ALICIA E. GALA, GUIA G. DOMINGO and RITA G.

BENSON, petitioners,
vs. ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO Name Number of Shares Amount
MANAGEMENT AND DEVELOPMENT CORPORATION, RAUL E.
GALA, VITALIANO N. AGUIRRE II, ADNAN V. ALONTO, ELIAS N.
CRESENCIO, MOISES S. MANIEGO, RODOLFO B. REYNO,
RENATO S. GONZALES, VICENTE C. NOLAN, NESTOR N. Raul E. Gala 6,640 66,400.00
BATICULON, respondents.

DECISION Ofelia E. Gala 6,640 66,400.00

YNARES-SANTIAGO, J.:
Guia G. Domingo 6,640 66,400.00
This is a petition for review under Rule 45 of the Rules of Court, seeking
the reversal of the decision dated November 8, 2002[1] and the resolution
dated December 27, 2002[2] of the Court of Appeals in CA-G.R. SP No.
71979. Virgilio Galeon 40 40.00
On March 28, 1979, the spouses Manuel and Alicia Gala, their
children Guia Domingo, Ofelia Gala, Raul Gala, and Rita Benson, and
their encargados Virgilio Galeon and Julian Jader formed and organized Julian Jader 40 40.00
the Ellice Agro-Industrial Corporation.[3] The total subscribed capital stock of
the corporation was apportioned as follows:
TOTAL 20,000 P200,000.00[9]
Name Number of Shares Amount
Manuel R. Gala 11, 700 1,170,000.00
Alicia E. Gala 23,200 2,320,000.00 On November 10, 1982, Manuel Gala sold 13,314 of his shares
Guia G. Domingo 16 1,600.00 in Ellice to Margo. [10]
Ofelia E. Gala 40 4,000.00
Alicia Gala transferred 1,000 of her shares in Ellice to a certain Victor de
Raul E. Gala 40 4,000.00
Villa on March 2, 1983. That same day, de Villa transferred said shares to
Rita G. Benson 2 200.00
Margo. [11] A few months later, on August 28, 1983, Alicia Gala transferred
Virgilio Galeon 1 100.00
854.3 of her shares to Ofelia Gala, 500 to Guia Domingo and 500 to Raul
Julian Jader 1 100.00
Gala. [12]
TOTAL 35,000 P3,500,000.00[4]
Years later, on February 8, 1988, Manuel Gala transferred all of his
As payment for their subscriptions, the Gala spouses transferred several remaining holdings in Ellice, amounting to 2,164 shares, to Raul Gala. [13]
parcels of land located in the provinces of Quezon and Laguna to Ellice. [5]
On July 20, 1988, Alicia Gala transferred 10,000 of her shares to
In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed to an Margo. [14]
additional 3,299 shares, 10,652.5 shares and 286.5 shares, respectively. [6]
Thus, as of the date on which this case was commenced, the
On June 28, 1982, Manuel Gala and Alicia Gala acquired an additional stockholdings in Ellice were allocated as follows:
550 shares and 281 shares, respectively. [7]
Subsequently, on September 16, 1982, Guia Domingo, Ofelia Gala, Name Number of Shares Amount
Raul Gala, Virgilio Galeon and Julian Jader incorporated the Margo
Management and Development Corporation (Margo). [8] The total subscribed
capital stock of Margo was apportioned as follows:
 Similarly, a special stockholders meeting of Ellice was held on August
Margo 24,312.5 2,431,250.00 24, 1990 to elect a new board of directors. In the ensuing organizational
meeting later that day, a new set of corporate officers was elected. Likewise,
Raul Gala was elected as chairman, president and general manager.

