powers to
generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the
1987 Constitution mandates Congress to enact a local government code that will, consistent with
the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing
powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among
the different local government units their powers, responsibilities, and resources, and provide for
the qualifications, election, appointment and removal, term, salaries, powers and functions and
duties of local officials, and all other matters relating to the organization and operation of the
local units."
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959, the Local Autonomy Act of 1959, the Decentralization Act of
1967 and the Local Government Code of 1983. Despite these initiatives, however, the shackles
of dependence on the national government remained. Local government units were faced with
the same problems that hamper their capabilities to participate effectively in the national
development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and approve development projects,
(d) heavy dependence on external sources of income, and (e) limited supervisory control over
personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian. 108
And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of Iloilo 109,
provides especially clear and emphatic rationale:

In closing, we reiterate that in taxing government-owned or controlled corporations, the State

ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV, 38 we
elucidated:
Actually, the State has no reason to decry the taxation of NPC's properties, as and by way of real
property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of
the Government in development and nation-building, particularly in the local government level.
xxxxxxxxx
To all intents and purposes, real property taxes are funds taken by the State with one hand and
given to the other. In no measure can the government be said to have lost anything.
Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax
exemption privileges granted to government-owned and controlled corporations and all other
units of government was that such privilege resulted in serious tax base erosion and distortions in
the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to
share in the requirements of development, fiscal or otherwise, by paying the taxes and other
charges due from them.110
How does the majority counter these seemingly valid rationales which establish the soundness of
a policy consideration subjecting national instrumentalities to local taxation? Again, by simply
ignoring that these doctrines exist. It is unfortunate if the majority deems these cases or the
principles of devolution and local autonomy as simply too inconvenient, and relies instead on
discredited precedents. Of course, if the majority faces the issues squarely, and expressly
discusses why Basco was right and Mactan was wrong, then this entire endeavor of the Court
would be more intellectually satisfying. But, this is not a game the majority wants to play.
Mischaracterization of My
Views on the Tax Exemption
Enjoyed by the National Government
Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing
my views on that provision as if I had been interpreting the provision as making "the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193." 111
Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the
majority. My main thesis on the matter merely echoes the explicit provision of Section 193 that
unless otherwise provided in the Local Government Code (LGC) all tax exemptions enjoyed by
all persons, whether natural or juridical, including GOCCs, were withdrawn upon the effectivity
of the Code. Since the provision speaks of withdrawal of tax exemptions of persons, it follows
that the exemptions theretofore enjoyed by MIAA which is definitely a person are deemed
withdrawn upon the advent of the Code.

On the other hand, the provision does not address the question of who are beyond the reach of
the taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof assumes
that the person or entity involved is subject to tax. Thus, Section 193 does not apply to entities
which were never given any tax exemption. This would include the national government and its
political subdivisions which, as a general rule, are not subjected to tax in the first place.112
Corollarily, the national government and its political subdivisions do not need tax exemptions.
And Section 193 which ordains the withdrawal of tax exemptions is obviously irrelevant to them.
Section 193 is in point for the disposition of this case as it forecloses dependence for the grant of
tax exemption to MIAA on Section 21 of its charter. Even the majority should concede that the
charter section is now ineffectual, as Section 193 withdraws the tax exemptions previously
enjoyed by all juridical persons.
With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the
effectivity of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have to
rely on a basis other than Section 21 of its charter.
Lung Center of the Philippines v. Quezon City113 provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center was
organized as a trust administered by an eponymous GOCC organized with the SEC. 114 There is
no doubt it is a GOCC, even by the majority's reckoning. Applying the Administrative Code, it is
also considered as an agency, the term encompassing even GOCCs. Yet since the Administrative
Code definition of "instrumentalities" encompasses agencies, especially those not attached to a
line department such as the Lung Center, it also follows that the Lung Center is an
instrumentality, which for the majority is exempt from all local government taxes, especially real
estate taxes. Yet just in 2004, the Court unanimously held that the Lung Center was not exempt
from real property taxes. Can the majority and Lung Center be reconciled? I do not see how, and
no attempt is made to demonstrate otherwise.
Another key point. The last paragraph of Section 234 specifically asserts that any previous
exemptions from realty taxes granted to or enjoyed by all persons, including all GOCCs, are
thereby withdrawn. The majority's interpretation of Sections 133 and 234(a) however necessarily
implies that all instrumentalities, including GOCCs, can never be subjected to real property
taxation under the Code. If that is so, what then is the sense of the last paragraph specifically
withdrawing previous tax exemptions to all persons, including GOCCs when juridical persons
such as MIAA are anyway, to his view, already exempt from such taxes under Section 133? The
majority's interpretation would effectively render the express and emphatic withdrawal of
previous exemptions to GOCCs inutile. Ut magis valeat quam pereat. Hence, where a statute is
susceptible of more than one interpretation, the court should adopt such reasonable and
beneficial construction which will render the provision thereof operative and effective, as well as
harmonious with each other.115
But, the majority seems content rendering as absurd the Local Government Code, since it does
not have much use anyway for the Code's general philosophy of fiscal autonomy, as evidently
seen by the continued reliance on Basco or Maceda. Local government rule has never been a

grant of emancipation from the national government. This is the favorite bugaboo of the
opponents of local autonomythe fallacy that autonomy equates to independence.
Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees or
charges of any kind. Moreover, the taxation of national instrumentalities and agencies by LGUs
should be strictly construed against the LGUs, citing Maceda and Basco. No mention is made of
the subsequent rejection of these cases in jurisprudence following the Local Government Code,
including Mactan. The majority is similarly silent on the general rule under Section 232 on real
property taxation or Section 5 on the rules of construction of the Local Government Code.
V.
MIAA, and not the National Government
Is the Owner of the Subject Taxable Properties
Section 232 of the Local Government Code explicitly provides that there are exceptions to the
general rule on rule property taxation, as "hereafter specifically exempted." Section 234,
certainly "hereafter," provides indubitable basis for exempting entities from real property
taxation. It provides the most viable legal support for any claim that an governmental entity such
as the MIAA is exempt from real property taxes. To repeat:
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from
payment of the real property tax:
xxx
(f) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person:
The majority asserts that the properties owned by MIAA are owned by the Republic of the
Philippines, thus placing them under the exemption under Section 234. To arrive at this
conclusion, the majority employs four main arguments.
MIAA Property Is Patrimonial
And Not Part of Public Dominion
The majority claims that the Airport Lands and Buildings are property of public dominion as
defined by the Civil Code, and therefore owned by the State or the Republic of the Philippines.
But as pointed out by Justice Azcuna in the first PPA case, if indeed a property is considered part
of the public dominion, such property is "owned by the general public and cannot be declared to
be owned by a public corporation, such as [the PPA]."

Relevant on this point are the following provisions of the MIAA charter:
Section 3. Creation of the Manila International Airport Authority. xxx
The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. xxx Any portion
thereof shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to the
Airport, and all assets, powers rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are
necessary for the operation of crash fire and rescue facilities, are hereby transferred to the
Authority.
Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express
transfer of ownership between the MIAA and the national government. If the distinction is to be
blurred, as the majority does, between the State/Republic/Government and a body corporate such
as the MIAA, then the MIAA charter showcases the remarkable absurdity of an entity
transferring property to itself.
Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership
over property of public dominion to an entity that it similarly owns. It is just like a family
transferring ownership over the properties its members own into a family corporation. The
family exercises effective control over the administration and disposition of these properties. Yet
for several purposes under the law, such as taxation, it is the corporation that is deemed to own
those properties. A similar situation obtains with MIAA, the State, and the Airport Lands and
Buildings.
The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful
doctrines in this regard. The Court refuted the claim that the properties of the PPA were owned
by the Republic of the Philippines, noting that PPA's charter expressly transferred ownership
over these properties to the PPA, a situation which similarly obtains with MIAA. The Court even
went as far as saying that the fact that the PPA "had not been issued any torrens title over the
port and port facilities and appurtenances is of no legal consequence. A torrens title does not, by
itself, vest ownership; it is merely an evidence of title over properties. xxx It has never been
recognized as a mode of acquiring ownership over real properties."116
The Court further added:
xxx The bare fact that the port and its facilities and appurtenances are accessible to the general
public does not exempt it from the payment of real property taxes. It must be stressed that the
said port facilities and appurtenances are the petitioner's corporate patrimonial properties, not for

public use, and that the operation of the port and its facilities and the administration of its
buildings are in the nature of ordinary business. The petitioner is clothed, under P.D. No. 857,
with corporate status and corporate powers in the furtherance of its proprietary interests xxx The
petitioner is even empowered to invest its funds in such government securities approved by the
Board of Directors, and derives its income from rates, charges or fees for the use by vessels of
the port premises, appliances or equipment. xxx Clearly then, the petitioner is a profit-earning
corporation; hence, its patrimonial properties are subject to tax. 117
There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public use.
A similar argument was propounded by the Light Rail Transit Authority in Light Rail Transit
Authority v. Central Board of Assessment, 118 which was cited in Philippine Ports Authority and
deserves renewed emphasis. The Light Rail Transit Authority (LRTA), a body corporate,
"provides valuable transportation facilities to the paying public."119 It claimed that its carriageways and terminal stations are immovably attached to government-owned national roads, and to
impose real property taxes thereupon would be to impose taxes on public roads. This view did
not persuade the Court, whose decision was penned by Justice (now Chief Justice) Panganiban. It
was noted:
Though the creation of the LRTA was impelled by public service to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila its operation
undeniably partakes of ordinary business. Petitioner is clothed with corporate status and
corporate powers in the furtherance of its proprietary objectives. Indeed, it operates much like
any private corporation engaged in the mass transport industry. Given that it is engaged in a
service-oriented commercial endeavor, its carriageways and terminal stations are patrimonial
property subject to tax, notwithstanding its claim of being a government-owned or controlled
corporation.
xxx
Petitioner argues that it merely operates and maintains the LRT system, and that the actual users
of the carriageways and terminal stations are the commuting public. It adds that the public use
character of the LRT is not negated by the fact that revenue is obtained from the latter's
operations.
We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible
only to those who pay the required fare. It is thus apparent that petitioner does not exist solely for
public service, and that the LRT carriageways and terminal stations are not exclusively for public
use. Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom. 120
xxx
Even granting that the national government indeed owns the carriageways and terminal stations,
the exemption would not apply because their beneficial use has been granted to petitioner, a
taxable entity.121

There is no substantial distinction between the properties held by the PPA, the LRTA, and the
MIAA. These three entities are in the business of operating facilities that promote public
transportation.
The majority further asserts that MIAA's properties, being part of the public dominion, are
outside the commerce of man. But if this is so, then why does Section 3 of MIAA's charter
authorize the President of the Philippines to approve the sale of any of these properties? In fact,
why does MIAA's charter in the first place authorize the transfer of these airport properties,
assuming that indeed these are beyond the commerce of man?
No Trust Has Been Created
Over MIAA Properties For
The Benefit of the Republic
The majority posits that while MIAA might be holding title over the Airport Lands and
Buildings, it is holding it in trust for the Republic. A provision of the Administrative Code is
cited, but said provision does not expressly provide that the property is held in trust. Trusts are
either express or implied, and only those situations enumerated under the Civil Code would
constitute an implied trust. MIAA does not fall within this enumeration, and neither is there a
provision in MIAA's charter expressly stating that these properties are being held in trust. In fact,
under its charter, MIAA is obligated to retain up to eighty percent (80%) of its gross operating
income, not an inconsequential sum assuming that the beneficial owner of MIAA's properties is
actually the Republic, and not the MIAA.
Also, the claim that beneficial ownership over the MIAA remains with the government and not
MIAA is ultimately irrelevant. Section 234(a) of the Local Government Code provides among
those exempted from paying real property taxes are "[r]eal property owned by the [Republic]
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person." In the context of Section 234(a), the identity of the beneficial owner over the
properties is not determinative as to whether the exemption avails. It is the identity of the
beneficial user of the property owned by the Republic or its political subdivisions that is crucial,
for if said beneficial user is a taxable person, then the exemption does not lie.
I fear the majority confuses the notion of what might be construed as "beneficial ownership" of
the Republic over the properties of MIAA as nothing more than what arises as a consequence of
the fact that the capital of MIAA is contributed by the National Government. 122 If so, then there
is no difference between the State's ownership rights over MIAA properties than those of a
majority stockholder over the properties of a corporation. Even if such shareholder effectively
owns the corporation and controls the disposition of its assets, the personality of the stockholder
remains separately distinct from that of the corporation. A brief recall of the entrenched rule in
corporate law is in order:

The first consequence of the doctrine of legal entity regarding the separate identity of the
corporation and its stockholders insofar as their obligations and liabilities are concerned, is
spelled out in this general rule deeply entrenched in American jurisprudence:
Unless the liability is expressly imposed by constitutional or statutory provisions, or by the
charter, or by special agreement of the stockholders, stockholders are not personally liable for
debts of the corporation either at law or equity. The reason is that the corporation is a legal entity
or artificial person, distinct from the members who compose it, in their individual capacity; and
when it contracts a debt, it is the debt of the legal entity or artificial person the corporation
and not the debt of the individual members. (13A Fletcher Cyc. Corp. Sec. 6213)
The entirely separate identity of the rights and remedies of a corporation itself and its individual
stockholders have been given definite recognition for a long time. Applying said principle, the
Supreme Court declared that a corporation may not be made to answer for acts or liabilities of its
stockholders or those of legal entities to which it may be connected, or vice versa. (Palay Inc. v.
Clave et. al. 124 SCRA 638) It was likewise declared in a similar case that a bonafide
corporation should alone be liable for corporate acts duly authorized by its officers and directors.
(Caram Jr. v. Court of Appeals et.al. 151 SCRA, p. 372) 123
It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the
powers of a corporation under the Corporation Law, including the right to corporate succession,
and the right to sue and be sued in its corporate name.124 The national government made a
particular choice to divest ownership and operation of the Manila International Airport and
transfer the same to such an empowered entity due to perceived advantages. Yet such transfer
cannot be deemed consequence free merely because it was the State which contributed the
operating capital of this body corporate.
The majority claims that the transfer the assets of MIAA was meant merely to effect a
reorganization. The imputed rationale for such transfer does not serve to militate against the legal
consequences of such assignment. Certainly, if it was intended that the transfer should be free of
consequence, then why was it effected to a body corporate, with a distinct legal personality from
that of the State or Republic? The stated aims of the MIAA could have very well been
accomplished by creating an agency without independent juridical personality.
VI.
MIAA Performs Proprietary Functions
Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its
political subdivisions from realty taxation. The obvious question is what comprises "the Republic
of the Philippines." I think the key to understanding the scope of "the Republic" is the phrase
"political subdivisions." Under the Constitution, political subdivisions are defined as "the
provinces, cities, municipalities and barangays."125 In correlation, the Administrative Code of
1987 defines "local government" as referring to "the political subdivisions established by or in
accordance with the Constitution."

Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and
are accordingly exempt. The same could be said generally of the national government, which
would be similarly exempt. After all, even with the principle of local autonomy, it is inherently
noxious and self-defeatist for local taxation to interfere with the sovereign exercise of functions.
However, the exercise of proprietary functions is a different matter altogether.
Sovereign and Proprietary
Functions Distinguished
Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of
advancing the general interests of society and are merely optional. 126 An exhaustive discussion
on the matter was provided by the Court in Bacani v. NACOCO:127
xxx This institution, when referring to the national government, has reference to what our
Constitution has established composed of three great departments, the legislative, executive, and
the judicial, through which the powers and functions of government are exercised. These
functions are twofold: constituent and ministrant. The former are those which constitute the very
bonds of society and are compulsory in nature; the latter are those that are undertaken only by
way of advancing the general interests of society, and are merely optional. President Wilson
enumerates the constituent functions as follows:
"'(1) The keeping of order and providing for the protection of persons and property from violence
and robbery.
'(2) The fixing of the legal relations between man and wife and between parents and children.
'(3) The regulation of the holding, transmission, and interchange of property, and the
determination of its liabilities for debt or for crime.
'(4) The determination of contract rights between individuals.
'(5) The definition and punishment of crime.
'(6) The administration of justice in civil cases.
'(7) The determination of the political duties, privileges, and relations of citizens.
'(8) Dealings of the state with foreign powers: the preservation of the state from external danger
or encroachment and the advancement of its international interests.'" (Malcolm, The Government
of the Philippine Islands, p. 19.)
The most important of the ministrant functions are: public works, public education, public
charity, health and safety regulations, and regulations of trade and industry. The principles
determining whether or not a government shall exercise certain of these optional functions are:

(1) that a government should do for the public welfare those things which private capital would
not naturally undertake and (2) that a government should do these things which by its very nature
it is better equipped to administer for the public welfare than is any private individual or group of
individuals. (Malcolm, The Government of the Philippine Islands, pp. 19-20.)
From the above we may infer that, strictly speaking, there are functions which our government is
required to exercise to promote its objectives as expressed in our Constitution and which are
exercised by it as an attribute of sovereignty, and those which it may exercise to promote merely
the welfare, progress and prosperity of the people. To this latter class belongs the organization of
those corporations owned or controlled by the government to promote certain aspects of the
economic life of our people such as the National Coconut Corporation. These are what we call
government-owned or controlled corporations which may take on the form of a private enterprise
or one organized with powers and formal characteristics of a private corporations under the
Corporation Law.128
The Court in Bacani rejected the proposition that the National Coconut Corporation exercised
sovereign functions:
Does the fact that these corporations perform certain functions of government make them a part
of the Government of the Philippines?
The answer is simple: they do not acquire that status for the simple reason that they do not come
under the classification of municipal or public corporation. Take for instance the National
Coconut Corporation. While it was organized with the purpose of "adjusting the coconut industry
to a position independent of trade preferences in the United States" and of providing "Facilities
for the better curing of copra products and the proper utilization of coconut by-products," a
function which our government has chosen to exercise to promote the coconut industry,
however, it was given a corporate power separate and distinct from our government, for it was
made subject to the provisions of our Corporation Law in so far as its corporate existence and the
powers that it may exercise are concerned (sections 2 and 4, Commonwealth Act No. 518). It
may sue and be sued in the same manner as any other private corporations, and in this sense it is
an entity different from our government. As this Court has aptly said, "The mere fact that the
Government happens to be a majority stockholder does not make it a public corporation"
(National Coal Co. vs. Collector of Internal Revenue, 46 Phil., 586-587). "By becoming a
stockholder in the National Coal Company, the Government divested itself of its sovereign
character so far as respects the transactions of the corporation. . . . Unlike the Government, the
corporation may be sued without its consent, and is subject to taxation. Yet the National Coal
Company remains an agency or instrumentality of government." (Government of the Philippine
Islands vs. Springer, 50 Phil., 288.)
The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez
bears noting:
The fact that government corporations are instrumentalities of the State does not divest them
with immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when the
government engages in a particular business through the instrumentality of a corporation, it

divests itself pro hoc vice of its sovereign character so as to subject itself to the rules governing
private corporations, (PNB v. Pabolan 82 SCRA 595) and is to be treated like any other
corporation. (PNR v. Union de Maquinistas Fogonero y Motormen, 84 SCRA 223)
In the same vein, when the government becomes a stockholder in a corporation, it does not
exercise sovereignty as such. It acts merely as a corporator and exercises no other power in the
management of the affairs of the corporation than are expressly given by the incorporating act.
Nor does the fact that the government may own all or a majority of the capital stock take from
the corporation its character as such, or make the government the real party in interest. (Amtorg
Trading Corp. v. US 71 F2d 524, 528)129
MIAA Performs Proprietary
Functions No Matter How
Vital to the Public Interest
The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary
functions. The operation of an airport facility by the State may be imbued with public interest,
but it is by no means indispensable or obligatory on the national government. In fact, as
demonstrated in other countries, it makes a lot of economic sense to leave the operation of
airports to the private sector.
The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and that
MIAA performs an essential public service as the primary domestic and international airport of
the Philippines. This premise is false, for one. On a local scale, MIAA competes with other
international airports situated in the Philippines, such as Davao International Airport and
MCIAA. More pertinently, MIAA also competes with other international airports in Asia, at
least. International airlines take into account the quality and conditions of various international
airports in determining the number of flights it would assign to a particular airport, or even in
choosing a hub through which destinations necessitating connecting flights would pass through.
Even if it could be conceded that MIAA does not compete in the market place, the example of
the Philippine National Railways should be taken into account. The PNR does not compete in the
marketplace, and performs an essential public service as the operator of the railway system in the
Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v. Philippine
National Railways,130 held that it was not.131
Even more relevant to this particular case is Teodoro v. National Airports Corporation, 132
concerning the proper appreciation of the functions performed by the Civil Aeronautics
Administration (CAA), which had succeeded the defunction National Airports Corporation. The
CAA claimed that as an unincorporated agency of the Republic of the Philippines, it was
incapable of suing and being sued. The Court noted:

Among the general powers of the Civil Aeronautics Administration are, under Section 3, to
execute contracts of any kind, to purchase property, and to grant concession rights, and under
Section 4, to charge landing fees, royalties on sales to aircraft of aviation gasoline, accessories
and supplies, and rentals for the use of any property under its management.
These provisions confer upon the Civil Aeronautics Administration, in our opinion, the power to
sue and be sued. The power to sue and be sued is implied from the power to transact private
business. And if it has the power to sue and be sued on its behalf, the Civil Aeronautics
Administration with greater reason should have the power to prosecute and defend suits for and
against the National Airports Corporation, having acquired all the properties, funds and choses in
action and assumed all the liabilities of the latter. To deny the National Airports Corporation's
creditors access to the courts of justice against the Civil Aeronautics Administration is to say that
the government could impair the obligation of its corporations by the simple expedient of
converting them into unincorporated agencies. 133
xxx
Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o
administer, operate, manage, control, maintain and develop the Manila International Airport." 134
Notwithstanding this expansion, in the 1988 case of CAA v. Court of Appeals 135 the Court
reaffirmed the ruling that the CAA was engaged in "private or non-governmental functions."136
Thus, the Court had already ruled that the predecessor agency of MIAA, the CAA was engaged
in private or non-governmental functions. These are more precedents ignored by the majority.
The following observation from the Teodoro case very well applies to MIAA.
The Civil Aeronautics Administration comes under the category of a private entity. Although not
a body corporate it was created, like the National Airports Corporation, not to maintain a
necessary function of government, but to run what is essentially a business, even if revenues be
not its prime objective but rather the promotion of travel and the convenience of the traveling
public. It is engaged in an enterprise which, far from being the exclusive prerogative of state,
may, more than the construction of public roads, be undertaken by private concerns. 137
If the determinative point in distinguishing between sovereign functions and proprietary
functions is the vitality of the public service being performed, then it should be noted that there is
no more important public service performed than that engaged in by public utilities. But notably,
the Constitution itself authorizes private persons to exercise these functions as it allows them to
operate public utilities in this country138 If indeed such functions are actually sovereign and
belonging properly to the government, shouldn't it follow that the exercise of these tasks remain
within the exclusive preserve of the State?
There really is no prohibition against the government taxing itself, 139 and nothing obscene with
allowing government entities exercising proprietary functions to be taxed for the purpose of
raising the coffers of LGUs. On the other hand, it would be an even more noxious proposition
that the government or the instrumentalities that it owns are above the law and may refuse to pay
a validly imposed tax. MIAA, or any similar entity engaged in the exercise of proprietary, and

not sovereign functions, cannot avoid the adverse-effects of tax evasion simply on the claim that
it is imbued with some of the attributes of government.
VII.
MIAA Property Not Subject to
Execution Sale Without Consent
Of the President.
Despite the fact that the City of Paraaque ineluctably has the power to impose real property
taxes over the MIAA, there is an equally relevant statutory limitation on this power that must be
fully upheld. Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred,
conveyed and assigned to the ownership and administration of the MIAA] shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines."140
Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be
deemed as repealing this prohibition under Section 3, even if it effectively forecloses one
possible remedy of the LGU in the collection of delinquent real property taxes. While the Local
Government Code withdrew all previous local tax exemptions of the MIAA and other natural
and juridical persons, it did not similarly withdraw any previously enacted prohibitions on
properties owned by GOCCs, agencies or instrumentalities. Moreover, the resulting legal effect,
subjecting on one hand the MIAA to local taxes but on the other hand shielding its properties
from any form of sale or disposition, is not contradictory or paradoxical, onerous as its effect
may be on the LGU. It simply means that the LGU has to find another way to collect the taxes
due from MIAA, thus paving the way for a mutually acceptable negotiated solution. 141
There are several other reasons this statutory limitation should be upheld and applied to this case.
It is at this juncture that the importance of the Manila Airport to our national life and commerce
may be accorded proper consideration. The closure of the airport, even by reason of MIAA's
legal omission to pay its taxes, will have an injurious effect to our national economy, which is
ever reliant on air travel and traffic. The same effect would obtain if ownership and
administration of the airport were to be transferred to an LGU or some other entity which were
not specifically chartered or tasked to perform such vital function. It is for this reason that the
MIAA charter specifically forbids the sale or disposition of MIAA properties without the consent
of the President. The prohibition prevents the peremptory closure of the MIAA or the hampering
of its operations on account of the demands of its creditors. The airport is important enough to be
sheltered by legislation from ordinary legal processes.
Section 3 of the MIAA charter may also be appreciated as within the proper exercise of
executive control by the President over the MIAA, a GOCC which despite its separate legal
personality, is still subsumed within the executive branch of government. The power of
executive control by the President should be upheld so long as such exercise does not contravene
the Constitution or the law, the President having the corollary duty to faithfully execute the

Constitution and the laws of the land. 142 In this case, the exercise of executive control is precisely
recognized and authorized by the legislature, and it should be upheld even if it comes at the
expense of limiting the power of local government units to collect real property taxes.
Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA
properties could not be subject of execution sale without the consent of the President, I suspect
that the parties would feel little distress. Through such action, both the Local Government Code
and the MIAA charter would have been upheld. The prerogatives of LGUs in real property
taxation, as guaranteed by the Local Government Code, would have been preserved, yet the
concerns about the ruinous effects of having to close the Manila International Airport would
have been averted. The parties would then be compelled to try harder at working out a
compromise, a task, if I might add, they are all too willing to engage in.143 Unfortunately, the
majority will cause precisely the opposite result of unremitting hostility, not only to the City of
Paraaque, but to the thousands of LGUs in the country.
VIII.
Summary of Points
My points may be summarized as follows:
1) Mactan and a long line of succeeding cases have already settled the rule that under the Local
Government Code, enacted pursuant to the constitutional mandate of local autonomy, all natural
and juridical persons, even those GOCCs, instrumentalities and agencies, are no longer exempt
from local taxes even if previously granted an exemption. The only exemptions from local taxes
are those specifically provided under the Local Government Code itself, or those enacted through
subsequent legislation.
2) Under the Local Government Code, particularly Section 232, instrumentalities, agencies and
GOCCs are generally liable for real property taxes. The only exemptions therefrom under the
same Code are provided in Section 234, which include real property owned by the Republic of
the Philippines or any of its political subdivisions.
3) The subject properties are owned by MIAA, a GOCC, holding title in its own name. MIAA, a
separate legal entity from the Republic of the Philippines, is the legal owner of the properties,
and is thus liable for real property taxes, as it does not fall within the exemptions under Section
234 of the Local Government Code.
4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a result, the
City of Paraaque is prohibited from seizing or selling these properties by public auction in order
to satisfy MIAA's tax liability. In the end, MIAA is encumbered only by a limited lien possessed
by the City of Paraaque.
On the other hand, the majority's flaws are summarized as follows:

1) The majority deliberately ignores all precedents which run counter to its hypothesis, including
Mactan. Instead, it relies and directly cites those doctrines and precedents which were overturned
by Mactan. By imposing a different result than that warranted by the precedents without
explaining why Mactan or the other precedents are wrong, the majority attempts to overturn all
these ruling sub silencio and without legal justification, in a manner that is not sanctioned by the
practices and traditions of this Court.
2) The majority deliberately ignores the policy and philosophy of local fiscal autonomy, as
mandated by the Constitution, enacted under the Local Government Code, and affirmed by
precedents. Instead, the majority asserts that there is no sound rationale for local governments to
tax national government instrumentalities, despite the blunt existence of such rationales in the
Constitution, the Local Government Code, and precedents.
3) The majority, in a needless effort to justify itself, adopts an extremely strained exaltation of
the Administrative Code above and beyond the Corporation Code and the various legislative
charters, in order to impose a wholly absurd definition of GOCCs that effectively declassifies
innumerable existing GOCCs, to catastrophic legal consequences.
4) The majority asserts that by virtue of Section 133(o) of the Local Government Code, all
national government agencies and instrumentalities are exempt from any form of local taxation,
in contravention of several precedents to the contrary and the proviso under Section 133, "unless
otherwise provided herein [the Local Government Code]."
5) The majority erroneously argues that MIAA holds its properties in trust for the Republic of the
Philippines, and that such properties are patrimonial in character. No express or implied trust has
been created to benefit the national government. The legal distinction between sovereign and
proprietary functions, as affirmed by jurisprudence, likewise preclude the classification of MIAA
properties as patrimonial.
IX.
Epilogue
If my previous discussion still fails to convince on how wrong the majority is, then the following
points are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas (Bangko
Sentral) as a government instrumentality that exercises corporate powers but not organized as a
stock or non-stock corporation. Correspondingly for the majority, the Bangko ng Sentral is
exempt from all forms of local taxation by LGUs by virtue of the Local Government Code.
Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:
SECTION 125. Tax Exemptions. The Bangko Sentral shall be exempt for a period of five (5)
years from the approval of this Act from all national, provincial, municipal and city taxes, fees,
charges and assessments.

The New Central Bank Act was promulgated after the Local Government Code if the BSP is
already preternaturally exempt from local taxation owing to its personality as an "government
instrumentality," why then the need to make a new grant of exemption, which if the majority is
to be believed, is actually a redundancy. But even more tellingly, does not this provision evince a
clear intent that after the lapse of five (5) years, that the Bangko Sentral will be liable for
provincial, municipal and city taxes? This is the clear congressional intent, and it is Congress,
not this Court which dictates which entities are subject to taxation and which are exempt.
Perhaps this notion will offend the majority, because the Bangko Sentral is not even a
government owned corporation, but a government instrumentality, or perhaps "loosely", a
"government corporate entity." How could such an entity like the Bangko Sentral , which is not
even a government owned corporation, be subjected to local taxation like any mere mortal? But
then, see Section 1 of the New Central Bank Act:
SECTION 1. Declaration of Policy. The State shall maintain a central monetary authority that
shall function and operate as an independent and accountable body corporate in the discharge of
its mandated responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority established
under this Act, while being a government-owned corporation, shall enjoy fiscal and
administrative autonomy.
Apparently, the clear legislative intent was to create a government corporation known as the
Bangko Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of
the provision and not the one that needs to be unearthed from the bowels of the archival offices
of the House and the Senate, is for naught to the majority, as it contravenes the Administrative
Code of 1987, which after all, is "the governing law defining the status and relationship of
government agencies and instrumentalities" and thus superior to the legislative charter in
determining the personality of a chartered entity. Its like saying that the architect who designed a
school building is better equipped to teach than the professor because at least the architect is
familiar with the geometry of the classroom.
Consider further the example of the Philippine Institute of Traditional and Alternative Health
Care (PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as
MIAA in that it is established as a body corporate,144 and empowered with the attributes of a
corporation,145 including the power to purchase or acquire real properties.146 However the
PITAHC has no capital stock and no members, thus following the majority, it is not a GOCC.
The state policy that guides PITAHC is the development of traditional and alternative health
care,147 and its objectives include the promotion and advocacy of alternative, preventive and
curative health care modalities that have been proven safe, effective and cost effective. 148
"Alternative health care modalities" include "other forms of non-allophatic, occasionally nonindigenous or imported healing methods" which include, among others "reflexology,
acupuncture, massage, acupressure" and chiropractics. 149
Given these premises, there is no impediment for the PITAHC to purchase land and construct
thereupon a massage parlor that would provide a cheaper alternative to the opulent spas that have

proliferated around the metropolis. Such activity is in line with the purpose of the PITAHC and
with state policy. Is such massage parlor exempt from realty taxes? For the majority, it is, for
PITAHC is an instrumentality or agency exempt from local government taxation, which does not
fall under the exceptions under Section 234 of the Local Government Code. Hence, this massage
parlor would not just be a shelter for frazzled nerves, but for taxes as well.
Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to
promote an absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself
up to all sorts of mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils
that could arise from the majority ruling. This is indeed a very strange and very wrong decision.
I dissent.
DANTE O. TINGA
Associate Justice

G.R. No. L-31061 August 17, 1976

SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS
& SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF
DEEDS OF BULACAN, defendants-appellees.
Hill & Associates Law Offices for appellant.
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the
Government Corporate Counsel for appellee National Waterworks & Sewerage
Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff corporation (non- stock may
institute an action in behalf of its individual members for the recovery of certain parcels
of land allegedly owned by said members; for the nullification of the transfer certificates
of title issued in favor of defendants appellees covering the aforesaid parcels of land; for
a declaration of "plaintiff's members as absolute owners of the property" and the
issuance of the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de
revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District,
Valenzuela, Bulacan, against defendants-appellees to recover the ownership and
possession of a large tract of land in San Jose del Monte, Bulacan, containing an area
of 27,982,250 square meters, more or less, registered under the Torrens System in the
name of defendants-appellees' predecessors-in-interest. 1 The complaint, as amended on
June 13, 1966, specifically alleged that plaintiff is a corporation organized and existing under the laws of
the Philippines, with its principal office and place of business at San Jose del Monte, Bulacan; that its
membership is composed of natural persons residing at San Jose del Monte, Bulacan; that the members
of the plaintiff corporation, through themselves and their predecessors-in-interest, had pioneered in the
clearing of the fore-mentioned tract of land, cultivated the same since the Spanish regime and
continuously possessed the said property openly and public under concept of ownership adverse against
the whole world; that defendant-appellee Gregorio Araneta, Inc., sometime in the year 1958, through
force and intimidation, ejected the members of the plaintiff corporation fro their possession of the
aforementioned vast tract of land; that upon investigation conducted by the members and officers of
plaintiff corporation, they found out for the first time in the year 1961 that the land in question "had been
either fraudelently or erroneously included, by direct or constructive fraud, in Original Certificate of Title

No. 466 of the Land of Records of the province of Bulacan", issued on May 11, 1916, which title is
fictitious, non-existent and devoid of legal efficacy due to the fact that "no original survey nor plan
whatsoever" appears to have been submitted as a basis thereof and that the Court of First Instance of
Bulacan which issued the decree of registration did not acquire jurisdiction over the land registration case
because no notice of such proceeding was given to the members of the plaintiff corporation who were
then in actual possession of said properties; that as a consequence of the nullity of the original title, all
subsequent titles derived therefrom, such as Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer Certificate of
Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued in the
name of, the National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of Title No. 4986
issued in the name of Hacienda Caretas, Inc., and another transfer certificate of title in the name of
Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently prayed (1) that Original
Certificate of Title No. 466, as well as all transfer certificates of title issued and derived therefrom, be
nullified; (2) that "plaintiff's members" be declared as absolute owners in common of said property and
that the corresponding certificate of title be issued to plaintiff; and (3) that defendant-appellee Gregorio
Araneta, Inc. be ordered to pay to plaintiff the damages therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the amended
complaint on the grounds that (1) the complaint states no cause of action; and (2) the cause of action, if
any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions
to dismiss based on the same grounds. Appellee National Waterworks & Sewerage Authority did not file
any motion to dismiss. However, it pleaded in its answer as special and affirmative defenses lack of
cause of action by the plaintiff-appellant and the barring of such action by prescription and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7, 1966,
praying that the case be transferred to another branch of the Court of First Instance sitting at Malolos,
Bulacan, According to defendants-appellees, they were not furnished a copy of said motion, hence, on
October 14, 1966, the lower court issued an Order requiring plaintiff-appellant to furnish the appellees
copy of said motion, hence, on October 14, 1966, defendant-appellant's motion dated October 7, 1966
and, consequently, prayed that the said motion be denied for lack of notice and for failure of the plaintiffappellant to comply with the Order of October 14, 1966. Similarly, defendant-appellee paradise Farms,
Inc. filed, on December 2, 1966, a manifestation information the court that it also did not receive a copy of
the afore-mentioned of appellant. On January 24, 1967, the trial court issued an Order dismissing the
amended complaint.
On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds that
the court had no jurisdiction to issue the Order of dismissal, because its request for the transfer of the
case from the Valenzuela Branch of the Court of First Instance to the Malolos Branch of the said court
has been approved by the Department of Justice; that the complaint states a sufficient cause of action
because the subject matter of the controversy in one of common interest to the members of the
corporation who are so numerous that the present complaint should be treated as a class suit; and that
the action is not barred by the statute of limitations because (a) an action for the reconveyance of
property registered through fraud does not prescribe, and (b) an action to impugn a void judgment may be
brought any time. This motion was denied by the trial court in its Order dated February 22, 1967. From
the afore-mentioned Order of dismissal and the Order denying its motion for reconsideration, plaintiffappellant appealed to the Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in the
appeal but only questions of law and jurisdiction, certified this case to this Court for resolution of the legal
issues involved in the controversy.
I

Appellant contends, as a first assignment of error, that the trial court acted without authority and
jurisdiction in dismissing the amended complaint when the Secretary of Justice had already approved the
transfer of the case to any one of the two branches of the Court of First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in the
different branches of the same Court of First Instance. Jurisdiction implies the power of the court to
decide a case, while venue the place of action. There is no question that respondent court has jurisdiction
over the case. The venue of actions in the Court of First Instance is prescribed in Section 2, Rule 4 of the
Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but must be in
accordance with the aforesaid provision of the rules. 2 The mere fact that a request for the transfer of a
case to another branch of the same court has been approved by the Secretary of Justice does not divest
the court originally taking cognizance thereof of its jurisdiction, much less does it change the venue of the
action. As correctly observed by the trial court, the indorsement of the Undersecretary of Justice did not
order the transfer of the case to the Malolos Branch of the Bulacan Court of First Instance, but only
"authorized" it for the reason given by plaintiff's counsel that the transfer would be convenient for the
parties. The trial court is not without power to either grant or deny the motion, especially in the light of a
strong opposition thereto filed by the defendant. We hold that the court a quo acted within its authority in
denying the motion for the transfer the case to Malolos notwithstanding the authorization" of the same by
the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to dismiss refer to the lack of
personality of plaintiff to file the instant action. Essentially, the term 'cause of action' is
composed of two elements: (1) the right of the plaintiff and (2) the violation of such right
by the defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules require that every
action must be prosecuted and defended in the name of the real party in interest and that
all persons having an interest in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In the amended complaint, the
people whose rights were alleged to have been violated by being deprived and
dispossessed of their land are the members of the corporation and not the corporation
itself. The corporation has a separate. and distinct personality from its members, and this
is not a mere technicality but a matter of substantive law. There is no allegation that the
members have assigned their rights to the corporation or any showing that the
corporation has in any way or manner succeeded to such rights. The corporation
evidently did not have any rights violated by the defendants for which it could seek
redress. Even if the Court should find against the defendants, therefore, the plaintiff
corporation would not be entitled to the reliefs prayed for, which are recoveries of
ownership and possession of the land, issuance of the corresponding title in its name,
and payment of damages. Neither can such reliefs be awarded to the members allegedly
deprived of their land, since they are not parties to the suit. It appearing clearly that the
action has not been filed in the names of the real parties in interest, the complaint must
be dismissed on the ground of lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed the
amended complaint.
It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal
entity to be considered as separate and apart from the individual stockholders or members who compose
it, and is not affected by the personal rights, obligations and transactions of its stockholders or members.

The property of the corporation is its property and not that of the stockholders, as owners, although they
have equities in it. Properties registered in the name of the corporation are owned by it as an entity
5
separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the
individual property of its stockholders unless transferred to the corporation, "even in the case of a oneman corporation. 6 The mere fact that one is president of a corporation does not render the property
which he owns or possesses the property of the corporation, since the president, as individual, and the
corporation are separate similarities. 7 Similarly, stockholders in a corporation engaged in buying and
dealing in real estate whose certificates of stock entitled the holder thereof to an allotment in the
distribution of the land of the corporation upon surrender of their stock certificates were considered not to
have such legal or equitable title or interest in the land, as would support a suit for title, especially against
8
parties other than the corporation.
It must be noted, however, that the juridical personality of the corporation, as separate and distinct from
the persons composing it, is but a legal fiction introduced for the purpose of convenience and to subserve
the ends of justice. 9 This separate personality of the corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work -an
10
injustice, or where necessary to achieve equity.
Thus, 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, the one being merely regarded as part or instrumentality of the other.
11
The same is true where a corporation is a dummy and serves no business purpose and is intended
only as a blind, or an alter ego or business conduit for the sole benefit of the stockholders. 12 This doctrine
of disregarding the distinct personality of the corporation has been applied by the courts in those cases
when the corporate entity is used for the evasion of taxes 13 or when the veil of corporate fiction is used to
confuse legitimate issue of employer-employee relationship, 14 or when necessary for the protection of
creditors, in which case the veil of corporate fiction may be pierced and the funds of the corporation may
be garnished to satisfy the debts of a principal stockholder. 15 The aforecited principle is resorted to by the
courts as a measure protection for third parties to prevent fraud, illegality or injustice. 16
It has not been claimed that the members have assigned or transferred whatever rights they may have on
the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a corporation,
like plaintiff-appellant herein, has no personality to bring an action for and in behalf of its stockholders or
members for the purpose of recovering property which belongs to said stockholders or members in their
personal capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right
17
conferred' by law upon a person. Evidently, there can be no wrong without a corresponding right, and
18
no breach of duty by one person without a corresponding right belonging to some other person. Thus,
the essential elements of a cause of action are legal right of the plaintiff, correlative obligation of the
defendant, an act or omission of the defendant in violation of the aforesaid legal right. 19 Clearly, no right
of action exists in favor of plaintiff corporation, for as shown heretofore it does not have any interest in the
subject matter of the case which is material and, direct so as to entitle it to file the suit as a real party in
interest.
III
Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant to
Section 12 of Rule 3 of the Revised Rules of Court.
In order that a class suit may prosper, the following requisites must be present: (1) that the subject matter
of the controversy is one of common or general interest to many persons; and (2) that the parties are so
numerous that it is impracticable to bring them all before the court. 20

Under the first requisite, the person who sues must have an interest in the controversy, common with
those for whom he sues, and there must be that unity of interest between him and all such other persons
which would entitle them to maintain the action if suit was brought by them jointly. 21
As to what constitutes common interest in the subject matter of the controversy, it has been explained in
22
Scott v. Donald thus:
The interest that will allow parties to join in a bill of complaint, or that will enable the court
to dispense with the presence of all the parties, when numerous, except a determinate
number, is not only an interest in the question, but one in common in the subject Matter
of the suit; ... a community of interest growing out of the nature and condition of the right
in dispute; for, although there may not be any privity between the numerous parties, there
is a common title out of which the question arises, and which lies at the foundation of the
proceedings ... [here] the only matter in common among the plaintiffs, or between them
and the defendants, is an interest in the Question involved which alone cannot lay a
foundation for the joinder of parties. There is scarcely a suit at law, or in equity which
settles a Principle or applies a principle to a given state of facts, or in which a general
statute is interpreted, that does not involved a Question in which other parties are
interested. ... (Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in the
subject matter of the controversy, and cannot, therefore, represent its members or stockholders who
claim to own in their individual capacities ownership of the said property. Moreover, as correctly stated by
the appellees, a class suit does not lie in actions for the recovery of property where several persons claim
Partnership of their respective portions of the property, as each one could alleged and prove his
respective right in a different way for each portion of the land, so that they cannot all be held to have
Identical title through acquisition prescription. 23
Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower court
cannot be considered as a class suit, it would be unnecessary and an Idle exercise for this Court to
resolve the remaining issue of whether or not the plaintiffs action for reconveyance of real property based
upon constructive or implied trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant.
Fernando, C.J., Barredo, Aquino and Concepcion, Jr., JJ., concur.