Alicia Gala 21,480.2 2,148,020.00 On March 27, 1990, respondents filed against petitioners with the
Securities and Exchange Commission (SEC) a petition for the appointment of
a management committee or receiver, accounting and restitution by the
directors and officers, and the dissolution of Ellice Agro-Industrial
Raul Gala 2,704.5 270,450.00
Corporation for alleged mismanagement, diversion of funds, financial losses
and the dissipation of assets, docketed as SEC Case No. 3747. [17] The
petition was amended to delete the prayer for the appointment of a
Ofelia Gala 980.8 98,080.00 management committee or receiver and for the dissolution
of Ellice. Additionally, respondents prayed that they be allowed to inspect the
corporate books and documents of Ellice. [18]
Gina Domingo 516 51,600.00 In turn, petitioners initiated a complaint against the respondents on June
26, 1991, docketed as SEC Case No. 4027, praying for, among others, the
nullification of the elections of directors and officers of both Margo
Rita Benson 2 200.00 Management and Development Corporation and Ellice Industrial Corporation;
the nullification of all board resolutions issued by Margo from June 23, 1990
up to the present and all board resolutions issued by Ellice from August 24,
1990 up to the present; and the return of all titles to real property in the name
Virgilio Galeon 1 100.00 of Margo and Ellice, as well as all corporate papers and records of both
Margo and Ellice which are in the possession and control of the
respondents. [19]
Julian Jader 1 100.00
The two cases were consolidated in an Order dated November 23,
1993. [20]

Adnan Alonto 1 100.00 Meanwhile, during the pendency of the SEC cases, the shares of stock
of Alicia and Ofelia Gala in Ellice were levied and sold at public auction to
satisfy a judgment rendered against them by he Regional Trial Court
of Makati, Branch 66, in Civil Case No. 42560,
Elias Cresencio 1 100.00 entitled Regines Condominium v. Ofelia (Gala) Panes and Alicia Gala. [21]
On November 3, 1998, the SEC rendered a Joint Decision in SEC
Cases Nos. 3747 and 4027, the dispositive portion of which states:
TOTAL 50,000 P5,000,000.00
WHEREFORE, premises considered, judgment is hereby rendered, as
On June 23, 1990, a special stockholders meeting of Margo was held, follows:
where a new board of directors was elected. [15] That same day, the newly-
elected board elected a new set of officers. Raul Gala was elected as 1. Dismissing the petition in SEC Case No. 3747,
chairman, president and general manager. During the meeting, the board
approved several actions, including the commencement of proceedings to 2. Issuing the following orders in SEC Case No. 4027;
annul certain dispositions of Margos property made by Alicia Gala. The board
also resolved to change the name of the corporation to MRG Management
and Development Corporation. [16]
 (a) Enjoining herein respondents to perform corporate acts
of both Ellice and Margo, as directors and officers
thereof.
(b) Nullifying the election of the new sets of Board of
Directors and Officers of Ellice and Margo from June
23, 1990 to the present, and that of Ellice
from August 24, 1990 to the present.
(c) Ordering the respondent Raul Gala to return all the titles
of real properties in the names of Ellice and Margo
which were unlawfully taken and held by him.
(d) Directing the respondents to return to herein petitioners
all corporate papers, records of both Ellice and
Margo which are in their possession and control.
SO ORDERED. [22]
Respondents appealed to the SEC En Banc, which, on July 4, 2002,
rendered its Decision, the decretal portion of which reads:
WHEREFORE, the Decision of the Hearing Officer dated November 3,
1998 is hereby REVERSED and SET ASIDE and a new one hereby rendered
granting the appeal, upholding the Amended Petition in SEC Case No. 3747,
and dismissing the Petition with Prayer for Issuance of Preliminary
Restraining Order and granting the Compulsory Counterclaim in SEC Case
No. 4027.
Accordingly, appellees Alicia Gala and Guia G. Domingo are ordered as
follows:
(1) jointly and solidarily pay ELLICE and/or MARGO the amount of
P700,000.00 representing the consideration for the
unauthorized sale of a parcel of land to Lucky Homes and
Development Corporation (Exhs. N and CCC);
(2) jointly and severally pay ELLICE and MARGO the proceeds of
sales of agricultural products averaging P120,000.00 per
month from February 17, 1988;
(3) jointly and severally indemnify the appellants P90,000.00 as
attorneys fees;
(4) jointly and solidarily pay the costs of suit;
(5) turn over to the individual appellants the corporate records of
ELLICE and MARGO in their possession; and
(6) desist and refrain from interfering with the management of
ELLICE and MARGO.