[G.R. No. 125986. January 28, 1999]

LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners, vs. HONORABLE
COURT OF APPEALS, JAMES BUILDER CONSTRUCTION and/or JAIME T. BRAVO,
respondents.
DECISION
MARTINEZ, J.:
This petition for review assails the decision of the respondent Court of Appeals dated March 15,
1996,i[1] which affirmed with modification the judgment of default rendered by the Regional
Trial Court of Muntinlupa, Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed
for in the complaint of private respondent James Builder Construction and/or Jaime T. Bravo.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectare property in
Sucat, Muntinlupa, which was occupied by squatters. Petitioner Posadas entered into
negotiations with private respondent Jaime T. Bravo regarding the development of the said
property into a residential subdivision. On May 3, 1989, she authorized private respondent to
negotiate with the squatters to leave the said property. With a written authorization, respondent
Bravo buckled down to work and started negotiations with the squatters.
Meanwhile, some seven (7) months later, on December 11, 1989, petitioner Posadas and her two
(2) children, through a Deed of Assignment, assigned the said property to petitioner Luxuria
Homes, Inc., purportedly for organizational and tax avoidance purposes. Respondent Bravo
signed as one of the witnesses to the execution of the Deed of Assignment and the Articles of
Incorporation of petitioner Luxuria Homes, Inc.
Then sometime in 1992, the harmonious and congenial relationship of petitioner Posadas and
respondent Bravo turned sour when the former supposedly could not accept the management
contracts to develop the 1.6 hectare property into a residential subdivision, the latter was
proposing. In retaliation, respondent Bravo demanded payment for services rendered in
connection with the development of the land. In his statement of account dated 21 August
1991ii[2] respondent demanded the payment of P1,708,489.00 for various services rendered, i.e.,
relocation of squatters, preparation of the architectural design and site development plan, survey
and fencing.
Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, private
respondents James Builder Construction and Jaime T. Bravo instituted a complaint for specific
performance before the trial court against petitioners Posadas and Luxuria Homes, Inc. Private
respondents alleged therein that petitioner Posadas asked them to clear the subject parcel of land
of squatters for a fee of P1,100,000.00 for which they were partially paid the amount of

P461,511.50, leaving a balance of P638,488.50. They were also supposedly asked to prepare a
site development plan and an architectural design for a contract price of P450,000.00 for which
they were partially paid the amount of P25,000.00, leaving a balance of P425,000.00. And in
anticipation of the signing of the land development contract, they had to construct a bunkhouse
and warehouse on the property which amounted to P300,000.00, and a hollow blocks factory for
P60,000.00. Private respondents also claimed that petitioner Posadas agreed that private
respondents will develop the land into a first class subdivision thru a management contract and
that petitioner Posadas is unjustly refusing to comply with her obligation to finalize the said
management contract.
The prayer in the complaint of the private respondents before the trial court reads as follows:
WHEREFORE, premises considered, it is respectfully prayed of this Honorable Court that after
hearing/trial judgment be rendered ordering defendant to:
a) Comply with its obligation to deliver/finalize Management Contract of its land in Sucat,
Muntinlupa, Metro Manila and to pay plaintiff its balance in the amount of P1,708,489.00;
b) Pay plaintiff moral and exemplary damages in the amount of P500,000.00;
c) Pay plaintiff actual damages in the amount of P500,000.00 (Bunkhouse/warehouse
P300,000.00, Hollow-block factory P60,000.00, lumber, cement, etc., P120,000.00, guard
P20,000.00);
d) Pay plaintiff attorneys fee of P50,000 plus P700 per appearance in court and 5% of that which
may be awarded by the court to plaintiff re its monetary claims;
e) Pay cost of this suit.iii[3]
On September 27, 1993, the trial court declared petitioner Posadas in default and allowed the
private respondents to present their evidence ex-parte. On March 8, 1994, it ordered petitioner
Posadas, jointly and in solidum with petitioner Luxuria Homes, Inc., to pay private respondents
as follows:
1. x x x the balance of the payment for the various services performed by Plaintiff with respect to
the land covered by TCT NO. 167895 previously No. 158290 in the total amount of
P1,708,489.00.
2. x x x actual damages incurred for the construction of the warehouses/bunks, and for the
materials used in the total sum of P1,500,000.00.
3. Moral and exemplary damages of P500,000.00.
4. Attorneys fee of P50,000.00.
5. And cost of this proceedings.

Defendant Aida Posadas as the Representative of the Corporation Luxuria Homes, Incorporated,
is further directed to execute the management contract she committed to do, also in consideration
of the various undertakings that Plaintiff rendered for her.iv[4]
Aggrieved by the aforecited decision, petitioners appealed to respondent Court of Appeals,
which, as aforestated, affirmed with modification the decision of the trial court. The appellate
court deleted the award of moral damages on the ground that respondent James Builder
Construction is a corporation and hence could not experience physical suffering and mental
anguish. It also reduced the award of exemplary damages. The dispositive portion of the decision
reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with the modification that the
award of moral damages is ordered deleted and the award of exemplary damages to the
plaintiffs-appellee should only be in the amount of FIFTY THOUSAND (P50,000.00)
PESOS.v[5]
Petitioners motion for reconsideration was denied, prompting the filing of this petition for review
before this Court.
On January 15, 1997, the Third Division of this Court denied due course to this petition for
failing to show convincingly any reversible error on the part of the Court of Appeals. This Court
however deleted the grant of exemplary damages and attorneys fees. The Court also reduced the
trial courts award of actual damages from P1,500,000.00 to P500,000.00 reasoning that the grant
should not exceed the amount prayed for in the complaint. In the prayer in the complaint
respondents asked for actual damages in the amount of P500,000.00 only.
Still feeling aggrieved with the resolution of this Court, petitioners filed a motion for
reconsideration. On March 17, 1997, this Court found merit in the petitioners motion for
reconsideration and reinstated this petition for review.
From their petition for review and motion for reconsideration before this Court, we now
synthesize the issues as follows:
1. Were private respondents able to present ex-parte sufficient evidence to substantiate the
allegations in their complaint and entitle them to their prayers?
2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents for the
transactions supposedly entered into between petitioner Posadas and private respondents?
3. Can petitioners be compelled to enter into a management contract with private
respondents?
Petitioners who were declared in default assert that the private respondents who presented their
evidence ex-parte nonetheless utterly failed to substantiate the allegations in their complaint and
as such cannot be entitled to the reliefs prayed for.

A perusal of the record shows that petitioner Posadas contracted respondents Bravo to render
various services for the initial development of the property as shown by vouchers evidencing
payments made by petitioner Posadas to respondents Bravo for squatter relocation, architectural
design, survey and fencing.
Respondents prepared the architectural design, site development plan and survey in connection
with petitioner Posadas application with the Housing and Land Regulatory Board (HLRUB) for
the issuance of the Development Permit, Preliminary Approval and Locational Clearance.vi[6]
Petitioner benefited from said services as the Development Permit and the Locational Clearance
were eventually issued by the HLURB in her favor. Petitioner Posadas is therefore liable to pay
for these services rendered by respondents. The contract price for the survey of the land is
P140,000.00. Petitioner made partial payments totaling P130,000.00 leaving a payable balance of
P10,000.00.
In his testimony,vii[7] he alleged that the agreed price for the preparation of the site development
plan is P500,000.00 and that the preparation of the architectural designs is for P450,000, or a
total of P950,000.00 for the two contracts. In his complaint however, respondent Bravo alleged
that he was asked to prepare the site development plan and the architectural designs x x x for a
contract price of P450,000.00 x x x.viii[8] The discrepancy or inconsistency was never
reconciled and clarified.
We reiterate that we cannot award an amount higher than what was claimed in the complaint.
Consequently for the preparation of both the architectural design and site development plan,
respondent is entitled to the amount of P450,000.00 less partial payments made in the amount of
P25,000.00. In Policarpio v. RTC of Quezon City,ix[9] it was held that a court is bereft of
jurisdiction to award, in a judgment by default, a relief other than that specifically prayed for in
the complaint.
As regards the contracts for the ejectment of squatters and fencing, we believe however that
respondents failed to show proof that they actually fulfilled their commitments therein. Aside
from the bare testimony of respondent Bravo, no other evidence was presented to show that all
the squatter were ejected from the property. Respondent Bravo failed to show how many shanties
or structures were actually occupying the property before he entered the same, to serve as basis
for concluding whether the task was finished or not. His testimony alone that he successfully
negotiated for the ejectment of all the squatters from the property will not suffice.
Likewise, in the case of fencing, there is no proof that it was accomplished as alleged.
Respondent Bravo claims that he finished sixty percent (60%) of the fencing project but he failed
to present evidence showing the area sought to be fenced and the actual area fenced by him. We
therefore have no basis to determining the veracity respondents allegations. We cannot assume
that the said services rendered for it will be unfair to require petitioner to pay the full amount
claimed in case the respondents obligations were not completely fulfilled.
For respondents failure to show proof of accomplishment of the aforesaid services, their claims
cannot be granted. In P.T. Cerna Corp. v. Court of Appeals,x[10] we ruled that in civil cases, the
burden of proof rests upon the party who, as determined by the pleadings or the nature of the

case, asserts the affirmative of an issue. In this case the burden lies on the complainant, who is
duty bound to prove the allegations in the complaint. As this Court has held, he who alleges a
fact has the burden of proving it and A MERE ALLEGATION IS NOT EVIDENCE.
And the rules do not change even if the defendant is declared in default. In the leading case of
Lopez v. Mendezona,xi[11] this Court ruled that after entry of judgment in default against a
defendant who has neither appeared nor answered, and before final judgment in favor of the
plaintiff, the latter must establish by competent evidence all the material allegations of his
complaint upon which he bases his prayer for relief. In De los Santos v. De la Cruzxii[12] this
Court declared that a judgment by default against a defendant does not imply a waiver of rights
except that of being heard and of presenting evidence in his favor. It does not imply admission
by the defendant of the facts and causes of action of the plaintiff, because the codal section
requires the latter to adduce his evidence in support of his allegations as an indispensable
condition before final judgment could be given in his favor. Nor could it be interpreted as an
admission by the defendant that the plaintiffs causes of action finds support in the law or that the
latter is entitled to the relief prayed for.
We explained the rule in judgments by default in Pascua v. Florendo,xiii[13] where we said that
nowhere is it stated that the complainants are automatically entitled to the relief prayed for, once
the defendants are declared in default. Favorable relief can be granted only after the court has
ascertained that the evidence offered and the facts proven by the presenting party warrant the
grant of the same. Otherwise it would be meaningless to require presentation of evidence if
everytime the other party is declared in default, a decision would automatically be rendered in
favor of the non-defaulting party and exactly according to the tenor of his prayer. In Lim Tanhu
v. Ramoletexiv[14] we elaborated and said that a defaulted defendant is not actually thrown out
of court. The rules see to it that any judgment against him must be in accordance with law. The
evidence to support the plaintiffs cause is, of course, presented in his absence, but the court is not
supposed to admit that which is basically incompetent. Although the defendant would not be in a
position to object, elementary justice requires that only legal evidence should be considered
against him. If the evidence presented should not be sufficient to justify a judgment for the
plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be justifiable,
it cannot exceed the amount or be different in kind from what is prayed for in the complaint.
The prayer for actual damages in the amount of P500,000.00, supposedly for the
bunkhouse/warehouse, hollow-block factory, lumber, cement, guard, etc., which the trial court
granted and even increased to P1,500,000.00, and which this Court would have rightly reduced
to the amount prayed for in the complaint, was not established, as shown upon further review of
the record. No receipts or vouchers were presented by private respondents to show that they
actually spent the amount. In Salas v. Court of Appeals,xv[15] we said that the burden of proof
of the damages suffered is on the party claiming the same. It his duty to present evidence to
support his claim for actual damages. If he failed to do so, he has only himself to blame if no
award for actual damages is handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of Appeals,xvi[16] basic
is the rule that to recover actual damages, the amount of loss must not only be capable of proof

but must actually be proven with reasonable degree of certainty, premised upon competent proof
or best evidence obtainable of the actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc., was a party to the transactions
entered into by petitioner Posadas and private respondents and thus could be held jointly and
severally with petitioner Posadas. Private respondents contend that petitioner Posadas
surreptitiously formed Luxuria Homes, Inc., and transferred the subject parcel of land to it to
evade payment and defraud creditors, including private respondents. This allegation does not
find support in the evidence on record.
On the contrary we hold that respondents Court of Appeals committed a reversible error when it
upheld the factual finding of the trial court that petitioners liability was aggravated by the fact
that Luxuria Homes, Inc., was formed by petitioner Posadas after demand for payment had been
made, evidently for her to evade payment of her obligation, thereby showing that the transfer of
her property to Luxuria Homes, Inc., was in fraud of creditors.
We easily glean from the record that private respondents sent demand letters on 21 August 1991
and 14 September 1991, or more than a year and a half after the execution of the Deed of
Assignment on 11 December 1989, and the issuance of the Articles of Incorporation of petitioner
Luxuria Homes on 26 January 1990. And, the transfer was made at the time the relationship
between petitioner Posadas and private respondents was supposedly very pleasant. In fact the
Deed of Assignment dated 11 December 1989 and the Articles of Incorporation of Luxuria
Homes, Inc., issued 26 January 1990 were both signed by respondent Bravo himself as witness.
It cannot be said then that the incorporation of petitioner Luxuria Homes and the eventual
transfer of the subject property to it were in fraud of private respondent as such were done with
the full knowledge of respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes, Inc., as
erroneously stated by the lower court. The Articles of Incorporation of petitioner Luxuria
Homes, Inc., clearly show that petitioner Posadas owns approximately 33% only of the capital
stock. Hence petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria
Homes, Inc.
To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly
and convincingly established. It cannot be presumed. This is elementary. Thus in Bayer-Roxas v.
Court of Appeals,xvii[17] we said that the separate personality of the corporation may be
disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to
work injustice, or where necessary for the protection of the creditors. Accordingly in Del
Rosario v. NLRC,xviii[18] where the Philsa International Placement and Services Corp. was
organized and registered with the POEA in 1981, several years before the complainant was filed
a case in 1985, we held that this cannot imply fraud.
Obviously in the instant case, private respondents failed to show proof that petitioner Posadas
acted in bad faith. Consequently since private respondents failed to show that petitioner Luxuria
Homes, Inc., was a party to any of the supposed transactions, not even to the agreement to
negotiate with and relocate the squatters, it cannot be held liable, nay jointly and in solidum, to

pay private respondents. In this case since it was petitioner Aida M. Posadas who contracted
respondent Bravo to render the subject services, only she is liable to pay the amounts adjudged
herein.
We now resolved the third and final issue. Private respondents urge the court to compel
petitioners to execute a management contract with them on the basis of the authorization letter
dated May 3, 1989. The full text of Exh D reads:
I hereby certify that we have duly authorized the bearer, Engineer Bravo to negotiate, in our
behalf, the ejectment of squatters from our property of 1.6 hectares, more or less, in Sucat,
Muntinlupa. This authority is extended to him as the representatives of the Managers, under our
agreement for them to undertake the development of said area and the construction of housing
units intended to convert the land into a first class subdivision.
The aforecited document is nothing more than a to-whom-it-may-concern authorization letter to
negotiate with the squatters. Although it appears that there was an agreement for the
development of the area, there is no showing that same was never perfected and finalized.
Private respondents presented in evidence only drafts of a proposed management contract with
petitioners handwritten marginal notes but the management contract was not put in its final form.
The reason why there was no final uncorrected draft was because the parties could not agree on
the stipulations of said contract, which even the private respondents admitted as found by the
trial court.xix[19] As a consequence the management drafts submitted by the private respondents
should at best be considered as mere unaccepted offers. We find no cogent reason, considering
that the parties no longer are in a harmonious relationship, for the execution of a contract to
develop a subdivision.
It is fundamental that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. To compel petitioner Posadas, whether as
representatives of petitioners Luxuria Homes or in her personal capacity, to execute a
management contract under the terms and conditions of private respondents would be to violate
the principle of consensuality of contracts. In Philippine National bank v. Court of
Appeals,xx[20] we held that if the assent is wanting on the part of one who contracts, his act has
no more efficacy than if it had been done under duress or by a person of unsound mind. In
ordering petitioner Posadas to execute a management contract with private respondents, the trial
court in effect is putting her under duress.
The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime
prior to the perfection of a contract, unaccepted offers and proposals remain as such and cannot
be considered as binding commitments; hence not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision dated March
15, 1996, of respondent Honorable Court of Appeals and its Resolution dated August 12, 1996,
are MODIFIED ordering PETITIONER AIDA M. POSADAS to pay PRIVATE
RESPONDENTS the amount of P435,000.00 as balance for the preparation of the architectural
design, site development plan and survey. All other claims of respondents are hereby DENIED
for lack of merit.

G.R. No. L-23893

October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC
SERVICE COMMISSION, defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendantsappellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.
Chuidian Law Office for plaintiff-appellant.
Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case
No. 41845, declaring null and void the sheriff's sale of two certificates of public convenience in
favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant
Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the
lawful owner of the said certificates of public convenience; and ordering the private defendants,
jointly and severally, to pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The
case against the PSC was dismissed.
The rather ramified circumstances of the instant case can best be understood by a chronological
narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business
name of Villa Rey Transit, pursuant to certificates of public convenience granted him by the
Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized
him to operate a total of thirty-two (32) units on various routes or lines from Pangasinan to
Manila, and vice-versa. On January 8, 1959, he sold the aforementioned two certificates of
public convenience to the Pangasinan Transportation Company, Inc. (otherwise known as
Pantranco), for P350,000.00 with the condition, among others, that the seller (Villarama) "shall
not for a period of 10 years from the date of this sale, apply for any TPU service identical or
competing with the buyer."
Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc.
(which shall be referred to hereafter as the Corporation) was organized with a capital stock of
P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the
subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the
incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by

the brother and sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00
was paid to the treasurer of the corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and Exchange Commission (March
10, 1959), the Corporation, on April 7, 1959, bought five certificates of public convenience,
forty-nine buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00,
of which P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon
the final approval of the sale by the PSC; P49,500.00 one year after the final approval of the sale;
and the balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the
SELLER."
The very same day that the aforementioned contract of sale was executed, the parties thereto
immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional
authority in favor of the vendee Corporation to operate the service therein involved. 1 On May 19,
1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be
modified or revoked by the Commission at any time, shall be subject to whatever action that may
be taken on the basic application and shall be valid only during the pendency of said
application." Before the PSC could take final action on said application for approval of sale,
however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public
convenience involved therein, namely, those issued under PSC cases Nos. 59494 and 63780,
pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case
No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando,
defendant, judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On
July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of public
convenience. Ferrer was the highest bidder, and a certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly
submitted for approval their corresponding contract of sale to the PSC.2 Pantranco therein prayed
that it be authorized provisionally to operate the service involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the Corporation,
Case No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint
hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during
the pendency of the cases and before a final resolution on the aforesaid applications, the
Pantranco shall be the one to operate provisionally the service under the two certificates
embraced in the contract between Ferrer and Pantranco. The Corporation took issue with this
particular ruling of the PSC and elevated the matter to the Supreme Court,3 which decreed, after
deliberation, that until the issue on the ownership of the disputed certificates shall have been
finally settled by the proper court, the Corporation should be the one to operate the lines
provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint
for the annulment of the sheriff's sale of the aforesaid two certificates of public convenience
(PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale
thereof by the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff

Corporation prayed therein that all the orders of the PSC relative to the parties' dispute over the
said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation
had no valid title to the certificates in question because the contract pursuant to which it acquired
them from Fernando was subject to a suspensive condition the approval of the PSC which
has not yet been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public
auction of the certificates referred to, as well as the sale of the same by Ferrer to Pantranco, were
valid and regular, and vested unto Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that
Villarama and the Corporation, are one and the same; that Villarama and/or the Corporation was
disqualified from operating the two certificates in question by virtue of the aforementioned
agreement between said Villarama and Pantranco, which stipulated that Villarama "shall not for
a period of 10 years from the date of this sale, apply for any TPU service identical or competing
with the buyer."
Upon the joinder of the issues in both the complaint and third-party complaint, the case was
tried, and thereafter decision was rendered in the terms, as above stated.
As stated at the beginning, all the parties involved have appealed from the decision. They
submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc.
(Corporation) is a distinct and separate entity from Jose M. Villarama; that the restriction clause
in the contract of January 8, 1959 between Pantranco and Villarama is null and void; that the
Sheriff's sale of July 16, 1959, is likewise null and void; and the failure to award damages in its
favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and
void; and the sale of the two certificates in question by Valentin Fernando to the Corporation, is
valid. He also assails the award of P5,000.00 as attorney's fees in favor of the Corporation, and
the failure to award moral damages to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision awarding
only P5,000.00 as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by
way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1)
Does the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the
former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE,
APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER,"
apply to new lines only or does it include existing lines?; (2) Assuming that said stipulation
covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the affirmative, that
said stipulation is valid, did it bind the Corporation?

For convenience, We propose to discuss the foregoing issues by starting with the last
proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the
Corporation, alleging that he did not become such, because he did not have sufficient funds to
invest, his wife, however, was an incorporator with the least subscribed number of shares, and
was elected treasurer of the Corporation. The finances of the Corporation which, under all
concepts in the law, are supposed to be under the control and administration of the treasurer
keeping them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as
if they were the private funds of Villarama, in such a way and extent that Villarama appeared to
be the actual owner-treasurer of the business without regard to the rights of the stockholders. The
following testimony of Villarama,4 together with the other evidence on record, attests to that
effect:
Q.
Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc.
You heard the testimony presented here by the bank regarding the initial opening deposit
of ONE HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five
Thousand Pesos was a check drawn by yourself personally. In the direct examination you
told the Court that the reason you drew a check for Eighty-Five Thousand Pesos was
because you and your wife, or your wife, had spent the money of the stockholders given
to her for incorporation. Will you please tell the Honorable Court if you knew at the time
your wife was spending the money to pay debts, you personally knew she was spending
the money of the incorporators?
A.
You know my money and my wife's money are one. We never talk about those
things.
Q.
Doctor, your answer then is that since your money and your wife's money are one
money and you did not know when your wife was paying debts with the incorporator's
money?
A.
Because sometimes she uses my money, and sometimes the money given to her
she gives to me and I deposit the money.
Q.
Actually, aside from your wife, you were also the custodian of some of the
incorporators here, in the beginning?
A.
Not necessarily, they give to my wife and when my wife hands to me I did not
know it belonged to the incorporators.
Q.
It supposes then your wife gives you some of the money received by her in her
capacity as treasurer of the corporation?
A.