SO ORDERED. [23]
Petitioners filed a petition for review with the Court of Appeals which
dismissed the petition for review and affirmed the decision of the SEC En
Banc. [24]
Hence, this petition, raising the following issues:
I
WHETHER OR NOT THE LOWER COURT ERRED IN NOT
DECLARING AS ILLEGAL AND CONTRARY TO PUBLIC
POLICY THE PURPOSES AND MANNER IN WHICH
RESPONDENT CORPORATIONS WERE ORGANIZED WHICH
WERE, E.G. TO (1) PREVENT THE GALA ESTATE FROM
BEING BROUGHT UNDER THE COVERAGE (SIC) OF THE
COMPREHENSIVE AGRARIAN REFORM PROGRAM (CARP)
AND (2) PURPORTEDLY FOR ESTATE PLANNING.
II
WHETHER OR NOT THE LOWER COURT ERRED (1) IN
SUSPICIOUSLY RESOLVING THE CASE WITHIN TWO (2)
DAYS FROM RECEIPT OF RESPONDENTS COMMENT; AND
(2) IN NOT MAKING A DETERMINATION OF THE ISSUES OF
FACTS AND INSTEAD RITUALLY CITING THE FACTUAL
FINDINGS OF THE COMMISSION A QUO WITHOUT
DISCUSSION AND ANALYSIS;
III
WHETHER OR NOT THE LOWER COURT ERRED IN RULING
THAT THE ORGANIZATION OF RESPONDENT
CORPORATIONS WAS NOT ILLEGAL FOR DEPRIVING
PETITIONER RITA G. BENSON OF HER LEGITIME.
IV
WHETHER OR NOT THE LOWER COURT ERRED IN NOT
PIERCING THE VEILS OF CORPORATE FICTION OF
RESPONDENTS CORPORATIONS ELLICE AND MARGO. [25]
 In essence, petitioners want this Court to disregard the separate juridical
personalities of Ellice and Margo for the purpose of treating all property
purportedly owned by said corporations as property solely owned by the Gala
spouses.
The petitioners first contention in support of this theory is that the
purposes for which Ellice and Margo were organized should be declared as
illegal and contrary to public policy. They claim that the respondents never
pursued exemption from land reform coverage in good faith and instead
merely used the corporations as tools to circumvent land reform laws and to
avoid estate taxes. Specifically, they point out that respondents have not
shown that the transfers of the land in favor of Ellice were executed in
compliance with the requirements of Section 13 of R.A. 3844. [26] Furthermore,
they alleged that respondent corporations were run without any of the
conventional corporate formalities. [27]
At the outset, the Court holds that petitioners contentions impugning the
legality of the purposes for which Ellice and Margo were organized, amount
to collateral attacks which are prohibited in this jurisdiction. [28]
The best proof of the purpose of a corporation is its articles of
incorporation and by-laws. The articles of incorporation must state the
primary and secondary purposes of the corporation, while the by-laws outline
the administrative organization of the corporation, which, in turn, is supposed
to insure or facilitate the accomplishment of said purpose. [29]
In the case at bar, a perusal of the Articles of Incorporation of Ellice and
Margo shows no sign of the allegedly illegal purposes that petitioners are
complaining of. It is well to note that, if a corporations purpose, as stated in
the Articles of Incorporation, is lawful, then the SEC has no authority to
inquire whether the corporation has purposes other than those stated, and
mandamus will lie to compel it to issue the certificate of incorporation. [30]
Assuming there was even a grain of truth to the petitioners claims
regarding the legality of what are alleged to be the corporations true
purposes, we are still precluded from granting them relief. We cannot
address here their concerns regarding circumvention of land reform laws, for
the doctrine of primary jurisdiction precludes a court from arrogating unto
itself the authority to resolve a controversy the jurisdiction over which is
initially lodged with an administrative body of special competence. [31] Since
primary jurisdiction over any violation of Section 13 of Republic Act No. 3844
that may have been committed is vested in the Department of Agrarian
Reform Adjudication Board (DARAB),[32] then it is with said administrative
agency that the petitioners must first plead their case. With regard to their
claim that Ellice and Margo were meant to be used as mere tools for the
avoidance of estate taxes, suffice it say that the legal right of a taxpayer to
reduce the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted. [33]
The petitioners allegation that Ellice and Margo were run without any of
the typical corporate formalities, even if true, would not merit the grant of any
of the relief set forth in their prayer.We cannot disregard the corporate
entities of Ellice and Margo on this ground. At most, such allegations, if
proven to be true, should be addressed in an administrative case before the
SEC. [34]
Thus, even if Ellice and Margo were organized for the purpose of
exempting the properties of the Gala spouses from the coverage of land
reform legislation and avoiding estate taxes, we cannot disregard their
separate juridical personalities.