Maybe.

Q.

What did you do with the money, deposit in a regular account?

A.

Deposit in my account.

Q.

Of all the money given to your wife, she did not receive any check?

A.

I do not remember.

Q.
Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking
what is this?
xxx
JUDGE:

xxx

xxx

Reform the question.

Q.
The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos,
did your wife give you Fifty-two Thousand Pesos?
A.
I have testified before that sometimes my wife gives me money and I do not know
exactly for what.
The evidence further shows that the initial cash capitalization of the corporation of P105,000.00
was mostly financed by Villarama. Of the P105,000.00 deposited in the First National City Bank
of New York, representing the initial paid-up capital of the Corporation, P85,000.00 was covered
by Villarama's personal check. The deposit slip for the said amount of P105,000.00 was admitted
in evidence as Exh. 23, which shows on its face that P20,000.00 was paid in cash and P85,000.00
thereof was covered by Check No. F-50271 of the First National City Bank of New York. The
testimonies of Alfonso Sancho 5 and Joaquin Amansec,6 both employees of said bank, have
proved that the drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of
the corporation there appears an entry that the treasurer received P95,000.00 as second
installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as the first
installment of the offer for second subscriptions worth P200,000.00 from the original
subscribers, yet Villarama directed him (Rivera) to make vouchers liquidating the sums.7 Thus, it
was made to appear that the P95,000.00 was delivered to Villarama in payment for equipment
purchased from him, and the P100,000.00 was loaned as advances to the stockholders. The said
accountant, however, testified that he was not aware of any amount of money that had actually
passed hands among the parties involved,8 and actually the only money of the corporation was
the P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned above, P85,000.00
was paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its initial months of operation,
Villarama purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits
20 and 21 disclose that the said purchases were paid by Philippine Bank of Commerce Checks
Nos. 992618-B and 993621-B, respectively. These checks have been sufficiently established by
Fausto Abad, Assistant Accountant of Manila Trading & Supply Co., from which the trucks were

purchased9 and Aristedes Solano, an employee of the Philippine Bank of Commerce, 10 as having
been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers
showing that Villarama had co-mingled his personal funds and transactions with those made in
the name of the Corporation, are very illuminating evidence. Villarama has assailed the
admissibility of these exhibits, contending that no evidentiary value whatsoever should be given
to them since "they were merely photostatic copies of the originals, the best evidence being the
originals themselves." According to him, at the time Pantranco offered the said exhibits, it was
the most likely possessor of the originals thereof because they were stolen from the files of the
Corporation and only Pantranco was able to produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of
secondary evidence when the original is in the custody of the adverse party, thus: (1) opponent's
possession of the original; (2) reasonable notice to opponent to produce the original; (3)
satisfactory proof of its existence; and (4) failure or refusal of opponent to produce the original in
court.11 Villarama has practically admitted the second and fourth requisites. 12 As to the third, he
admitted their previous existence in the files of the Corporation and also that he had seen some
of them.13 Regarding the first element, Villarama's theory is that since even at the time of the
issuance of the subpoena duces tecum, the originals were already missing, therefore, the
Corporation was no longer in possession of the same. However, it is not necessary for a party
seeking to introduce secondary evidence to show that the original is in the actual possession of
his adversary. It is enough that the circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party entitled to the custody of the
instrument should, on being notified to produce it, admit having it in his possession. 14 Hence,
secondary evidence is admissible where he denies having it in his possession. The party calling
for such evidence may introduce a copy thereof as in the case of loss. For, among the exceptions
to the best evidence rule is "when the original has been lost, destroyed, or cannot be produced in
court."15 The originals of the vouchers in question must be deemed to have been lost, as even the
Corporation admits such loss. Viewed upon this light, there can be no doubt as to the
admissibility in evidence of Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's testimony, 16 it would
appear that: Villarama supplied the organization expenses and the assets of the Corporation, such
as trucks and equipment;17 there was no actual payment by the original subscribers of the
amounts of P95,000.00 and P100,000.00 as appearing in the books;18 Villarama made use of the
money of the Corporation and deposited them to his private accounts;19 and the Corporation paid
his personal accounts.20
Villarama himself admitted that he mingled the corporate funds with his own money. 21 He also
admitted that gasoline purchases of the Corporation were made in his name 22 because "he had
existing account with Stanvac which was properly secured and he wanted the Corporation to
benefit from the rebates that he received."23

The foregoing circumstances are strong persuasive evidence showing that Villarama has been too
much involved in the affairs of the Corporation to altogether negative the claim that he was only
a part-time general manager. They show beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of Villarama's
oneness with the Corporation has been denied by him. On the contrary, he has admitted them
with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the
Corporation with the lame excuse that "his wife had requested him to reimburse the amount
entrusted to her by the incorporators and which she had used to pay the obligations of Dr.
Villarama (her husband) incurred while he was still the owner of Villa Rey Transit, a single
proprietorship." But with his admission that he had received P350,000.00 from Pantranco for the
sale of the two certificates and one unit,24 it becomes difficult to accept Villarama's explanation
that he and his wife, after consultation, 25 spent the money of their relatives (the stockholders)
when they were supposed to have their own money. Even if Pantranco paid the P350,000.00 in
check to him, as claimed, it could have been easy for Villarama to have deposited said check in
his account and issued his own check to pay his obligations. And there is no evidence adduced
that the said amount of P350,000.00 was all spent or was insufficient to settle his prior
obligations in his business, and in the light of the stipulation in the deed of sale between
Villarama and Pantranco that P50,000.00 of the selling price was earmarked for the payments of
accounts due to his creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila Trading &
Supply Co. with his personal checks, his reason was that he was only sharing with the
Corporation his credit with some companies. And his main reason for mingling his funds with
that of the Corporation and for the latter's paying his private bills is that it would be more
convenient that he kept the money to be used in paying the registration fees on time, and since he
had loaned money to the Corporation, this would be set off by the latter's paying his bills.
Villarama admitted, however, that the corporate funds in his possession were not only for
registration fees but for other important obligations which were not specified. 26
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a parttime manager,27 he admitted not only having held the corporate money but that he advanced and
lent funds for the Corporation, and yet there was no Board Resolution allowing it. 28
Villarama's explanation on the matter of his involvement with the corporate affairs of the
Corporation only renders more credible Pantranco's claim that his control over the corporation,
especially in the management and disposition of its funds, was so extensive and intimate that it is
impossible to segregate and identify which money belonged to whom. The interference of
Villarama in the complex affairs of the corporation, and particularly its finances, are much too
inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to
separate personal responsibilities from corporate undertakings. It is the very essence of
incorporation that the acts and conduct of the corporation be carried out in its own corporate
name because it has its own personality.

The doctrine that a corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which are within reason
and the law.29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement
or perfection of a monopoly or generally the perpetration of knavery or crime, 30 the veil with
which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of
evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and
that the restrictive clause in the contract entered into by the latter and Pantranco is also
enforceable and binding against the said Corporation. For the rule is that a seller or promisor
may not make use of a corporate entity as a means of evading the obligation of his covenant. 31
Where the Corporation is substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee. 32
The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama
are one and the same, the restrictive clause in the contract between Villarama and Pantranco does
not include the purchase of existing lines but it only applies to application for the new lines. The
clause in dispute reads thus:
(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply
for any TPU service identical or competing with the BUYER. (Emphasis supplied)
As We read the disputed clause, it is evident from the context thereof that the intention of the
parties was to eliminate the seller as a competitor of the buyer for ten years along the lines of
operation covered by the certificates of public convenience subject of their transaction. The word
"apply" as broadly used has for frame of reference, a service by the seller on lines or routes that
would compete with the buyer along the routes acquired by the latter. In this jurisdiction, prior
authorization is needed before anyone can operate a TPU service, 33whether the service consists
in a new line or an old one acquired from a previous operator. The clear intention of the parties
was to prevent the seller from conducting any competitive line for 10 years since, anyway, he has
bound himself not to apply for authorization to operate along such lines for the duration of such
period.34
If the prohibition is to be applied only to the acquisition of new certificates of public
convenience thru an application with the Public Service Commission, this would, in effect, allow
the seller just the same to compete with the buyer as long as his authority to operate is only
acquired thru transfer or sale from a previous operator, thus defeating the intention of the parties.
For what would prevent the seller, under the circumstances, from having a representative or
dummy apply in the latter's name and then later on transferring the same by sale to the seller?
Since stipulations in a contract is the law between the contracting parties,
Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith. (Art. 19, New
Civil Code.)

We are not impressed of Villarama's contention that the re-wording of the two previous drafts of
the contract of sale between Villarama and Pantranco is significant in that as it now appears, the
parties intended to effect the least restriction. We are persuaded, after an examination of the
supposed drafts, that the scope of the final stipulation, while not as long and prolix as those in the
drafts, is just as broad and comprehensive. At most, it can be said that the re-wording was done
merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a competitor, and this
must be, considering such factors as the good will35 that the seller had already gained from the
riding public and his adeptness and proficiency in the trade. On this matter, Corbin, an authority
on Contracts has this to say.36
When one buys the business of another as a going concern, he usually wishes to keep it
going; he wishes to get the location, the building, the stock in trade, and the customers.
He wishes to step into the seller's shoes and to enjoy the same business relations with
other men. He is willing to pay much more if he can get the "good will" of the business,
meaning by this the good will of the customers, that they may continue to tread the old
footpath to his door and maintain with him the business relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays for the seller's promise not to
reopen business in competition with the business sold.
As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the
matter37says:
The law concerning contracts which tend to restrain business or trade has gone through a
long series of changes from time to time with the changing condition of trade and
commerce. With trifling exceptions, said changes have been a continuous development of
a general rule. The early cases show plainly a disposition to avoid and annul all contract
which prohibited or restrained any one from using a lawful trade "at any time or at any
place," as being against the benefit of the state. Later, however, the rule became well
established that if the restraint was limited to "a certain time" and within "a certain
place," such contracts were valid and not "against the benefit of the state." Later cases,
and we think the rule is now well established, have held that a contract in restraint of
trade is valid providing there is a limitation upon either time or place. A contract,
however, which restrains a man from entering into business or trade without either a
limitation as to time or place, will be held invalid.
The public welfare of course must always be considered and if it be not involved and the
restraint upon one party is not greater than protection to the other requires, contracts like
the one we are discussing will be sustained. The general tendency, we believe, of modern
authority, is to make the test whether the restraint is reasonably necessary for the
protection of the contracting parties. If the contract is reasonably necessary to protect the
interest of the parties, it will be upheld. (Emphasis supplied.)

Analyzing the characteristics of the questioned stipulation, We find that although it is in the
nature of an agreement suppressing competition, it is, however, merely ancillary or incidental to
the main agreement which is that of sale. The suppression or restraint is only partial or limited:
first, in scope, it refers only to application for TPU by the seller in competition with the lines
sold to the buyer; second, in duration, it is only for ten (10) years; and third, with respect to situs
or territory, the restraint is only along the lines covered by the certificates sold. In view of these
limitations, coupled with the consideration of P350,000.00 for just two certificates of public
convenience, and considering, furthermore, that the disputed stipulation is only incidental to a
main agreement, the same is reasonable and it is not harmful nor obnoxious to public service.38 It
does not appear that the ultimate result of the clause or stipulation would be to leave solely to
Pantranco the right to operate along the lines in question, thereby establishing monopoly or
predominance approximating thereto. We believe the main purpose of the restraint was to protect
for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or
deterioration of the service because of the close supervision of the Public Service Commission. 39
This Court had stated long ago,40 that "when one devotes his property to a use in which the
public has an interest, he virtually grants to the public an interest in that use and submits it to
such public use under reasonable rules and regulations to be fixed by the Public Utility
Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement,
the underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale and transfer
of a trade or business, and which purports to bind the seller not to engage in the same
business in competition with the purchaser, is lawful and enforceable. While such
covenants are designed to prevent competition on the part of the seller, it is ordinarily
neither their purpose nor effect to stifle competition generally in the locality, nor to
prevent it at all in a way or to an extent injurious to the public. The business in the hands
of the purchaser is carried on just as it was in the hands of the seller; the former merely
takes the place of the latter; the commodities of the trade are as open to the public as they
were before; the same competition exists as existed before; there is the same employment
furnished to others after as before; the profits of the business go as they did before to
swell the sum of public wealth; the public has the same opportunities of purchasing, if it
is a mercantile business; and production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and
finding that the stipulation is illegal and void seems misplaced. In the said Red Line case, the
agreement therein sought to be enforced was virtually a division of territory between two
operators, each company imposing upon itself an obligation not to operate in any territory
covered by the routes of the other. Restraints of this type, among common carriers have always
been covered by the general rule invalidating agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case. In
Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not to apply for

the lifting of restrictions imposed on his certificates of public convenience was not an ancillary
or incidental agreement. The restraint was the principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of
the line, or trips, or increase of equipment was not an agreement between the parties but a
condition imposed in the certificate of public convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama
for a period of 10 years to "apply" for TPU service along the lines covered by the certificates of
public convenience sold by him to Pantranco is valid and reasonable. Having arrived at this
conclusion, and considering that the preponderance of the evidence have shown that Villa Rey
Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in Pantranco's third party
complaint, that the said Corporation should, until the expiration of the 1-year period
abovementioned, be enjoined from operating the line subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon
Villarama is not against his application for, or purchase of, certificates of public convenience,
but merely the operation of TPU along the lines covered by the certificates sold by him to
Pantranco. Consequently, the sale between Fernando and the Corporation is valid, such that the
rightful ownership of the disputed certificates still belongs to the plaintiff being the prior
purchaser in good faith and for value thereof. In view of the ancient rule of caveat emptor
prevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was only the right
which Fernando, judgment debtor, had in the certificates of public convenience on the day of the
sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was
notified that "by virtue of an Order of Execution issued by the Court of First Instance of
Pangasinan, the rights, interests, or participation which the defendant, VALENTIN A.
FERNANDO in the above entitled case may have in the following realty/personalty is
attached or levied upon, to wit: The rights, interests and participation on the Certificates of
Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines
Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the
vendee at auction of said certificates, merely stepped into the shoes of the judgment debtor. Of
the same principle is the provision of Article 1544 of the Civil Code, that "If the same thing
should have been sold to different vendees, the ownership shall be transferred to the person who
may have first taken possession thereof in good faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public
convenience in question, between the Corporation and Fernando, was not consummated, it being
only a conditional sale subject to the suspensive condition of its approval by the Public Service
Commission. While section 20(g) of the Public Service Act provides that "subject to established
limitation and exceptions and saving provisions to the contrary, it shall be unlawful for any
public service or for the owner, lessee or operator thereof, without the approval and authorization
of the Commission previously had ... to sell, alienate, mortgage, encumber or lease its property,
franchise, certificates, privileges, or rights or any part thereof, ...," the same section also
provides:

... Provided, however, That nothing herein contained shall be construed to prevent the
transaction from being negotiated or completed before its approval or to prevent the sale,
alienation, or lease by any public service of any of its property in the ordinary course of
its business.
It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the
validity and consummation of the sale.
Anent the question of damages allegedly suffered by the parties, each of the appellants has its or
his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and
Ferrer) in acquiring the certificates of public convenience in question, despite constructive and
actual knowledge on their part of a prior sale executed by Fernando in favor of the said
corporation, which necessitated the latter to file the action to annul the sheriff's sale to Ferrer and
the subsequent transfer to Pantranco, it is entitled to collect actual and compensatory damages,
and attorney's fees in the amount of P25,000.00. The evidence on record, however, does not
clearly show that said defendants acted in bad faith in their acquisition of the certificates in
question. They believed that because the bill of sale has yet to be approved by the Public Service
Commission, the transaction was not a consummated sale, and, therefore, the title to or
ownership of the certificates was still with the seller. The award by the lower court of attorney's
fees of P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set
aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had
suffered and should be awarded moral, exemplary damages and attorney's fees, cannot be
entertained, in view of the conclusion herein reached that the sale by Fernando to the
Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that when it
purchased ViIlarama's business for P350,000.00, it intended to build up the traffic along the lines
covered by the certificates but it was rot afforded an opportunity to do so since barely three
months had elapsed when the contract was violated by Villarama operating along the same lines
in the name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the underhanded
manner in which Villarama violated the contract is pertinent in establishing punitive or moral
damages. Its contention as to the proper measure of damages is that it should be the purchase
price of P350,000.00 that it paid to Villarama. While We are fully in accord with Pantranco's
claim of entitlement to damages it suffered as a result of Villarama's breach of his contract with
it, the record does not sufficiently supply the necessary evidentiary materials upon which to base
the award and there is need for further proceedings in the lower court to ascertain the proper
amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando to
Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the
aforesaid certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation
Co. against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and
separate from the personality of Jose M. Villarama, and insofar as it awards the sum of
P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in consonance with the
above findings as regards the amount of damages suffered by Pantranco; and
4. On equitable considerations, without costs. So ordered.

[G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and
SPOUSES GREGORIO and LIBRADA MANUEL, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the
decisionxxi[1] of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision
rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural
antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaintxxii[2] against private respondents to recover
three thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the
jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost
of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorneys
fees.xxiii[3] To the original balance on the price of jeep body were added the costs of
repair.xxiv[4] In their answer, private respondents interposed a counterclaim for unpaid legal
services by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was not paid
by the incorporators, directors and officers of the petitioner. The trial court decided the case on
June 26, 1985, in favor of petitioner in regard to the petitioners claim for money, but also
allowed the counter-claim of private respondents. Both parties appealed. On April 15, 1991, the
Court of Appeals sustained the trial courts decision.xxv[5] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim which private
respondents filed together with their answer to petitioners complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioners
Assistant Legal Officer, he represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner. Hence to counter petitioners collection suit, he filed a permissive
counterclaim for the unpaid attorneys fees.xxvi[6]
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default
on this score, and evidence ex-parte was presented on the counterclaim. The trial court ruled in
favor of private respondents and found that Gregorio Manuel indeed rendered legal services to
the Francisco family in Special Proceedings Number 7803- In the Matter of Intestate Estate of
Benita Trinidad. Said court also found that his legal services were not compensated despite
repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand
(P50,000.00) pesos.xxvii[7]
Dissatisfied with the trial courts order, petitioner elevated the matter to the Court of Appeals,
posing the following issues:

I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL
AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE
DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE
ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM
OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT
TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. xxviii[8]
Petitioner contended that the trial court did not acquire jurisdiction over it because no summons
was validly served on it together with the copy of the answer containing the permissive
counterclaim. Further, petitioner questions the propriety of its being made party to the case
because it was not the real party in interest but the individual members of the Francisco family
concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a
counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of
Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a
counterclaim was set up against him. Failure to serve summons, said respondent court, did not
effectively negate trial courts jurisdiction over petitioner in the matter of the counterclaim. It
likewise pointed out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the
copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioners new counsel, Jose N. Aquino, entered his appearance,
three (3) days still remained within the period to file an answer to the counterclaim. Having
failed to answer, petitioner was correctly considered in default by the trial court.xxix[9] Even
assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said,
but having filed a motion for reconsideration seeking relief from the said order of default,
petitioner was estopped from further questioning the trial courts jurisdiction.xxx[10]
On the question of its liability for attorneys fees owing to private respondent Gregorio Manuel,
petitioner argued that being a corporation, it should not be held liable therefor because these fees
were owed by the incorporators, directors and officers of the corporation in their personal
capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation,
vis--vis the individual persons who hired the services of private respondent, is separate and
distinct,xxxi[11] hence, the liability of said individuals did not become an obligation chargeable
against petitioner.

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by law for convenience
and to promote justice. Accordingly, this separate personality of the corporation may be
disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover
for found (sic) illegality, or to work an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347)
Corporations are composed of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and inequity. (Chemplex Philippines,
Inc. vs. Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is
composed of the heirs of the late Benita Trinidad as directors and incorporators for whom
defendant Gregorio Manuel rendered legal services in the intestate estate case of their deceased
mother. Considering the aforestated principles and circumstances established in this case, equity
and justice demands plaintiff-appellants veil of corporate identity should be pierced and the
defendant be compensated for legal services rendered to the heirs, who are directors of the
plaintiff-appellant corporation.xxxii[12]
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE
VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION
OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM. xxxiii[13]
Petitioner submits that respondent court should not have resorted to piercing the veil of corporate
fiction because the transaction concerned only respondent Gregorio Manuel and the heirs of the
late Benita Trinidad. According to petitioner, there was no cause of action by said respondent
against petitioner; personal concerns of the heirs should be distinguished from those involving
corporate affairs. Petitioner further contends that the present case does not fall among the
instances wherein the courts may look beyond the distinct personality of a corporation.
According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees
from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their
personal capacity, and not involve the corporation.xxxiv[14]
With regard to the permissive counterclaim, petitioner also insists that there was no proper
service of the answer containing the permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing party through summons.
Further petitioner states that by nature, a permissive counterclaim is one which does not arise out
of nor is necessarily connected with the subject of the opposing partys claim. Petitioner avers

that since there was no service of summons upon it with regard to the counterclaim, then the
court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action
independent from the answer, according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party is at the same time both plaintiff and
defendant with respect to the other,xxxv[15] requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They
defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
separate summonses on petitioner in regard to their permissive counterclaim contained in the
answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio
Manuel was employed as assistant legal officer of petitioner corporation, and that his services
were solicited by the incorporators, directors and members to handle and represent them in
Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They
assert that the members of petitioner corporation took advantage of their positions by not
compensating respondent Gregorio Manuel after the termination of the estate proceedings
despite his repeated demands for payment of his services. They cite findings of the appellate
court that support piercing the veil of corporate identity in this particular case. They assert that
the corporate veil may be disregarded when it is used to defeat public convenience, justify
wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the
corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of
the stockholders or of another corporate entity. In these instances, they aver, the corporation
should be treated merely as an association of individual persons.xxxvi[16]
Private respondents dispute petitioners claim that its right to due process was violated when
respondents counterclaim was granted due course, although no summons was served upon it.
They claim that no provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the petitioner filed its
complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As a
consequence, the issuance of summons on it was no longer necessary. Private respondents say
they served a copy of their answer with affirmative defenses and counterclaim on petitioners
former counsel, Nicanor G. Alvarez. While petitioner would have the Court believe that
respondents served said copy upon Alvarez after he had withdrawn his appearance as counsel for
the petitioner, private respondents assert that this contention is utterly baseless. Records disclose
that the answer was received two (2) days before the former counsel for petitioner withdrew his
appearance, according to private respondents. They maintain that the present petition is but a
form of dilatory appeal, to set off petitioners obligations to the respondents by running up more
interest it could recover from them. Private respondents therefore claim damages against
petitioner.xxxvii[17]
To resolve the issues in this case, we must first determine the propriety of piercing the veil of
corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct
from its stockholders and from other corporations to which it may be connected.xxxviii[18]

However, under the doctrine of piercing the veil of corporate entity, the corporations separate
juridical personality may be disregarded, for example, when the corporate identity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime. Also, where the
corporation is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation, then its distinct personality may be
ignored.xxxix[19] In these circumstances, the courts will treat the corporation as a mere
aggrupation of persons and the liability will directly attach to them. The legal fiction of a
separate corporate personality in those cited instances, for reasons of public policy and in the
interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing the
corporate veil has no relevant application here. Respondent court erred in permitting the trial
courts resort to this doctrine. The rationale behind piercing a corporations identity in a given case
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. However, in the case at bar, instead of holding certain
individuals or persons responsible for an alleged corporate act, the situation has been reversed. It
is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation. Note that according to
private respondent Gregorio Manuel his services were solicited as counsel for members of the
Francisco family to represent them in the intestate proceedings over Benita Trinidads estate.
These estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members but
also from petitioner corporation on the claims that its management had requested his services and
he acceded thereto as an employee of petitioner from whom it could be deduced he was also
receiving a salary. His move to recover unpaid legal fees through a counterclaim against
Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep
body could only result from an obvious misapprehension that petitioners corporate assets could
be used to answer for the liabilities of its individual directors, officers, and incorporators. Such
result if permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there
are no hard and fast rules on disregarding separate corporate identity, we must always be mindful
of its function and purpose. A court should be careful in assessing the milieu where the doctrine
of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may
result from its erroneous application.

The personality of the corporation and those of its incorporators, directors and officers in their
personal capacities ought to be kept separate in this case. The claim for legal fees against the
concerned individual incorporators, officers and directors could not be properly directed against
the corporation without violating basic principles governing corporations. Moreover, every
action including a counterclaim must be prosecuted or defended in the name of the real party in
interest.xl[20] It is plainly an error to lay the claim for legal fees of private respondent Gregorio
Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioners allegation, that it needed to be
summoned anew in order for the court to acquire jurisdiction over it, we agree with respondent
courts view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim
or cross-claim must be answered within ten (10) days from service. Nothing in the Rules of
Court says that summons should first be served on the defendant before an answer to
counterclaim must be made. The purpose of a summons is to enable the court to acquire
jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the plaintiff in the
original complaint, has already submitted to the jurisdiction of the court. Following Rule 9,
Section 3 of the 1997 Rules of Civil Procedure,xli[21] if a defendant (herein petitioner) fails to
answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in default.
This is what happened to petitioner in this case, and this Court finds no procedural error in the
disposition of the appellate court on this particular issue. Moreover, as noted by the respondent
court, when petitioner filed its motion seeking to set aside the order of default, in effect it
submitted itself to the jurisdiction of the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon
its request, plaintiff-appellant was granted time to file a motion for reconsideration of the
disputed decision. Plaintiff-appellant did file its motion for reconsideration to set aside the order
of default and the judgment rendered on the counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it
vigorously insists, plaintiff-appellant is considered to have submitted to the courts jurisdiction
when it filed the motion for reconsideration seeking relief from the court. (Soriano vs. Palacio,
12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily
submitting himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar
against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37). xlii[22]
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing
the proper suit against the concerned members of the Francisco family in their personal capacity.
No pronouncement as to costs.
SO ORDERED.

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING
CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY
and the Heirs of EUGENIO D. TRINIDAD, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the Decision42[1] dated October 21,
1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners
appeal from the Decision43[2] dated February 10, 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners
complaint for annulment of real estate mortgage and the extra-judicial foreclosure thereof.
Likewise brought for our review is the Resolution44[3] dated February 23, 2000 of the Court of
Appeals which denied petitioners motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned Belas Export Trading
(BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao,
Quezon City. BET was engaged in the manufacture of garments for domestic and foreign
consumption. The Lipats also owned the Mystical Fashions in the United States, which sells
goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita
B. Lipat, to manage BET in the Philippines while she was managing Mystical Fashions in the
United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed on December 14,
1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans
and other credit accommodations from respondent Pacific Banking Corporation (Pacific Bank).
She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned
by her as security for the obligations to be extended by Pacific Bank including any extension or
renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure
for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to
P583,854.00 to buy fabrics to be manufactured by BET and exported to Mystical Fashions in the
United States. As security therefor, the Lipat spouses, as represented by Teresita, executed a Real
Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said

property was likewise made to secure other additional or new loans, discounting lines, overdrafts
and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may
subsequently obtain from the Mortgagee as well as any renewal or extension by the Mortgagor
and/or Debtor of the whole or part of said original, additional or new loans, discounting lines,
overdrafts and other credit accommodations, including interest and expenses or other obligations
of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal
or secondary, as appears in the accounts, books and records of the Mortgagee.45[4]
On September 5, 1979, BET was incorporated into a family corporation named Belas Export
Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in
the business of manufacturing and exportation of all kinds of garments of whatever kind and
description46[5] and utilized the same machineries and equipment previously used by BET. Its
incorporators and directors included the Lipat spouses who owned a combined 300 shares out of
the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives and
friends of the Lipats.47[6] Estelita Lipat was named president of BEC, while Teresita became the
vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf
of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting
Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust
receipt therefor. Export bills were also executed in favor of Pacific Bank for additional finances.
These transactions were all secured by the real estate mortgage over the Lipats property.
The promissory notes, export bills, and trust receipt eventually became due and demandable.
Unfortunately, BEC defaulted in its payments. After receipt of Pacific Banks demand letters,
Estelita Lipat went to the office of the banks liquidator and asked for additional time to enable
her to personally settle BECs obligations. The bank acceded to her request but Estelita failed to
fulfill her promise.
Consequently, the real estate mortgage was foreclosed and after compliance with the
requirements of the law the mortgaged property was sold at public auction. On January 31, 1989,
a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued
over the property against Pacific Bank and Eugenio D. Trinidad. The complaint, which was
docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory notes, trust
receipt, and export bills were all ultra vires acts of Teresita as they were executed without the
requisite board resolution of the Board of Directors of BEC. The Lipats also averred that

assuming said acts were valid and binding on BEC, the same were the corporations sole
obligation, it having a personality distinct and separate from spouses Lipat. It was likewise
pointed out that Teresitas authority to secure a loan from Pacific Bank was specifically limited to
Mrs. Lipats sole use and benefit and that the real estate mortgage was executed to secure the
Lipats and BETs P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat
cannot evade payments of the value of the promissory notes, trust receipt, and export bills with
their property because they and the BEC are one and the same, the latter being a family
corporation. Respondent Trinidad further claimed that he was a buyer in good faith and for value
and that petitioners are estopped from denying BECs existence after holding themselves out as a
corporation.
After trial on the merits, the RTC dismissed the complaint, thus:
WHEREFORE, this Court holds that in view of the facts contained in the record, the complaint
filed in this case must be, as is hereby, dismissed. Plaintiffs however has five (5) months and
seventeen (17) days reckoned from the finality of this decision within which to exercise their
right of redemption. The writ of injunction issued is automatically dissolved if no redemption is
effected within that period.
The counterclaims and cross-claim are likewise dismissed for lack of legal and factual basis.
No costs.
IT IS SO ORDERED.48[7]
The trial court ruled that there was convincing and conclusive evidence proving that BEC was a
family corporation of the Lipats. As such, it was a mere extension of petitioners personality and
business and a mere alter ego or business conduit of the Lipats established for their own benefit.
Hence, to allow petitioners to invoke the theory of separate corporate personality would sanction
its use as a shield to further an end subversive of justice. 49[8] Thus, the trial court pierced the veil
of corporate fiction and held that Belas Export Corporation and petitioners (Lipats) are one and
the same. Pacific Bank had transacted business with both BET and BEC on the supposition that
both are one and the same. Hence, the Lipats were estopped from disclaiming any obligations on
the theory of separate personality of corporations, which is contrary to principles of reason and
good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No.
41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The Court
of Appeals found that there was ample evidence on record to support the application of the
doctrine of piercing the veil of corporate fiction. In affirming the findings of the RTC, the

appellate court noted that Mrs. Lipat had full control over the activities of the corporation and
used the same to further her business interests.50[9] In fact, she had benefited from the loans
obtained by the corporation to finance her business. It also found unnecessary a board resolution
authorizing Teresita Lipat to secure loans from Pacific Bank on behalf of BEC because the
corporations by-laws allowed such conduct even without a board resolution. Finally, the Court of
Appeals ruled that the mortgage property was not only liable for the original loan of P583,854.00
but likewise for the value of the promissory notes, trust receipt, and export bills as the mortgage
contract equally applies to additional or new loans, discounting lines, overdrafts, and credit
accommodations which petitioners subsequently obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was denied by the appellate court in its
Resolution of February 23, 2000.51[10]
Hence, this petition, with petitioners submitting that the court a quo erred
1) .IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION APPLIES IN THIS CASE.
2) .IN HOLDING THAT PETITIONERS PROPERTY CAN BE HELD LIABLE UNDER THE
REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT ALSO
FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT
BILLS OF BELAS EXPORT CORPORATION.
3) .IN HOLDING THAT THE IMPOSITION OF 15% ATTORNEYS FEES IN THE EXTRAJUDICIAL FORECLOSURE IS BEYOND THIS COURTS JURISDICTION FOR IT IS BEING
RAISED FOR THE FIRST TIME IN THIS APPEAL.
4) .IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED
PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS
DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.
5) .IN DENYING PETITIONERS MOTION FOR RECONSIDERATION AND IN HOLDING
THAT SAID MOTION FOR RECONSIDERATION IS AN UNAUTHORIZED MOTION, A
MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY
CONSEQUENCE TO APPELLANTS.52[11]
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case;

2. Whether or not petitioners' property under the real estate mortgage is liable not only for the
amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and export
bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorneys fees stipulated in the deed of
real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts erred in holding
them liable for the obligations incurred by BEC through the application of the doctrine of
piercing the veil of corporate fiction absent any clear showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to show fraud on part of
petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that BEC
was organized as a business conduit for the benefit of petitioners.
Petitioners contentions fail to persuade this Court. A careful reading of the judgment of the RTC
and the resolution of the appellate court show that in finding petitioners mortgaged property
liable for the obligations of BEC, both courts below relied upon the alter ego doctrine or
instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the
corporation is the mere alter ego or business conduit of a person, the separate personality of the
corporation may be disregarded.53[12] This is commonly referred to as the instrumentality rule or
the alter ego doctrine, which the courts have applied in disregarding the separate juridical
personality of corporations. As held in one case,
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in
fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
instrumentality may be disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but
a conduit for its principal. xxx54[13]
We find that the evidence on record demolishes, rather than buttresses, petitioners contention
that BET and BEC are separate business entities. Note that Estelita Lipat admitted that she and
her husband, Alfredo, were the owners of BET 55[14] and were two of the incorporators and
majority stockholders of BEC.56[15] It is also undisputed that Estelita Lipat executed a special
power of attorney in favor of her daughter, Teresita, to obtain loans and credit lines from Pacific
Bank on her behalf. 57[16] Incidentally, Teresita was designated as executive-vice president and

general manager of both BET and BEC, respectively. 58[17] We note further that: (1) Estelita and
Alfredo Lipat are the owners and majority shareholders of BET and BEC, respectively; 59[18] (2)
both firms were managed by their daughter, Teresita;60[19] (3) both firms were engaged in the
garment business, supplying products to Mystical Fashion, a U.S. firm established by Estelita
Lipat; (4) both firms held office in the same building owned by the Lipats; 61[20] (5) BEC is a
family corporation with the Lipats as its majority stockholders; (6) the business operations of the
BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable;
(7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible
assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family
members;62[21] (9) Estelita had full control over the activities of and decided business matters of
the corporation;63[22] and that (10) Estelita Lipat had benefited from the loans secured from
Pacific Bank to finance her business abroad64[23] and from the export bills secured by BEC for
the account of Mystical Fashion. 65[24] It could not have been coincidental that BET and BEC are
so intertwined with each other in terms of ownership, business purpose, and management.
Apparently, BET and BEC are one and the same and the latter is a conduit of and merely
succeeded the former. Petitioners attempt to isolate themselves from and hide behind the
corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the
classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In our
view, BEC is a mere continuation and successor of BET, and petitioners cannot evade their
obligations in the mortgage contract secured under the name of BEC on the pretext that it was
signed for the benefit and under the name of BET. We are thus constrained to rule that the Court
of Appeals did not err when it applied the instrumentality doctrine in piercing the corporate veil
of BEC.
On the second issue, petitioners contend that their mortgaged property should not be made liable
for the subsequent credit lines and loans incurred by BEC because, first, it was not covered by
the mortgage contract of BET which only covered the loan of P583,854.00 and which allegedly
had already been paid; and, second, it was secured by Teresita Lipat without any authorization or
board resolution of BEC.

We find petitioners contention untenable. As found by the Court of Appeals, the mortgaged
property is not limited to answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats property can be held liable under the real estate mortgage
is not limited to P583,854.00. It can be held liable for the value of the promissory notes, trust
receipt and export bills as well. For the mortgage was executed not only for the purpose of
securing the Belas Export Tradings original loan of P583,854.00, but also for other additional or
new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which
the Mortgagor and/or Debtor may subsequently obtain from the mortgagee as well as any
renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other credit accommodations,
including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly principal or secondary, as appears in the accounts,
books and records of the mortgagee.66[25]
As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot be
reviewed on appeal by the Supreme Court, provided they are borne out by the record or based on
substantial evidence.67[26] As noted earlier, BEC merely succeeded BET as petitioners alter ego;
hence, petitioners mortgaged property must be held liable for the subsequent loans and credit
lines of BEC.
Further, petitioners contention that the original loan had already been paid, hence, the mortgaged
property should not be made liable to the loans of BEC, is unsupported by any substantial
evidence other than Estelita Lipats self-serving testimony. Two disputable presumptions under
the rules on evidence weigh against petitioners, namely: (a) that a person takes ordinary care of
his concerns;68[27] and (b) that things have happened according to the ordinary course of nature
and the ordinary habits of life.69[28] Here, if the original loan had indeed been paid, then logically,
petitioners would have asked from Pacific Bank for the required documents evidencing receipt
and payment of the loans and, as owners of the mortgaged property, would have immediately
asked for the cancellation of the mortgage in the ordinary course of things. However, the records
are bereft of any evidence contradicting or overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property should not bind the loans and credit lines
obtained by BEC as they were secured without any proper authorization or board resolution.
They also blame the bank for its laxity and complacency in not requiring a board resolution as a
requisite for approving the loans.
Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution since per
admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners rebuttal witness, no
business or stockholders meetings were conducted nor were there election of officers held since
its incorporation. In fact, not a single board resolution was passed by the corporate board 70[29]
and it was Estelita Lipat and/or Teresita Lipat who decided business matters. 71[30]
Secondly, the principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the
authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and
BEC. While the power and responsibility to decide whether the corporation should enter into a
contract that will bind the corporation is lodged in its board of directors, subject to the articles of
incorporation, by-laws, or relevant provisions of law, yet, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of directors may validly delegate some
of its functions and powers to officers, committees, or agents. The authority of such individuals
to bind the corporation is generally derived from law, corporate by-laws, or authorization from
the board, either expressly or impliedly by habit, custom, or acquiescence in the general course
of business.72[31] Apparent authority, is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an officer or agent
as having the power to act or, in other words, the apparent authority to act in general, with which
it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. 73[32]
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a
special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the
manager of both BEC and BET and had been deciding business matters in the absence of Estelita
Lipat. Further, the export bills secured by BEC were for the benefit of Mystical Fashion owned
by Estelita Lipat.74[33] Hence, Pacific Bank cannot be faulted for relying on the same authority
granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar
doctrine that if a corporation knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, it holds him out to the public as possessing the power
to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agents authority. 75[34]

We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent
credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the real
estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans obtained
using the same mortgage contract since it is, by its very terms, a continuing mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of Appeals for not taking
cognizance of the issue on attorneys fees on the ground that it was raised for the first time on
appeal. We find the conclusion of the Court of Appeals to be in accord with settled
jurisprudence. Basic is the rule that matters not raised in the complaint cannot be raised for the
first time on appeal. 76[35] A close perusal of the complaint yields no allegations disputing the
attorneys fees imposed under the real estate mortgage and petitioners cannot now allege that they
have impliedly disputed the same when they sought the annulment of the contract.
In sum, we find no reversible error of law committed by the Court of Appeals in rendering the
decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the
Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are
AFFIRMED. Costs against petitioners.
SO ORDERED.

WILLIAM C. YAO, SR.,

LUISA C. YAO, RICHARD
C. YAO, WILLIAM C. YAO
JR., and ROGER C. YAO,
Petitioners,

-versus

THE PEOPLE OF THE

PHILIPPINES,
PETRON
CORPORATION
and
PILIPINAS
SHELL
PETROLEUM CORP., and
its Principal, SHELL INTL
PETROLEUM CO. LTD.,
Respondents.

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorarix[1] under Rule 45 of the Rules of

Court, petitioners William C. Yao, Sr., Luisa C. Yao, Richard C. Yao, William C.
Yao, Jr., and Roger C. Yao pray for the reversal of the Decision dated 30

September 2004,x[2] and Resolution dated 1 June 2005, of the Court of Appeals in
CA G.R. SP No. 79256,x[3] affirming the two Orders, both dated 5 June 2003, of
the Regional Trial Court (RTC), Branch 17, Cavite City, relative to Search
Warrants No. 2-2003 and No. 3-2003.x[4] In the said Orders, the RTC denied the
petitioners Motion to Quash Search Warrantx[5] and Motion for the Return of the
Motor Compressor and Liquified Petroleum Gas (LPG) Refilling Machine.x[6]

The following are the facts:

Petitioners

are

incorporators

and officers

of MASAGANA GAS

CORPORATION (MASAGANA), an entity engaged in the refilling, sale and

distribution of LPG products. Private respondents Petron Corporation (Petron) and
Pilipinas Shell Petroleum Corporation (Pilipinas Shell) are two of the largest bulk
suppliers and producers of LPG in the Philippines. Their LPG products are sold
under the marks GASUL and SHELLANE, respectively. Petron is the registered
owner in the Philippines of the trademarks GASUL and GASUL cylinders used for
its LPG products. It is the sole entity in the Philippines authorized to allow refillers
and distributors to refill, use, sell, and distribute GASUL LPG containers, products
and its trademarks. Pilipinas Shell, on the other hand, is the authorized user in the
Philippines of the tradename, trademarks, symbols, or designs of its principal,
Shell International Petroleum Company Limited (Shell International), including the
marks SHELLANE and SHELL device in connection with the production, sale and
distribution of SHELLANE LPGs. It is the only corporation in the Philippines

authorized to allow refillers and distributors to refill, use, sell and distribute
SHELLANE LPG containers and products.x[7]

On 3 April 2003, National Bureau of Investigation (NBI) agent Ritche N.

Oblanca (Oblanca) filed two applications for search warrant with the RTC, Branch
17, Cavite City, against petitioners and other occupants of the MASAGANA
compound located at Governors Drive, Barangay Lapidario, Trece Martires, Cavite
City, for alleged violation of Section 155, in relation to Section 170 of Republic
Act No. 8293, otherwise known as The Intellectual Property Code of the
Philippines.x[8] The two applications for search warrant uniformly alleged that per
information, belief, and personal verification of Oblanca, the petitioners are
actually producing, selling, offering for sale and/or distributing LPG products
using steel cylinders owned by, and bearing the tradenames, trademarks, and
devices of Petron and Pilipinas Shell, without authority and in violation of the
rights of the said entities.

In his two separate affidavitsx[9] attached to the two applications for search
warrant, Oblanca alleged:
1.
[That] on 11 February 2003, the National Bureau of Investigation
(NBI) received a letter-complaint from Atty. Bienvenido I. Somera Jr. of
Villaraza and Angangco, on behalf of among others, [Petron Corporation
(PETRON)] and Pilipinas Shell Petroleum Corporation (PSPC), the authorized
representative of Shell International Petroleum Company Limited (Shell
International), requesting assistance in the investigation and, if warranted,
apprehension and prosecution of certain persons and/or establishments suspected
of violating the intellectual property rights [of PETRON] and of PSPC and Shell
International.