Next, petitioners make much of the fact that the Court of Appeals
promulgated its assailed Decision a mere two days from the time the
respondents filed their Comment. They alleged that the appellate court could
not have made a deliberate study of the factual questions in the case,
considering the sheer volume of evidence available. [35] In support of this
allegation, they point out that the Court of Appeals merely adopted the factual
findings of the SEC En Banc verbatim, without deliberation and analysis. [36]
In People v. Mercado, [37] we ruled that the speed with which a lower
court disposes of a case cannot thus be attributed to the injudicious
performance of its function. Indeed, magistrates are not supposed to study a
case only after all the pertinent pleadings have been filed. It is a mark of
diligence and devotion to duty that jurists study a case long before the
deadline set for the promulgation of their decision has arrived. The two-day
period between the filing of petitioners Comment and the promulgation of the
decision was sufficient time to consider their arguments and to incorporate
these in the decision. As long as the lower court does not sacrifice the
orderly administration of justice in favor of a speedy but reckless disposition
of a case, it cannot be taken to task for rendering its decision with due
dispatch. The Court of Appeals in this intra-corporate controversy committed
no reversible error and, consequently, its decision should be
affirmed. [38] Verily, if such swift disposition of a case is considered a non-
issue in cases where the life or liberty of a person is at stake, then we see no
reason why the same principle cannot apply when only private rights are
involved.
Furthermore, well-settled is the rule that the factual findings of the Court
of Appeals are conclusive on the parties and are not reviewable by the
Supreme Court. They carry even more weight when the Court of Appeals
affirms the factual findings of a lower fact-finding body.[39] Likewise, the
findings of fact of administrative bodies, such as the SEC, will not be
interfered with by the courts in the absence of grave abuse of discretion on
the part of said agencies, or unless the aforementioned findings are not
supported by substantial evidence. [40]
 However, in the interest of equity, this Court has reviewed the factual
findings of the SEC En Banc, which were affirmed in toto by the Court of
Appeals, and has found no cogent reason to disturb the same. Indeed, we
are convinced that the arguments raised by the petitioners are nothing but
unwarranted conclusions of law. Specifically, they insist that the Gala
spouses never meant to part with the ownership of the shares which are in
the names of their children and encargados, and that all transfers of property
to these individuals are supposedly void for being absolutely simulated for
lack of consideration.[41] However, as correctly held by the SEC En Banc, the
transfers were only relatively simulated, inasmuch as the evident intention of
the Gala spouses was to donate portions of their property to their children
and encargados. [42]
In an attempt to bolster their theory that the organization of the
respondent corporations was illegal, the petitioners aver that
the legitime pertaining to petitioners Rita G. Benson and Guia G. Domingo
from the estate of their father had been subject to unwarranted reductions as
a result thereof. In sum, they claim that stockholdings in Ellice which the late
Manuel Gala had assigned to them were insufficient to cover their legitimes,
since Benson was only given two shares while Domingo received only
sixteen shares out of a total number of 35,000 issued shares. [43]
Moreover, the reliefs sought by petitioners should have been raised in a
proceeding for settlement of estate, rather than in the present intra-corporate
controversy. If they are genuinely interested in securing that part of their late
fathers property which has been reserved for them in their capacity as
compulsory heirs, then they should simply exercise
their actio ad supplendam legitimam, or their right of completion of legitime.