2.
[That] on the basis of the letter-complaint, I, together with
Agent Angelo Zarzoso, was assigned as the NBI agent on the case.
3.
[That] prior to conducting the investigation on the reported
illegal activities, he reviewed the certificates of trademark registrations issued
in favor of [PETRON], PSPC and Shell International as well as other
documents and other evidence obtained by the investigative agency authorized
by [PETRON], PSPC and Shell International to investigate and cause the
investigation of persons and establishments violating the rights of [PETRON],
PSPC and Shell International, represented by Mr. Bernabe C. Alajar. Certified
copies of the foregoing trademark registrations are attached hereto as Annexes
A to :E.
4.
[That] among the establishments alleged to be unlawfully
refilling and unlawfully selling and distributing [Gasul LPG and] Shellane
products is Masagana Gas Corporation (MASAGANA). Based on Securities
and Exchange Commission Records, MASAGANA has its principal office
address at 9775 Kamagong Street, San Antonio Village, Makati, Metro Manila.
The incorporators and directors of MASAGANA are William C. Yao, Sr., Luisa
C. Yao, Richard C. Yao, William C. Yao, Jr., and Roger C. Yao. x x x.
5.
I confirmed that MASAGANA is not authorized to use
[PETRON and] Shellane LPG cylinders and its trademarks and tradenames or
to be refillers or distributors of [PETRON and] Shellane LPGs.
6.
I went to MASAGANAs refilling station located at Governors
Drive, Barangay Lapidario, Trece Martires City (sic), Cavite to investigate its
activities. I confirmed that MASAGANA is indeed engaged in the unauthorized
refilling, sale and/or distribution of [Gasul and] Shellane LPG cylinders. I found
out that MASAGANA delivery trucks with Plate Nos. UMN-971, PEZ-612,
WTE-527, XAM-970 and WFC-603 coming in and out of the refilling plant
located at the aforementioned address contained multi-brand LPG cylinders
including [Gasul and] Shellane. x x x.
7.
[That] on 13 February 2003, I conducted a test-buy
accompanied by Mr. Bernabe C. Alajar. After asking the purpose of our visit,
MASAGANAs guard allowed us to enter the MASAGANA refilling plant to
purchase GASUL and SHELLANE LPGs. x x x. We were issued an order slip
which we presented to the cashiers office located near the refilling station. After
paying the amount x x x covering the cost of the cylinders and their contents,
they were issued Cash Invoice No. 56210 dated February 13, 2003. We were,
thereafter, assisted by the plant attendant in choosing empty GASUL and
SHELLANE 11 kg. cylinders, x x x were brought to the refilling station [and

filled in their presence.] I noticed that no valve seals were placed on the
cylinders.
[That] while inside the refilling plant doing the test-buy, I noticed that
stockpiles of multi-branded cylinders including GASUL and SHELLANE
cylinders were stored near the refilling station. I also noticed that the total land
area of the refilling plant is about 7,000 to 10,000 square meters. At the corner
right side of the compound immediately upon entering the gate is a covered area
where the maintenance of the cylinders is taking place. Located at the back right
corner of the compound are two storage tanks while at the left side also at the
corner portion is another storage tank. Several meters and fronting the said
storage tank is where the refilling station and the office are located. It is also in
this storage tank where the elevated blue water tank depicting MASAGANA
CORP. is located. About eleven (11) refilling pumps and stock piles of multibranded cylinders including Shellane and GASUL are stored in the refilling
station. At the left side of the entrance gate is the guard house with small door
for the pedestrians and at the right is a blue steel gate used for incoming and
outgoing vehicles.
8.
[That] on 27 February 2003, I conducted another test-buy
accompanied by Mr. Bernabe C. Alajar. x x x After choosing the cylinders, we
were issued an order slip which we presented to the cashier. Upon payment,
Cash Invoice No. 56398 was issued covering the cost of both GASUL and
SHELLANE LPG cylinders and their contents. x x x Both cylinders were
refilled in our presence and no valve seals were placed on the cylinders.

Copies of the photographs of the delivery trucks, LPG cylinders and

registration papers were also attached to the aforementioned affidavits.x[10]

Bernabe C. Alajar (Alajar), owner of Able Research and Consulting

Services Inc., was hired by Petron and Pilipinas Shell to assist them in carrying out
their Brand Protection Program. Alajar accompanied Oblanca during the
surveillance of and test-buys at the refilling plant of MASAGANA. He also
executed two separate affidavits corroborating the statements of Oblanca. These
were annexed to the two applications for search warrant.x[11]

After conducting the preliminary examination on Oblanca and Alajar, and

upon reviewing their sworn affidavits and other attached documents, Judge
Melchor Q.C. Sadang (Judge Sadang), Presiding Judge of the RTC, Branch 17,
Cavite City, found probable cause and correspondingly issued Search Warrants
No. 2-2003 and No. 3-2003.x[12] The search warrants commanded any peace
officer to make an immediate search of the MASAGANA compound and to seize
the following items:
Under Search Warrant No. 2-2003:
a.

Empty/filled LPG cylinder tanks/containers, bearing the tradename

SHELLANE, SHELL (Device) of Pilipinas Shell Petroleum Corporation
and the trademarks and other devices owned by Shell International
Petroleum Company, Ltd.;

b.

Machinery and/or equipment being used or intended to be used for the

purpose of illegally refilling LPG cylinders belonging to Pilipinas Shell
Petroleum Corporation bearing the latters tradename as well as the marks
belonging to Shell International Petroleum Company, Ltd., enumerated
hereunder:
1.
2.
3.
4.
5.
6.
7.

Bulk/Bullet LPG storage tanks;

Compressor/s (for pneumatic refilling system);
LPG hydraulic pump/s;
LPG refilling heads/hoses and appurtenances or LPG filling
assembly;
LPG pipeline gate valve or ball valve and handles and levers;
LPG weighing scales; and
Seals simulating the shell trademark.

c.

Sales invoices, ledgers, journals, official receipts, purchase orders, and

all other books of accounts, inventories and documents pertaining to the
production, sale and/or distribution of the aforesaid goods/products.

d.

Delivery truck bearing Plate Nos. WTE-527, XAM-970 and WFC-603,

hauling trucks, and/or other delivery trucks or vehicles or conveyances

being used or intended to be used for the purpose of selling and/or

distributing the above-mentioned counterfeit products.

Under Search Warrant No. 3-2003:

a.

Empty/filled LPG cylinder tanks/containers, bearing Petron Corporations

(Petron) tradename and its tradename GASUL and other devices owned
and/or used exclusively by Petron;

b.

Machinery and/or equipment being used or intended to be used for the

purpose of illegally refilling LPG cylinders belonging to Petron
enumerated hereunder;
1.
2.
3.
4.
5.
6.
7.

Bulk/Bullet LPG storage tanks;

Compressor/s (for pneumatic filling system);
LPG hydraulic pump/s;
LPG filling heads/hoses and appurtenances or LPG filling
assembly;
LPG pipeline gate valve or ball valve and handles levers;
LPG weighing scales; and
Seals bearing the Petron mark;

c.

Sales invoices, ledgers, journals, official receipts, purchase orders, and

all other books of accounts, inventories and documents pertaining to the
production, sale and/or distribution of the aforesaid goods/products; and

d.

Delivery trucks bearing Plate Nos. UMN-971, PEZ-612 and WFC-603,

hauling trucks, and/or other delivery trucks or vehicles or conveyances
being used for the purpose of selling and/or distributing the abovementioned counterfeit products.

Upon the issuance of the said search warrants, Oblanca and several NBI
operatives immediately proceeded to the MASAGANA compound and served
the search warrants on petitioners.x[13] After searching the premises of
MASAGANA, the following articles described in Search Warrant No. 2-2003
were seized:

a.

Thirty-eight (38) filled 11 kg. LPG cylinders, bearing the tradename of

Pilipinas Shell Petroleum Corporation and the trademarks and other
devices owned by Shell International Petroleum Company, Ltd.;

b.

Thirty-nine (39) empty 11 kg. LPG cylinders, bearing the tradename of

Pilipinas Shell Petroleum Corporation and the trademarks and other
devices owned by Shell International Petroleum Company, Ltd.;

c.

Eight (8) filled 50 kg. LPG cylinders, bearing the tradename of Pilipinas
Shell Petroleum Corporation and the trademarks and other devices owned
by Shell International Petroleum Company, Ltd.;

d.

Three (3) empty 50 kg. LPG cylinders, bearing the tradename of Pilipinas
Shell Petroleum Corporation and the trademarks and other devices owned
by Shell International Petroleum Company, Ltd.;

e.

One (1) set of motor compressor for filling system.

Pursuant to Search Warrant No. 3-2003, the following articles were also
seized:

a.

Six (6) filled 11 kg. LPG cylinders without seal, bearing Petrons
tradename and its trademark GASUL and other devices owned and/or used
exclusively by Petron;

b.

Sixty-three (63) empty 11 kg. LPG cylinders, bearing Petrons tradename

and its trademark GASUL and other devices owned and/or used
exclusively by Petron;

c.

Seven (7) tampered 11 kg. LPG cylinders, bearing Petrons tradename and
its trademark GASUL and other devices owned and/or used exclusively by
Petron;

d.

Five (5) tampered 50 kg. LPG cylinders, bearing Petrons tradename and
its trademark GASUL and other devices owned and/or used exclusively by
Petron with tampered GASUL logo;

e.

One (1) set of motor compressor for filling system; and

f.

One (1) set of LPG refilling machine.

On 22 April 2003, petitioners filed with the RTC a Motion to Quash Search
Warrants No. 2-2003 and No. 3-2003x[14] on the following grounds:

1.

There is no probable cause for the issuance of the search

warrant and the conditions for the issuance of a search warrant
were not complied with;

2.

Applicant NBI Agent Ritchie N. Oblanca and his witness

Bernabe C. Alajar do not have any authority to apply for a search
warrant. Furthermore, they committed perjury when they alleged
in their sworn statements that they conducted a test-buy on two
occasions;

3.

The place to be searched was not specified in the Search

Warrant as the place has an area of 10,000 square meters (one
hectare) more or less, for which reason the place to be searched
must be indicated with particularity;

4.

The search warrant is characterized as a general warrant as the

items to be seized as mentioned in the search warrant are being
used in the conduct of the lawful business of respondents and the
same are not being used in refilling Shellane and Gasul LPGs.

On 30 April 2003, MASAGANA, as third party claimant, filed with the

RTC a Motion for the Return of Motor Compressor and LPG Refilling
Machine.x[15] It claimed that it is the owner of the said motor compressor and
LPG refilling machine; that these items were used in the operation of its
legitimate business; and that their seizure will jeopardize its business interests.

On 5 June 2003, the RTC issued two Orders, one of which denied the
petitioners Motion to Quash Search Warrants No. 2-2003 and No. 3-2003, and
the other one also denied the Motion for the Return of Motor Compressor and
LPG Refilling Machine of MASAGANA, for lack of merit.x[16]

With respect to the Order denying the petitioners motion to quash Search
Warrants No. 2-2003 and No. 3-2003, the RTC held that based on the testimonies
of Oblanca and Alajar, as well as the documentary evidence consisting of
receipts, photographs, intellectual property and corporate registration papers,
there is probable cause to believe that petitioners are engaged in the business of
refilling or using cylinders which bear the trademarks or devices of Petron and
Pilipinas Shell in the place sought to be searched and that such activity is
probably in violation of Section 155 in relation to Section 170 of Republic Act
No. 8293.

It also ruled that Oblanca and Alajar had personal knowledge of the acts
complained of since they were the ones who monitored the activities of and
conducted test-buys on MASAGANA; that the search warrants in question are
not general warrants because the compound searched are solely used and
occupied by MASAGANA, and as such, there was no need to particularize the
areas within the compound that would be searched; and that the items to be
seized in the subject search warrants were sufficiently described with
particularity as the same was limited to cylinder tanks bearing the trademarks
GASUL and SHELLANE.

As regards the Order denying the motion of MASAGANA for the return of
its motor compressor and LPG refilling machine, the RTC resolved that
MASAGANA cannot be considered a third party claimant whose rights were
violated as a result of the seizure since the evidence disclosed that petitioners are
stockholders of MASAGANA and that they conduct their business through the
same juridical entity. It maintained that to rule otherwise would result in the
misapplication and debasement of the veil of corporate fiction. It also stated that
the veil of corporate fiction cannot be used as a refuge from liability.

Further, the RTC ratiocinated that ownership by another person or entity of

the seized items is not a ground to order its return; that in seizures pursuant to a
search warrant, what is important is that the seized items were used or intended
to be used as means of committing the offense complained of; that by its very
nature, the properties sought to be returned in the instant case appear to be related

to and intended for the illegal activity for which the search warrants were applied
for; and that the items seized are instruments of an offense.

Petitioners filed Motions for Reconsideration of the assailed Orders,x[17]

but these were denied by the RTC in its Order dated 21 July 2003 for lack of
compelling reasons.x[18]

Subsequently, petitioners appealed the two Orders of the RTC to the Court
of Appeals via a special civil action for certiorari under Rule 65 of the Rules of
Court.x[19] On 30 September 2004, the Court of Appeals promulgated its
Decision affirming the Orders of the RTC.x[20] It adopted in essence the bases
and reasons of the RTC in its two Orders. The decretal portion thereof reads:

Based on the foregoing, this Court finds no reason to disturb the assailed
Orders of the respondent judge. Grave abuse of discretion has not been proven to
exist in this case.
WHEREFORE, the petition is hereby DISMISSED for lack of merit. The
assailed orders both dated June 5, 2003 are hereby AFFIRMED.

Petitioners filed a Motion for Reconsiderationx[21] of the Decision of the

Court of Appeals, but this was denied in its Resolution dated 1 June 2005 for lack
of merit.x[22]

Petitioners filed the instant petition on the following grounds:

I.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PRESIDING JUDGE OF RTC CAVITE CITY HAD SUFFICIENT BASIS IN
DECLARING THE EXISTENCE OF PROBABLE CAUSE;
II.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT NBI
AGENT (RITCHIE OBLANCA) CAN APPLY FOR THE SEARCH
WARRANTS NOTHWITHSTANDING HIS LACK OF AUTHORITY;
III.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
REQUIREMENT OF GIVING A PARTICULAR DESCRIPTION OF THE
PLACE TO BE SEARCHED WAS COMPLIED WITH;

IV.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
APPLICATIONS AND THE SEARCH WARRANTS THEMSELVES SHOW
NO AMBIGUITY OF THE ITEMS TO BE SEIZED;

V.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
COMPLAINT IS DIRECTED AGAINST MASAGANA GAS CORPORATION,
ACTING THROUGH ITS OFFICERS AND DIRECTORS, HENCE
MASAGANA GAS CORPORATION MAY NOT BE CONSIDERED AS
THIRD PARTY CLAIMANT WHOSE RIGHTS WERE VIOLATED AS A
RESULT OF THE SEIZURE.x[23]

Apropos the first issue, petitioners allege that Oblanca and Alajar had no
personal knowledge of the matters on which they testified; that Oblanca and Alajar
lied to Judge Sadang when they stated under oath that they were the ones who
conducted the test-buys on two different occasions; that the truth of the matter is
that Oblanca and Alajar never made the purchases personally; that the transactions
were undertaken by other persons namely, Nikko Javier and G. Villanueva as
shown in the Entry/Exit Slips of MASAGANA; and that even if it were true that
Oblanca and Alajar asked Nikko Javier and G. Villanueva to conduct the test-buys,
the information relayed by the latter two to the former was mere hearsay.x[24]

Petitioners also contend that if Oblanca and Alajar had indeed used different
names in purchasing the LPG cylinders, they should have mentioned it in their
applications for search warrants and in their testimonies during the preliminary
examination; that it was only after the petitioners had submitted to the RTC the
entry/exit slips showing different personalities who made the purchases that
Oblanca and Alajar explained that they had to use different names in order to avoid
detection; that Alajar is not connected with either of the private respondents; that
Alajar was not in a position to inform the RTC as to the distinguishing trademarks
of SHELLANE and GASUL; that Oblanca was not also competent to testify on the
marks allegedly infringed by petitioners; that Judge Sadang failed to ask probing
questions on the distinguishing marks of SHELLANE and GASUL; that the
findings of the Brand Protection Committee of Pilipinas Shell were not submitted
nor presented to the RTC; that although Judge Sadang examined Oblanca and
Alajar, the former did not ask exhaustive questions; and that the questions Judge

Sadang asked were merely rehash of the contents of the affidavits of Oblanca and
Alajar.x[25]

These contentions are devoid of merit.

Article III, Section 2, of the present Constitution states the requirements

before a search warrant may be validly issued, to wit:

Section 2. The right of the people to be secure in their persons, houses,

papers, and effects against unreasonable searches and seizures of whatever nature
and for any purpose shall be inviolable, and no search warrant or warrant of
arrest shall issue except upon probable cause to be determined personally by
the judge after examination under oath or affirmation of the complainant
and the witnesses he may produce, and particularly describing the place to
be searched and the persons or things to be seized. (emphasis supplied).

Section 4 of Rule 126 of the Revised Rules on Criminal Procedure, provides

with more particularity the requisites in issuing a search warrant, viz:

SEC. 4. Requisites for issuing search warrant. A search warrant shall not
issue except upon probable cause in connection with one specific offense to be
determined personally by the judge after examination under oath or affirmation of
the complainant and the witnesses he may produce, and particularly describing the
place to be searched and the things to be seized which may be anywhere in the
Philippines.

According to the foregoing provisions, a search warrant can be issued only

upon a finding of probable cause. Probable cause for search warrant means such
facts and circumstances which would lead a reasonably discreet and prudent man
to believe that an offense has been committed and that the objects sought in
connection with the offense are in the place to be searched.x[26]

The facts and circumstances being referred thereto pertain to facts, data or
information personally known to the applicant and the witnesses he may
present.x[27] The applicant or his witnesses must have personal knowledge of the
circumstances surrounding the commission of the offense being complained of.
Reliable information is insufficient. Mere affidavits are not enough, and the judge
must depose in writing the complainant and his witnesses.x[28]

Section 155 of Republic Act No. 8293 identifies the acts constituting
trademark infringement, thus:

SEC. 155. Remedies; Infringement. Any person who shall, without the
consent of the owner of the registered mark:
155.1. Use in commerce any reproduction, counterfeit, copy, or colorable
imitation of a registered mark or the same container or a dominant feature thereof
in connection with the sale, offering for sale, distribution, advertising of any
goods or services including other preparatory steps necessary to carry out the sale

of any goods or services on or in connection with which such use is likely to

cause confusion, or to cause mistake, or to deceive; or
155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark
or a dominant feature thereof and apply such reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints, packages, wrappers, receptacles or
advertisements intended to be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake,
or to deceive, shall be liable in a civil action for infringement by the registrant for
the remedies hereinafter set forth: Provided, That the infringement takes place at
the moment any of the acts stated in Subsection 155.1 or this subsection are
committed regardless of whether there is actual sale of goods or services using the
infringing material.

As can be gleaned in Section 155.1, mere unauthorized use of a container

bearing a registered trademark in connection with the sale, distribution or
advertising of goods or services which is likely to cause confusion, mistake or
deception among the buyers/consumers can be considered as trademark
infringement.

In his sworn affidavits,x[29] Oblanca stated that before conducting an

investigation on the alleged illegal activities of MASAGANA, he reviewed the
certificates of trademark registrations issued by the Philippine Intellectual Property
Office in favor of Petron and Pilipinas Shell; that he confirmed from Petron and
Pilipinas Shell that MASAGANA is not authorized to sell, use, refill or distribute
GASUL and SHELLANE LPG cylinder containers; that he and Alajar monitored
the activities of MASAGANA in its refilling plant station located within its
compound at Governors Drive, Barangay Lapidario, Trece Martires, Cavite City;

that, using different names, they conducted two test-buys therein where they
purchased LPG cylinders bearing the trademarks GASUL and SHELLANE; that
the said GASUL and SHELLANE LPG cylinders were refilled in their presence by
the MASAGANA employees; that while they were inside the MASAGANA
compound, he noticed stock piles of multi-branded cylinders including GASUL
and SHELLANE LPG cylinders; and that they observed delivery trucks loaded
with GASUL and SHELLANE LPG cylinders coming in and out of the
MASAGANA compound and making deliveries to various retail outlets. These
allegations were corroborated by Alajar in his separate affidavits.

In support of the foregoing statements, Oblanca also submitted the following

documentary and object evidence:

1.

Certified true copy of the Certificate of Registration No. 44046 for

SHELL (DEVICE) in the name of Shell International;

2.

Certified true copy of the Certificate of Registration No. 41789 for

SHELL (DEVICE) in the name of Shell International;

3.

Certified true copy of the Certificate of Registration No. 37525 for

SHELL (DEVICE) in the name of Shell International;

4.

Certified true copy of the Certificate of Registration No. R-2813 for

SHELL in the name of Shell International;

5.

Certified true copy of the Certificate of Registration No. 31443 for

SHELLANE in the name of Shell International;

6.

Certified true copy of the Certificate of Registration No. 57945 for the
mark GASUL in the name of Petron;

7.

Certified true copy of the Certificate of Registration No. C-147 for

GASUL CYLINDER CONTAINING LIQUEFIED PETROLEUM GAS
in the name of Petron;

8.

Certified true copy of the Certificate of Registration No. 61920 for the
mark GASUL AND DEVICE in the name of Petron;

9.

Certified true copy of the Articles of Incorporation of Masagana;

10.

Certified true copy of the By-laws of Masagana;

11.

Certified true copy of the latest General Information Sheet of Masagana

on file with the Securities and Exchange Commission;

12.

Pictures of delivery trucks coming in and out of Masagana while it

delivered Gasul and Shellane LPG;

13.

Cash Invoice No. 56210 dated 13 February 2003 issued by Masagana for
the Gasul and Shellane LPG purchased by Agent Oblanca and witness
Alajar;

14.

Pictures of the Shellane and Gasul LPGs covered by Cash Invoice No.
56210 purchased from Masagana by Agent Oblanca and witness Alajar;

15.

Cash Invoice No. 56398 dated 27 February 2003 issued by Masagana for
the Gasul and Shellane LPG purchased by Agent Oblanca and witness
Alajar; and

16.

Pictures of the Shellane and Gasul LPGs covered by Cash Invoice No.
56398 purchased from Masagana by Agent Oblanca and witness
Alajar.x[30]

Extant from the foregoing testimonial, documentary and object evidence is

that Oblanca and Alajar have personal knowledge of the fact that petitioners,
through MASAGANA, have been using the LPG cylinders bearing the marks
GASUL and SHELLANE without permission from Petron and Pilipinas Shell, a
probable cause for trademark infringement. Both Oblanca and Alajar were clear

and insistent that they were the very same persons who monitored the activities of
MASAGANA; that they conducted test-buys thereon; and that in order to avoid
suspicion, they used different names during the test-buys. They also personally
witnessed the refilling of LPG cylinders bearing the marks GASUL and
SHELLANE inside the MASAGANA refilling plant station and the deliveries of
these refilled containers to some outlets using mini-trucks.

Indeed, the aforesaid facts and circumstances are sufficient to establish

probable cause. It should be borne in mind that the determination of probable cause
does not call for the application of the rules and standards of proof that a judgment
of conviction requires after trial on the merits. As the term implies, probable cause
is concerned with probability, not absolute or even moral certainty. The standards
of judgment are those of a reasonably prudent man, not the exacting calibrations of
a judge after a full blown trial.x[31]

The fact that Oblanca and Alajar used different names in the purchase
receipts do not negate personal knowledge on their part. It is a common practice of
the law enforcers such as NBI agents during covert investigations to use different
names in order to conceal their true identities. This is reasonable and
understandable so as not to endanger the life of the undercover agents and to
facilitate the lawful arrest or apprehension of suspected violators of the law.

Petitioners contention that Oblanca and Alajar should have mentioned the
fact that they used different names in their respective affidavits and during the
preliminary examination is puerile. The argument is too vacuous to merit serious
consideration. There is nothing in the provisions of law concerning the issuance of
a search warrant which directly or indirectly mandates that the applicant of the
search warrant or his witnesses should state in their affidavits the fact that they
used different names while conducting undercover investigations, or to divulge
such fact during the preliminary examination. In the light of other more material
facts which needed to be established for a finding of probable cause, it is not
difficult to believe that Oblanca and Alajar failed to mention that they used aliases
in entering the MASAGANA compound due to mere oversight.

It cannot be gainfully said that Oblanca and Alajar are not competent to
testify on the trademarks infringed by the petitioners. As earlier discussed, Oblanca
declared under oath that before conducting an investigation on the alleged illegal
activities of MASAGANA, he reviewed the certificates of trademark registrations
issued by the Philippine Intellectual Property Office in favor of Petron and
Pilipinas Shell. These certifications of trademark registrations were attached by
Oblanca in his applications for the search warrants. Alajar, on the other hand,
works as a private investigator and, in fact, owns a private investigation and
research/consultation firm. His firm was hired and authorized, pursuant to the
Brand Protection Program of Petron and Pilipinas Shell, to verify reports that
MASAGANA is involved in the illegal sale and refill of GASUL and SHELLANE
LPG cylinders.x[32] As part of the job, he studied and familiarized himself with
the registered trademarks of GASUL and SHELLANE, and the distinct features of

the LPG cylinders bearing the same trademarks before conducting surveillance and
test-buys on MASAGANA.x[33] He also submitted to Oblanca several copies of
the same registered trademark registrations and accompanied Oblanca during the
surveillance and test-buys.

As to whether the form and manner of questioning made by Judge Sadang

complies with the requirements of law, Section 5 of Rule 126 of the Revised Rules
on Criminal Procedure, prescribes the rules in the examination of the complainant
and his witnesses when applying for search warrant, to wit:

SEC. 5. Examination of complainant; record.- The judge must, before

issuing the warrant, personally examine in the form of searching questions and
answers, in writing under oath, the complainant and the witnesses he may produce
on facts personally known to them and attach to the record their sworn statements,
together with the affidavits submitted.

The searching questions propounded to the applicant and the witnesses

depend largely on the discretion of the judge. Although there is no hard-andfast
rule governing how a judge should conduct his investigation, it is axiomatic that
the examination must be probing and exhaustive, not merely routinary, general,
peripheral, perfunctory or pro forma. The judge must not simply rehash the
contents of the affidavit but must make his own inquiry on the intent and
justification of the application.x[34]

After perusing the Transcript of Stenographic Notes of the preliminary

examination, we found the questions of Judge Sadang to be sufficiently probing,
not at all superficial and perfunctory.x[35] The testimonies of Oblanca and Alajar
were consistent with each other and their narration of facts was credible. As
correctly found by the Court of Appeals:

This Court is likewise not convinced that respondent Judge failed to ask
probing questions in his determination of the existence of probable cause. This
Court has thoroughly examined the Transcript of Stenographic Notes taken during
the investigation conducted by the respondent Judge and found that respondent
Judge lengthily inquired into the circumstances of the case. For instance, he
required the NBI agent to confirm the contents of his affidavit, inquired as to
where the test-buys were conducted and by whom, verified whether PSPC and
PETRON have registered trademarks or tradenames, required the NBI witness to
explain how the test-buys were conducted and to describe the LPG cylinders
purchased from Masagana Gas Corporation, inquired why the applications for
Search Warrant were filed in Cavite City considering that Masagana Gas
Corporation was located in Trece Martires, Cavite, inquired whether the NBI
Agent has a sketch of the place and if there was any distinguishing sign to identify
the place to be searched, and inquired about their alleged tailing and monitoring
of the delivery trucks. x x x.x[36]

Since probable cause is dependent largely on the opinion and findings of the
judge who conducted the examination and who had the opportunity to question the
applicant and his witnesses, the findings of the judge deserves great weight. The
reviewing court can overturn such findings only upon proof that the judge
disregarded the facts before him or ignored the clear dictates of reason.x[37] We
find no compelling reason to disturb Judge Sadangs findings herein.

Anent the second issue, petitioners argue that Judge Sadang failed to require
Oblanca to show his authority to apply for search warrants; that Oblanca is a
member of the Anti-Organized Crime and not that of the Intellectual Property
Division of the NBI; that all complaints for infringement should be investigated by
the Intellectual Property Division of the NBI; that it is highly irregular that an
agent not assigned to the Intellectual Property Division would apply for a search
warrant and without authority from the NBI Director; that the alleged lettercomplaint of Atty. Bienvenido Somera, Jr. of Villaraza and Angangco Law Office
was not produced in court; that Judge Sadang did not require Oblanca to produce
the alleged letter-complaint which is material and relevant to the determination of
the existence of probable cause; and that Petron and Pilipinas Shell, being two
different corporations, should have issued a board resolution authorizing the
Villaraza and Angangco Law Office to apply for search warrant in their
behalf.x[38]

We reject these protestations.

The authority of Oblanca to apply for the search warrants in question is

clearly discussed and explained in his affidavit, viz:

[That] on 11 February 2003, the National Bureau of Investigation (NBI)

received a letter-complaint from Atty. Bienvenido I. Somera, Jr. of Villaraza and
Angangco, on behalf of among others, Petron Corporation (PETRON) [and
Pilipinas Shell Petroleum Corporation (PSPC), the authorized representative of

Shell International Petroleum Company Limited (SHELL INTERNATIONAL)]

requesting assistance in the investigation and, if warranted, apprehension and
prosecution of certain persons and/or establishments suspected of violating the
intellectual property rights of PETRON [and of PSPC and Shell International.]
11.
[That] on the basis of the letter-complaint, I, together with Agent
Angelo Zarzoso, was assigned as the NBI agent on the case.x[39]

The fact that Oblanca is a member of the Anti-Organized Crime Division

and not that of the Intellectual Property Division does not abrogate his authority to
apply for search warrant. As aptly stated by the RTC and the Court of Appeals,
there is nothing in the provisions on search warrant under Rule 126 of the Revised
Rules on Criminal Procedure, which specifically commands that the applicant law
enforcer must be a member of a division that is assigned or related to the subject
crime or offense before the application for search warrant may be acted upon. The
petitioners did not also cite any law, rule or regulation mandating such
requirement. At most, petitioners may only be referring to the administrative
organization and/or internal rule or practice of the NBI. However, not only did
petitioners failed to establish the existence thereof, but they also did not prove that
such administrative organization and/or internal rule or practice are inviolable.

Neither is the presentation of the letter-complaint of Atty. Somera and board

resolutions from Petron and Pilipinas Shell required or necessary in determining
probable cause. As heretofore discussed, the affidavits of Oblanca and Alajar,
coupled with the object and documentary evidence they presented, are sufficient to
establish probable cause. It can also be presumed that Oblanca, as an NBI agent, is
a public officer who had regularly performed his official duty.x[40] He would not

have initiated an investigation on MASAGANA without a proper complaint.

Furthermore, Atty. Somera did not step up to deny his letter-complaint.

Regarding the third issue, petitioners posit that the applications for search
warrants of Oblanca did not specify the particular area to be searched, hence,
giving the raiding team wide latitude in determining what areas they can search.
They aver that the search warrants were general warrants, and are therefore
violative of the Constitution. Petitioners also assert that since the MASAGANA
compound is about 10,000.00 square meters with several structures erected on the
lot, the search warrants should have defined the areas to be searched.

The long standing rule is that a description of the place to be searched is

sufficient if the officer with the warrant can, with reasonable effort, ascertain and
identify the place intended and distinguish it from other places in the community.
Any designation or description known to the locality that points out the place to the
exclusion of all others, and on inquiry leads the officers unerringly to it, satisfies
the constitutional requirement.x[41]

Moreover, in the determination of whether a search warrant describes the

premises to be searched with sufficient particularity, it has been held that the
executing officers prior knowledge as to the place intended in the warrant is
relevant. This would seem to be especially true where the executing officer is the
affiant on whose affidavit the warrant had been issued, and when he knows that the

judge who issued the warrant intended the compound described in the
affidavit.x[42]

The search warrants in question commanded any peace officer to make an

immediate search on MASAGANA compound located at Governors Drive,
Barangay Lapidario, Trece Martires, Cavite City. It appears that the raiding team
had ascertained and reached MASAGANA compound without difficulty since
MASAGANA does not have any other offices/plants in Trece Martires, Cavite
City. Moreover, Oblanca, who was with the raiding team, was already familiar
with the MASAGANA compound as he and Alajar had monitored and conducted
test-buys thereat.

Even if there are several structures inside the MASAGANA compound,

there was no need to particularize the areas to be searched because, as correctly
stated by Petron and Pilipinas Shell, these structures constitute the essential and
necessary components of the petitioners business and cannot be treated separately
as they form part of one entire compound. The compound is owned and used solely
by MASAGANA. What the case law merely requires is that, the place to be
searched can be distinguished in relation to the other places in the community.
Indubitably, this requisite was complied with in the instant case.

As to the fourth issue, petitioners asseverate that the search warrants did not
indicate with particularity the items to be seized since the search warrants merely

described the items to be seized as LPG cylinders bearing the trademarks GASUL
and SHELLANE without specifying their sizes.

A search warrant may be said to particularly describe the things to be seized

when the description therein is as specific as the circumstances will ordinarily
allow; or when the description expresses a conclusion of fact not of law by which
the warrant officer may be guided in making the search and seizure; or when the
things described are limited to those which bear direct relation to the offense for
which the warrant is being issued.x[43]

While it is true that the property to be seized under a warrant must be

particularly described therein and no other property can be taken thereunder, yet
the description is required to be specific only in so far as the circumstances will
ordinarily allow. The law does not require that the things to be seized must be
described in precise and minute details as to leave no room for doubt on the part of
the searching authorities; otherwise it would be virtually impossible for the
applicants to obtain a search warrant as they would not know exactly what kind of
things they are looking for. Once described, however, the articles subject of the
search and seizure need not be so invariant as to require absolute concordance, in
our view, between those seized and those described in the warrant. Substantial
similarity of those articles described as a class or specie would suffice.x[44]

Measured against this standard, we find that the items to be seized under the
search warrants in question were sufficiently described with particularity. The
articles to be confiscated were restricted to the following: (1) LPG cylinders
bearing the trademarks GASUL and SHELLANE; (2) Machines and equipments
used or intended to be used in the illegal refilling of GASUL and SHELLANE
cylinders. These machines were also specifically enumerated and listed in the
search warrants; (3) Documents which pertain only to the production, sale and
distribution of the GASUL and SHELLANE LPG cylinders; and (4) Delivery
trucks bearing Plate Nos. WTE-527, XAM-970 and WFC-603, hauling trucks,
and/or other delivery trucks or vehicles or conveyances being used or intended to
be used for the purpose of selling and/or distributing GASUL and SHELLANE
LPG cylinders.x[45]

Additionally, since the described items are clearly limited only to those
which bear direct relation to the offense, i.e., violation of section 155 of Republic
Act No. 8293, for which the warrant was issued, the requirement of particularity of
description is satisfied.

Given the foregoing, the indication of the accurate sizes of the GASUL and
SHELLANE LPG cylinders or tanks would be unnecessary.

Finally, petitioners claim that MASAGANA has the right to intervene and to
move for the return of the seized items; that the items seized by the raiding team

were being used in the legitimate business of MASAGANA; that the raiding team
had no right to seize them under the guise that the same were being used in
refilling GASUL and SHELLANE LPG cylinders; and that there being no action
for infringement filed against them and/or MASAGANA from the seizure of the
items up to the present, it is only fair that the seized articles be returned to the
lawful owner in accordance with Section 20 of A.M. No. 02-1-06-SC.

It is an elementary and fundamental principle of corporation law that a

corporation is an entity separate and distinct from its stockholders, directors or
officers. 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.x[46] In other words, the law will not recognize the separate
corporate existence if the corporation is being used pursuant to the foregoing
unlawful objectives. This non-recognition is sometimes referred to as the doctrine
of piercing the veil of corporate entity or disregarding the fiction of corporate
entity. Where the separate corporate entity is disregarded, the corporation will be
treated merely as an association of persons and the stockholders or members will
be considered as the corporation, that is, liability will attach personally or directly
to the officers and stockholders.x[47]

As we now find, the petitioners, as directors/officers of MASAGANA, are

utilizing the latter in violating the intellectual property rights of Petron and
Pilipinas Shell. Thus, petitioners collectively and MASAGANA should be

considered as one and the same person for liability purposes. Consequently,
MASAGANAs third party claim serves no refuge for petitioners.

Even if we were to sustain the separate personality of MASAGANA from

that of the petitioners, the effect will be the same. The law does not require that the
property to be seized should be owned by the person against whom the search
warrants is directed. Ownership, therefore, is of no consequence, and it is sufficient
that the person against whom the warrant is directed has control or possession of
the property sought to be seized.x[48] Hence, even if, as petitioners claimed, the
properties seized belong to MASAGANA as a separate entity, their seizure
pursuant to the search warrants is still valid.

Further, it is apparent that the motor compressor, LPG refilling machine and
the GASUL and SHELL LPG cylinders seized were the corpus delicti, the body or
substance of the crime, or the evidence of the commission of trademark
infringement. These were the very instruments used or intended to be used by the
petitioners in trademark infringement. It is possible that, if returned to
MASAGANA, these items will be used again in violating the intellectual property
rights of Petron and Pilipinas Shell.x[49] Thus, the RTC was justified in denying
the petitioners motion for their return so as to prevent the petitioners and/or
MASAGANA from using them again in trademark infringement.

Petitioners reliance on Section 20 of A.M. No. 02-1-06-SC,x[50] is not

tenable. As correctly observed by the Solicitor General, A.M. 02-1-06-SC is not
applicable in the present case because it governs only searches and seizures in civil
actions for infringement of intellectual property rights.x[51] The offense
complained of herein is for criminal violation of Section 155 in relation to Section
170x[52] of Republic Act No. 8293.

WHEREFORE, the petition is DENIED. The Decision and Resolution of

the Court of Appeals in CA-G.R. SP No. 79256, dated 30 September 2004 and 1
June 2005, respectively, are hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. L-2598

June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN,
EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed
and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer
stating that 23,428 shares of stock had been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to
do business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the articles of 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 Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;
and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins
to exist only from the moment such certificate is issued not before (sec. 11, Corporation
Law). The complaining associates have not represented to the others that they were incorporated
any more than the latter had made similar representations to them. And as nobody was led to
believe anything to his prejudice and damage, the principle of estoppel does not apply.
Obviously this is not an instance requiring the enforcement of contracts with the corporation
through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law
applies, and therefore the court had not jurisdiction to take cognizance of said civil case number
381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a corporation
under this Act and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may be a party, but such inquiry
may be had at the suit of the Insular Government on information of the Attorney-General.
There are least two reasons why this section does not govern the situation. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its
stockholders may not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim is
compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply with
the law the claim to be a corporation "under this act" could not be made "in good faith."
(Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs.
Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.
There might be room for argument on the right of minority stockholders to sue for dissolution;1
but that question does not affect the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal. Whkch brings us to one principal reason why this petition may not
prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the
proper time.
There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or corporation,
and it was no error to reject the counter-bond, the court having declared the dissolution. As to the
amount of the bond to be demanded of the receiver, much depends upon the discretion of the trial
court, which in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF
APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF
LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME
WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING
CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD
"LYCEUM". The Articles of Incorporation of a corporation must, among other things, set out
the name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule
insofar as corporate names are concerned: "Section 18. Corporate name. No corporate name
may be allowed by the Securities an Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name." The policy underlying the prohibition in Section 18
against the registration of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would
have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and
the reduction of difficulties of administration and supervision over corporations. We do not
consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT
ATTENDED WITH EXCLUSIVITY. It is claimed, however, by petitioner that the word

"Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word,
although originally a generic, has become appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however, been extended to corporate names sine the
right to use a corporate name to the exclusion of others is based upon the same principle which
underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc. v.
Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or phrase has come to mean that the article
was his product." The question which arises, therefore, is whether or not the use by petitioner of
"Lyceum" in its corporate name has been for such length of time and with such exclusivity as to
have become associated or identified with the petitioner institution in the mind of the general
public (or at least that portion of the general public which has to do with schools). The Court of
Appeals recognized this issue and answered it in the negative: "Under the doctrine of secondary
meaning, a word or phrase originally incapable of exclusive appropriation with reference to an
article in the market, because geographical or otherwise descriptive might nevertheless have
been used so long and so exclusively by one producer with reference to this article that, in that
trade and to that group of the purchasing public, the word or phrase has come to mean that the
article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has evolved through the
substantial and exclusive use of the same for a considerable period of time. . . . No evidence was
ever presented in the hearing before the Commission which sufficiently proved that the word
'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of
this kind, the same tend to prove only that the appellant had been using the disputed word for a
long period of time. . . . In other words, while the appellant may have proved that it had been
using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the
said word had acquired secondary meaning in its favor because the appellant failed to prove that
it had been using the same word all by itself to the exclusion of others. More so, there was no
evidence presented to prove that confusion will surely arise if the same word were to be used by
other educational institutions. Consequently, the allegations of the appellant in its first two
assigned errors must necessarily fail." We agree with the Court of Appeals. The number alone of
the private respondents in the case at bar suggests strongly that petitioner's use of the word
"Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of
secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth
shared with the Western Pangasinan Lyceum and a little later with other private respondent
institutions which registered with the SEC using "Lyceum" as part of their corporation names.
There may well be other schools using Lyceum or Liceo in their names, but not registered with
the SEC because they have not adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER
THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE
ENTITY'S NAME. petitioner institution is not entitled to a legally enforceable exclusive right
to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as

part of their corporate names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate name, it is not enough to
ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate
names in their entirety and when the name of petitioner is juxtaposed with the names of private
respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively
similar" with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their respective
names.
Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972
The following private respondents were declared in default for failure to file an answer despite
service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the
Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the
Liceum of Araullo was dismissed when that school motu proprio change its corporate name to
"Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc.
to require it to change its corporate name and to adopt another name not "similar [to] or
identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio
Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were
substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of
the geographical location of the campus being the only word which distinguished one from the
other corporate name. The SEC also noted that petitioner had registered as a corporation ahead of
the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name to
another name "not similar or identical [with]" the names of previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case
docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court
denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the
educational institutions it could find using the word "Lyceum" as part of their corporate name,
and advised them to discontinue such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No.
2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the
word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc.
case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and
that petitioner had acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing
officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to
have become so identified with petitioner as to render use thereof by other institutions as
productive of confusion about the identity of the schools concerned in the mind of the general

public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names
to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially
in view of the fact that the campuses of petitioner and those of the private respondents were
physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991,
however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner
filed a motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No.
L-46595 did not constitute stare decisis as to apply to this case and in not holding that said
Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated
by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by
noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare
decisis pertinent, if only because the SEC En Banc itself has re-examined Associate
Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court
in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned:
"SECTION 18. Corporate name. No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the

avoidance of fraud upon the public which would have occasion to deal with the entity concerned,
the evasion of legal obligations and duties, and the reduction of difficulties of administration and
supervision over corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical
with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to
Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the philosopher Aristotle and his followers for
teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions
providing public lectures and concerts and public discussions. Thus today, the word "Lyceum"
generally refers to a school or an institution of learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also found in Spanish (liceo) and in French
(lycee). As the Court of Appeals noted in its Decision, Roman Catholic schools frequently use
the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate,"
"Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the
name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It
may be (though this is a question of fact which we need not resolve) that the use of the word
"Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not
inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of
their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is
not unnatural to use this word to designate an entity which is organized and operating as an
educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning
in relation to petitioner with the result that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the
doctrine of secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade

and to that branch of the purchasing public, the word or phrase has come to mean that the article
was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools). The Court of Appeals
recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into which the name or phrase
has evolved through the substantial and exclusive use of the same for a considerable period of
time. Consequently, the same doctrine or principle cannot be made to apply where the evidence
did not prove that the business (of the plaintiff) has continued for so long a time that it has
become of consequence and acquired a good will of considerable value such that its articles and
produce have acquired a well-known reputation, and confusion will result by the use of the
disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil.
448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend to prove only that the appellant had
been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive
use of the word (Lyceum) was never established or proven as in fact the evidence tend to convey
that the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior to the
date the appellant started using the same word in its corporate name. Furthermore, educational
institutions of the Roman Catholic Church had been using the same or similar word like 'Liceo
de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long
before appellant started using the word 'Lyceum'. The appellant also failed to prove that the word
'Lyceum' has become so identified with its educational institution that confusion will surely arise
in the minds of the public if the same word were to be used by other educational institutions.
In other words, while the appellant may have proved that it had been using the word 'Lyceum' for
a long period of time, this fact alone did not amount to mean that the said word had acquired
secondary meaning in its favor because the appellant failed to prove that it had been using the
same word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case at
bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with
the SEC and began using the word "Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan
Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which
records had been destroyed during World War II, Western Pangasinan Lyceum should be
deemed to have lost all rights it may have acquired by virtue of its past registration. It might be
noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner
had filed its own registration on 21 September 1950. Whether or not Western Pangasinan
Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears
to us to be quite secondary in importance; we refer to this earlier registration simply to
underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that
term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with
other private respondent institutions which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools using Lyceum or Liceo in their names,
but not registered with the SEC because they have not adopted the corporate form of
organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other institutions may
use "Lyceum" as part of their corporate names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not
enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the
Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement
as to costs.
SO ORDERED.