[44]
Such relief must be sought during the distribution and partition stage of a
case for the settlement of the estate of Manuel Gala, filed before a court
which has taken jurisdiction over the settlement of said estate. [45]
Finally, the petitioners pray that the veil of corporate fiction that shroud
both Ellice and Margo be pierced, consistent with their earlier allegation that
both corporations were formed for purposes contrary to law and public
policy. In sum, they submit that the respondent corporations are mere
business conduits of the deceased Manuel Gala and thus may be
disregarded to prevent injustice, the distortion or hiding of the truth or the
letting in of a just defense. [46]
However, to warrant resort to the extraordinary remedy of piercing the
veil of corporate fiction, there must be proof that the corporation is being
used as a cloak or cover for fraud or illegality, or to work injustice, [47] and the
petitioners have failed to prove that Ellice and Margo were being used
thus. They have not presented any evidence to show how the separate
juridical entities of Ellice and Margo were used by the respondents to commit
fraudulent, illegal or unjust acts. Hence, this contention, too, must fail.
On June 5, 2003, the petitioners filed a Reply, where, aside from
reiterating the contentions raised in their Petition, they averred that there is
no proof that either capital gains taxes or documentary stamp taxes were
paid in the series of transfers of Ellice and Margo shares. Thus, they invoke
Sections 176 and 201 of the National Internal Revenue Code, which would
bar the presentation or admission into evidence of any document that
purports to transfer any benefit derived from certificates of stock if the
requisite documentary stamps have not been affixed thereto and cancelled.
Curiously, the petitioners never raised this issue before the SEC
Hearing Officer, the SEC En Banc or the Court of Appeals. Thus, we are
precluded from passing upon the same for, as a rule, no question will be
entertained on appeal unless it has been raised in the court below, for points
of law, theories, issues and arguments not brought to the attention of the
lower court need not be, and ordinarily will not be, considered by a reviewing
court, as they cannot be raised for the first time at that late stage. Basic
considerations of due process impel this rule. [48]Furthermore, even if these
allegations were proven to be true, such facts would not render the
underlying transactions void, for these instruments would not be the sole
means, much less the best means, by which the existence of these
transactions could be proved. For this purpose, the books and records of a
corporation, which include the stock and transfer book, are generally
admissible in evidence in favor of or against the corporation and its
members. They can be used to prove corporate acts, a corporations financial
status and other matters, including ones status as a stockholder. Most
importantly, these books and records are, ordinarily, the best evidence of
corporate acts and proceedings. [49] Thus, reference to these should have
been made before the SEC Hearing Officer, for this Court will not entertain
this belated questioning of the evidence now.
It is always sad to see families torn apart by money matters and
property disputes. The concept of a close corporation organized for the
purpose of running a family business or managing family property has
formed the backbone of Philippine commerce and industry. Through this
device, Filipino families have been able to turn their humble, hard-earned life
savings into going concerns capable of providing them and their families with
a modicum of material comfort and financial security as a reward for years of
hard work. A family corporation should serve as a rallying point for family
unity and prosperity, not as a flashpoint for familial strife. It is hoped that
people reacquaint themselves with the concepts of mutual aid and security
that are the original driving forces behind the formation of family corporations
and use these tenets in order to facilitate more civil, if not more amicable,
settlements of family corporate disputes.
WHEREFORE, in view of the foregoing, the petition is DENIED. The
Decision dated November 8, 2002 and the Resolution dated December 27,
2002, both of the Court of Appeals, are AFFIRMED. Costs against
petitioners.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU
GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D.
TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND
RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG
YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG
ALONZO, respondents.
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15, 2002,
of petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong,
William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for
partial reconsideration, dated March 15, 2002, of petitioner movant Willie
Ong seeking a reversal of this Courts Decision, [1] dated February 1, 2002, in
G.R. Nos. 144476 and 144629 affirming with modification the decision [2] of
the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11,
1998; and (3) motion for issuance of writ of execution of petitioners David S.
Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and
Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was
threatened with stoppage and incompletion when its owner, the First Landlink
Asia Development Corporation (FLADC), which was owned by the Tius,
encountered dire financial difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off foreclosure of the
mortgage on the two lots where the mall was being built, the Tius invited Ong
Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia
Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed to maintain
equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000
shares at a par value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already
existing subscription of 450,200 shares. Furthermore, they agreed that the
Tius were entitled to nominate the Vice-President and the Treasurer plus five
directors while the Ongs were entitled to nominate the President, the
Secretary and six directors (including the chairman) to the board of directors
of FLADC. Moreover, the Ongs were given the right to manage and operate
the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to
1,000,000 shares of stock while the Tius committed to contribute to FLADC a
four-storey building and two parcels of land respectively valued at P20 million
(for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for
49,800 shares) to cover their additional 549,800 stock subscription therein.