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT
SUHAY NG KATOTOHANAN, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7, 1997xxxix[1] and the
Resolution dated February 16, 1999xxxix[2] of the Court of Appeals in CA-G.R. SP No. 40933,
which affirmed the Decision of the Securities and Exchange and Commission (SEC) in SEC-AC
No. 539.xxxix[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God
in Christ Jesus, the Pillar and Ground of Truth),xxxix[4] is a non-stock religious society or
corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members
of respondent corporation disassociated themselves from the latter and succeeded in registering
on March 30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which
petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name to another name that is not similar or identical to any
name already used by a corporation, partnership or association registered with the
Commission.xxxix[5] No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the registration
on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at Saligan ng
Katotohanan.xxxix[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC Case
No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be barred
from using the same or similar name on the ground that the same causes confusion among their
members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default
and respondent was allowed to present its evidence ex parte.

On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate
name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner (respondent
herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang Pilipinas
(petitioner herein) is hereby MANDATED to change its corporate name to another not
deceptively similar or identical to the same already used by the Petitioner, any corporation,
association, and/or partnership presently registered with the Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and Legal
Department [CLD] of this Commission for their records, reference and/or for whatever
requisite action, if any, to be undertaken at their end.
SO ORDERED.xxxix[7]
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539. In a
decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a finding that
petitioner's corporate name was identical or confusingly or deceptively similar to that of
respondents corporate name.xxxix[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court of
Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioners
motion for reconsideration was denied by the Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT
PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED
ON TOTALLY INAPPLICABLE JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF THE
CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS
INSTITUTION.
III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY

APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE
APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT
CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE
THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM,
THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONERS
RIGHTS.xxxix[9]
Invoking the case of Legarda v. Court of Appeals,xxxix[10] petitioner insists that the decision of
the Court of Appeals and the SEC should be set aside because the negligence of its former
counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss
was denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds the client.
This is based on the rule that any act performed by a lawyer within the scope of his general or
implied authority is regarded as an act of his client.xxxix[11] An exception to the foregoing is
where the reckless or gross negligence of the counsel deprives the client of due process of
law.xxxix[12] Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause consisted
in filing a motion for extension of time to file answer before the trial court. When his client was
declared in default, the counsel did nothing and allowed the judgment by default to become final
and executory. Upon the insistence of his client, the counsel filed a petition to annul the
judgment with the Court of Appeals, which denied the petition, and again the counsel allowed
the denial to become final and executory. This Court found the counsel grossly negligent and
consequently declared as null and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a
motion to dismiss on the ground of lack of cause of action. When his client was declared in
default for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the
order of default.xxxix[13] After judgment by default was rendered against petitioner corporation,
Atty. Garaygay filed a motion for extension of time to appeal/motion for reconsideration, and
thereafter a motion to set aside the decision.xxxix[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an
answer that led to the rendition of a judgment by default against petitioner, his efforts were
palpably real, albeit bereft of zeal.xxxix[15]
Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the
Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be
construed as a waiver of that defense.xxxix[16] At any rate, the SEC has the authority to de-

register at all times and under all circumstances corporate names which in its estimation are
likely to spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate
names not only for the protection of the corporations involved but more so for the protection of
the public.xxxix[17]
Section 18 of the Corporation Code provides:
Corporate Name. --- No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently deceptive,
confusing or is contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d)
If the proposed name contains a word similar to a word already used as part of the firm
name or style of a registered company, the proposed name must contain two other words
different from the name of the company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name similar
to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.xxxix[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but
eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.,
which, petitioner argues, effectively distinguished it from respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners name are, as
correctly observed by the SEC, merely descriptive of and also referring to the members, or
kaanib, of respondent who are likewise residing in the Philippines. These words can hardly serve
as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym --- H.S.K.;xxxix[19] not to mention the fact
that both are espousing religious beliefs and operating in the same place. Parenthetically, it is
well to mention that the acronym H.S.K. used by petitioner stands for Haligi at Saligan ng
Katotohanan.xxxix[20]
Then, too, the records reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN
NG KATOTOHANAN, which is strikingly similar to respondent's corporate name, thus making it
even more evident that the additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc., are
merely descriptive of and pertaining to the members of respondent corporation.xxxix[21]

Significantly, the only difference between the corporate names of petitioner and respondent are
the words SALIGAN and SUHAY. These words are synonymous --- both mean ground,
foundation or support. Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,xxxix[22] where the Court ruled that the corporate names Universal
Mills Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under
the test of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot
find justification under the generic word rule. We agree with the Court of Appeals conclusion
that a contrary ruling would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names Church
of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in
Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not authorize
the use by petitioner of the essential and distinguishing feature of respondent's registered and
protected corporate name.xxxix[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to change
its corporate name is not a violation of its constitutionally guaranteed right to religious freedom.
In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines in the
approval of partnership and corporate names, namely its undertaking to manifest its willingness
to change its corporate name in the event another person, firm, or entity has acquired a prior right
to the use of the said firm name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, and Pardo, JJ., concur.
Puno, J., on official leave.

WILSON GAMBOA VS. FINANCE SECRETARY MARGARITO B. TEVES,

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and

declaration of nullity of the sale of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of the Republic of the Philippines
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine

Long Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company
and a major PLDT stockholder, sold 26 percent of the outstanding common shares of
PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the
owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,

acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
of the outstanding capital stock of PTIC, through a public bidding to be conducted on
4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510
million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by
IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2
March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of

46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or about
6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacifics
common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the common shareholdings of foreigners in PLDT to about
81.47 percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility to not
more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves,

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision4 which became final and
executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance
and the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid
conference was held, and the original deadline for bidding scheduled on 4 December
2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as

the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with
PTICs Articles of Incorporation. First Pacific announced its intention to match
Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good

Government conducted a public hearing on the particulars of the then impending sale
of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)
the auction of the governments 111,415 PTIC shares bore due diligence, transparency
and conformity with existing legal procedures; and (b) First Pacifics intended
acquisition of the governments 111,415 PTIC shares resulting in First Pacifics
100% ownership of PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only 13.847 percent of the

total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific

completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a
public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by
First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to
P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for
PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result
in an increase in First Pacifics common shareholdings in PLDT from 30.7 percent to
37 percent, and this, combined with Japanese NTT DoCoMos common shareholdings
in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56
percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7
percent to 37.0 percent of its common or voting- stockholdings, x x x. Hence, the
consummation of the sale will put the two largest foreign investors in PLDT First Pacific
and Japans NTT DoCoMo, which is the worlds largest wireless telecommunications firm,
owning 51.56 percent of PLDT common equity. x x x With the completion of the sale,
data culled from the official website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five percent of common equity,
will collectively own 81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K
reports x x x which PLDT submitted to the New York Stock Exchange for
the period 2003-2005, revealed that First Pacific and several other foreign
entities breached the constitutional limit of 40 percent ownership as early
as 2003. x x x7

Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit
on foreign ownership of a public utility; (2) whether public respondents committed
grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First
Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave
to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28
August 2007, the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among

others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9
which indisputably demand a thorough examination of the evidence of the parties, are
generally beyond this Courts jurisdiction. Adhering to this well-settled principle, the
Court shall confine the resolution of the instant controversy solely on the threshold
and purely legal issue of whether the term capital in Section 11, Article XII of the
Constitution refers to the total common shares only or to the total outstanding capital

stock (combined total of common and non-voting preferred shares) of PLDT, a public
utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of
this court, which however is not exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the certificates
for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for
mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would

result in the interpretation of a banking law. In that case, which involved the crime of
rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
foreign currency deposits from attachment, garnishment or any other order or process
of any court, inapplicable due to the peculiar circumstances of the case. The Court
held that injustice would result especially to a citizen aggrieved by a foreign guest like
accused x x x that would negate Article 10 of the Civil Code which provides that in
case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for damages and to release
the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly

brushed aside the procedural infirmity of the petition for declaratory relief and treated
the same as one for mandamus. In Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among
the four employers under Presidential Decree No. 851 which are required to pay their
employees x x x a thirteenth (13th) month pay x x x ? The Constitutional principle
involved therein affected all government employees, clearly justifying a relaxation of
the technical rules of procedure, and certainly requiring the interpretation of the
assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief.
However, exceptions to this rule have been recognized. Thus, where the petition has
far-reaching implications and raises questions that should be resolved, it may be
treated as one for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term capital in
Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this Court
to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy. In fact, a resolution of this issue
will determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue that has farreaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term capital in Section
11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as
G.R. No. 157360.16 That case involved the same public utility (PLDT) and
substantially the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and instead
denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts Decision of 21 February
2003 via a petition for review under Rule 45. The Courts Resolution, denying the
petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure,
in the words of the Constitution, a self-reliant and independent national economy
effectively controlled by Filipinos.18 Besides, in the light of vague and confusing
positions taken by government agencies on this purely legal issue, present and future
foreign investors in this country deserve, as a matter of basic fairness, a categorical

ruling from this Court on the extent of their participation in the capital of public
utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources,19 in Section 7, Article XII
on ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the
ownership of educational institutions,22 and in Section 11(2), Article XVI on the
ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in
this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters
of transcendental importance to the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in
Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be
valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that the right they
sought to be enforced is a public right recognized by no less than the fundamental law of the
land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared that when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the
general public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the economic development of the country
and the magnitude of the financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution would constitute sufficient authority
for upholding the petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of

transcendental public importance, the petitioner has the requisite locus standi.

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under the condition that
it shall be subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of
the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least
sixty per centum of the capital of which is owned by such citizens, nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the National Assembly
when the public interest so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate
share in the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV
of the 1935 Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or other entities organized under the laws of the Philippines sixty
per centum of the capital of which is owned by citizens of the Philippines, nor shall
such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. No franchise or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional

Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public utilities
by requiring that any form of authorization for the operation of public utilities should
be granted only to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens. The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security.26 The evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national
interest.27 This specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and independent
national economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must therefore meet
the minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public
utility, at least 60 percent of its capital must be owned by Filipino citizens.

The crux of the controversy is the definition of the term capital. Does the term capital
in Section 11, Article XII of the Constitution refer to common shares or to the total

outstanding capital stock (combined total of common and non-voting preferred

shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it is
through voting that control over a corporation is exercised. Petitioner posits that the
term capital in Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of shares alone, under
the corporate set-up of PLDT, can vote and elect members of the board of directors. It
is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by
then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line
to subscribe to non-voting preferred shares to pay for the investment cost of installing
the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt

petitioners definition of the term capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private respondents
Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the
common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps

mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders. Respondent
Nazareno does not deny petitioners allegation of foreigners dominating the common
shareholdings of PLDT. Nazareno stressed mainly that the petition seeks to divest
foreign common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares. Thus, the foreign

natural and juridical PLDT shareholders must be impleaded in this suit so that they
can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of the
foreign common shareholders.

While Nazareno does not introduce any definition of the term capital, he states that
among the factual assertions that need to be established to counter petitioners
allegations is the uniform interpretation by government agencies (such as the
SEC), institutions and corporations (such as the Philippine National Oil
Company-Energy Development Corporation or PNOC-EDC) of including both
preferred shares and common shares in controlling interest in view of testing
compliance with the 40% constitutional limitation on foreign ownership in public
utilities.35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in
Section 11, Article XII of the Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in
his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent
Pangilinan alleges that the issue should be whether owners of shares in PLDT as well
as owners of shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without any law requiring
them to surrender their shares and also without notice and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of the
utility company as a condition for keeping their shares in the utility company.
According to him, Section 11 does not authorize taking one persons property (the
shareholders stock in the utility company) on the basis of another partys alleged
failure to satisfy a requirement that is a condition only for that other partys retention
of another piece of property (the utility company being at least 60% Filipino-owned to
keep its franchise).36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary

John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise
silent on the definition of the term capital. In its Memorandum37 dated 24 September
2007, the OSG also limits its discussion on the supposed procedural defects of the
petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties,
and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the Constitution. The
OSG contends that the petition actually partakes of a collateral attack on PLDTs
franchise as a public utility, which in effect requires a full-blown trial where all the
parties in interest are given their day in court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of

the Philippine Stock Exchange (PSE), does not also define the term capital and seeks
the dismissal of the petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs
prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be

a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and
restrictions on fully nationalized and partially nationalized activities is for Filipino
nationals to be always in control of the corporation undertaking said activities. Otherwise,
if the Trial Courts ruling upholding respondents arguments were to be given credence, it
would be possible for the ownership structure of a public utility corporation to be divided
into one percent (1%) common stocks and ninety-nine percent (99%) preferred stocks.
Following the Trial Courts ruling adopting respondents arguments, the common shares

can be owned entirely by foreigners thus creating an absurd situation wherein foreigners,
who are supposed to be minority shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the
beneficial ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock entitled to vote, i.e.,
common shares. Furthermore, ownership of record of shares will not suffice but it must
be shown that the legal and beneficial ownership rests in the hands of Filipino citizens.
Consequently, in the case of petitioner PLDT, since it is already admitted that the voting
interests of foreigners which would gain entry to petitioner PLDT by the acquisition of
SMART shares through the Questioned Transactions is equivalent to 82.99%, and the
nominee arrangements between the foreign principals and the Filipino owners is likewise
admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the
Trial Court to support the proposition that the meaning of the word capital as used in
Section 11, Article XII of the Constitution allegedly refers to the sum total of the shares
subscribed and paid-in by the shareholder and it allegedly is immaterial how the stock is
classified, whether as common or preferred, cannot stand in the face of a clear legislative
policy as stated in the FIA which took effect in 1991 or way after said opinions were
rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to
state that as between the law and an opinion rendered by an administrative agency, the
law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail
over the clear intent of the framers of the Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the Constitution is
at best merely advisory for it is the courts that finally determine what a law means. 39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,

Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr.
Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del
Rosario, and Orlando B. Vea, argued that the term capital in Section 11, Article XII of
the Constitution includes preferred shares since the Constitution does not distinguish
among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporations capital,
without distinction as to classes of shares. x x x

In this connection, the Corporation Code which was already in force at the time the
present (1987) Constitution was drafted defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term outstanding capital stock, as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and
preferred shares, nor exclude either class of shares, in determining the outstanding capital
stock (the capital) of a corporation. Consequently, petitioners suggestion to reckon
PLDTs foreign equity only on the basis of PLDTs outstanding common shares is without
legal basis. The language of the Constitution should be understood in the sense it has in
common use.
xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is
necessary, there is nothing in the Record of the Constitutional Commission (Vol. III)
which petitioner misleadingly cited in the Petition x x x which supports petitioners view
that only common shares should form the basis for computing a public utilitys foreign
equity.

xxxx

18. In addition, the SEC the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitutions foreign equity restrictions as regards nationalized activities x x x has
categorically ruled that both common and preferred shares are properly considered in
determining outstanding capital stock and the nationality composition thereof. 40

We agree with petitioner and petitioners-in-intervention. The term capital in Section

11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, 41 and not to
the total outstanding capital stock comprising both common and non-voting preferred
shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be

divided into classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided
in this Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares may have a
par value or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-par value shares of
stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board of Directors, where
authorized in the articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such terms and conditions shall be

effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued for
a consideration less than the value of five (P5.00) pesos per share: Provided, further, That
the entire consideration received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer only
to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the
election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of
directors.

This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, capital refers to the
voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section
15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: Where do we
base the equity requirement, is it on the authorized capital stock, on the subscribed capital
stock, or on the paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from
the UP Law Center who provided us a draft. The phrase that is contained here which
we adopted from the UP draft is 60 percent of voting stock.

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a

corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
voting stock or controlling interest.

MR. AZCUNA. Hence, without the Davide amendment, the committee report would
read: corporations or associations at least sixty percent of whose CAPITAL is owned by
such citizens.

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the
capital to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the
minority. Let us say 40 percent of the capital is owned by them, but it is the voting
capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation
where the corporation is controlled by foreigners despite being the minority because
they have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word stock as stated in the 1973
and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say CAPITAL.

MR. AZCUNA. We should not eliminate the phrase controlling interest.

MR. BENGZON. In the case of stock corporations, it is assumed. 49 (Emphasis

supplied)

Thus, 60 percent of the capital assumes, or should result in, controlling interest in the
corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national
in the Foreign Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to
vote of each of both corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing Rules and

Regulations of the Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or

association wholly owned by the citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty percent [60%] of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent [60%] of the
fund will accrue to the benefit of the Philippine nationals; Provided, that where a
corporation its non-Filipino stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty percent [60%] of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by citizens
of the Philippines and at least sixty percent [60%] of the members of the Board of
Directors of each of both corporation must be citizens of the Philippines, in order that the
corporation shall be considered a Philippine national. The control test shall be applied for
this purpose.

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine

nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress may
prescribe, certain areas of investments. Thus, in numerous laws Congress has reserved
certain areas of investments to Filipino citizens or to corporations at least sixty
percent of the capital of which is owned by Filipino citizens. Some of these laws are:
(1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and
Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section
11, Article XII of the Constitution is also used in the same context in numerous
laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming

majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders
of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51

On the other hand, holders of common shares are granted the exclusive right to vote in
the election of directors. PLDTs Articles of Incorporation 52 state that each holder of
Common Capital Stock shall have one vote in respect of each share of such stock held
by him on all matters voted upon by the stockholders, and the holders of Common
Capital Stock shall have the exclusive right to vote for the election of directors
and for all other purposes.53

In short, only holders of common shares can vote in the election of directors, meaning
only common shareholders exercise control over PLDT. Conversely, holders of

preferred shares, who have no voting rights in the election of directors, do not have
any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority
of the common shares of PLDT. In fact, based on PLDTs 2010 General Information
Sheet (GIS),54 which is a document required to be submitted annually to the Securities
and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners
hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends compared
to the common shares. PLDT declared dividends for the common shares at P70.00 per
share, while the declared dividends for the preferred shares amounted to a measly
P1.00 per share.59 So the preferred shares not only cannot vote in the election of
directors, they also have very little and obviously negligible dividend earning capacity
compared to common shares.

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares is P10.00
per share. In other words, preferred shares have twice the par value of common shares
but cannot elect directors and have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners
own only a minuscule 0.56% of the preferred shares.61 Worse, preferred shares
constitute 77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is
not with the non-voting preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less
than 60 percent of the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that [n]o franchise, certificate,
or any other form of authorization for the operation of a public utility shall be granted
except to x x x corporations x x x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn; 63 (5)
preferred shares have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred shares
with a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the Constitution
to include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the
States constitutional duty to limit control of public utilities to Filipino citizens. Such
an interpretation certainly runs counter to the constitutional provision reserving
certain areas of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and advertising
businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of
the national interest. The Court must perform its solemn duty to defend and uphold
the intent and letter of the Constitution to ensure, in the words of the Constitution, a
self-reliant and independent national economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to implement these selfexecuting provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a
constitutional mandate, the presumption now is that all provisions of the constitution are
self-executing. If the constitutional provisions are treated as requiring legislation instead
of self-executing, the legislature would have the power to ignore and practically nullify
the mandate of the fundamental law. This can be cataclysmic. That is why the prevailing
view is, as it has always been, that

. . . in case of doubt, the Constitution should be considered self-executing rather than

non-self-executing. . . . Unless the contrary is clearly intended, the provisions of the
Constitution should be considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall be effective. These
provisions would be subordinated to the will of the lawmaking body, which could make
them entirely meaningless by simply refusing to pass the needed implementing statute.
(Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice
Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than
as requiring future legislation for their enforcement. The reason is not difficult to discern.
For if they are not treated as self-executing, the mandate of the fundamental law
ratified by the sovereign people can be easily ignored and nullified by Congress.
Suffused with wisdom of the ages is the unyielding rule that legislative actions may
give breath to constitutional rights but congressional inaction should not suffocate
them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests,
searches and seizures, the rights of a person under custodial investigation, the rights of an
accused, and the privilege against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions guaranteeing the
fundamental rights of life, liberty and the protection of property. The same treatment is
accorded to constitutional provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen

of his land to an alien, and as both the citizen and the alien have violated the law, none of
them should have a recourse against the other, and it should only be the State that should

be allowed to intervene and determine what is to be done with the property subject of the
violation. We have said that what the State should do or could do in such matters is a
matter of public policy, entirely beyond the scope of judicial authority. (Dinglasan, et al.
vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature has
not definitely decided what policy should be followed in cases of violations against
the constitutional prohibition, courts of justice cannot go beyond by declaring the
disposition to be null and void as violative of the Constitution. x x x (Emphasis
supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the constitutional
provisions expressly reserving specific areas of investments to corporations, at least
60 percent of the capital of which is owned by Filipinos, was enforceable. In short, the
framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively
reserve to Filipinos specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the
legislatures that convened since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that determine who will effectively
control the national economy, Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.

This Court has held that the SEC has both regulatory and adjudicative functions. 69
Under its regulatory functions, the SEC can be compelled by mandamus to perform its
statutory duty when it unlawfully neglects to perform the same. Under its adjudicative
or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear
and decide a possible violation of any law it administers or enforces when it is
mandated by law to investigate such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to
reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution. Thus, the SEC is the government agency tasked with the statutory duty

to enforce the nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present case, can
direct the SEC to perform its statutory duty under the law, a duty that the SEC has
apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law. The SEC is mandated
under Section 5(d) of the same Code with the power and function to investigate x x x
the activities of persons to ensure compliance with the laws and regulations that
SEC administers or enforces. The GIS that all corporations are required to submit to
SEC annually should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition for mandamus
as in the present case, to hear and decide a possible violation of Section 11, Article
XII of the Constitution in view of the ownership structure of PLDTs voting shares, as
admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to
SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.