The Ongs paid in another P70 million[3] to FLADC and P20 million to the Tius
over and above their P100 million investment, the total sum of which (P190
million) was used to settle the P190 million mortgage indebtedness of
FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC,
however, was shortlived because the Tius, on February 23, 1996, rescinded
the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing
to credit to them the FLADC shares covering their real property contributions;
(2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of
and performing their duties as Vice-President and Treasurer, respectively,
and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S.
Tiu to assume the positions and perform the duties of Vice-President and
Treasurer, respectively, but the Ongs prevented them from doing
so. Furthermore, the Ongs refused to provide them the space for their
executive offices as Vice-President and Treasurer. Finally, and most serious
of all, the Ongs refused to give them the shares corresponding to their
property contributions of a four-story building, a 1,902.30 square-meter lot
and a 151 square-meter lot. Hence, they felt they were justified in setting
aside their Pre-Subscription Agreement with the Ongs who allegedly refused
to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in
fact assumed the positions of Vice-President and Treasurer of FLADC but
that it was they who refused to comply with the corporate duties assigned to
them. It was the contention of the Ongs that they wanted the Tius to sign the
checks of the corporation and undertake their management duties but that
the Tius shied away from helping them manage the corporation. On the issue
of office space, the Ongs pointed out that the Tius did in fact already have
existing executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which were
anyway subsequently provided to them. On the most important issue of their
alleged failure to credit the Tius with the FLADC shares commensurate to the
Tius property contributions, the Ongs asserted that, although the Tius
executed a deed of assignment for the 1,902.30 square-meter lot in favor of
FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and
documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius property contribution (as opposed to cash
contribution). This, in turn, would make it impossible to secure a new
Transfer Certificate of Title (TCT) over the property in FLADCs name. In any
event, it was easy for the Tius to simply pay the said transfer taxes and, after
the new TCT was issued in FLADCs name, they could then be given the
corresponding shares of stocks. On the 151 square-meter property, the Tius
never executed a deed of assignment in favor of FLADC. The Tius initially
claimed that they could not as yet surrender the TCT because it was still
being reconstituted by the Lichaucos from whom the Tius bought it. The
Ongs later on discovered that FLADC had in reality owned the property all
along, even before their Pre-Subscription Agreement was executed in
1994. This meant that the 151 square-meter property was at that time
already the corporate property of FLADC for which the Tius were not entitled
to the issuance of new shares of stock.
The controversy finally came to a head when this case was
commenced[4] by the Tius on February 27, 1996 at the Securities and
Exchange Commission (SEC), seeking confirmation of their rescission of the
Pre-Subscription Agreement. After hearing, the SEC, through then Hearing
Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997
confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the
Pre-Subscription Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for
1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to
conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,
132494, 134066 (formerly 15587), 135325 and 134204 and any
other title or deed in the name of FLADC, failing in which said
titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor
of the plaintiffs and to cancel the annotation of the Pre-
Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their
agents and representatives, to desist from exercising or
performing any and all acts pertaining to stockholder, director or
officer of FLADC or in any manner intervene in the management
and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00 and all
interest payments as well as any payments on principal
received from the P70,000,000.00 inexistent loan, plus the legal
rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus
legal interest from the date of receipt of such amount.
SO ORDERED.[5]
On motion of both parties, the above decision was partially reconsidered
but only insofar as the Ongs P70 million was declared not as a premium on
capital stock but an advance (loan) by the Ongs to FLADC and that the
imposition of interest on it was correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision
on September 11, 1998, affirming the May 19, 1997 decision of the Hearing
Officer. The SEC en banc confirmed the rescission of the Pre-Subscription
Agreement but reverted to classifying the P70 million paid by the Ongs as
premium on capital and not as a loan or advance to FLADC, hence, not
entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5,
1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities
and Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601
confirming the rescission of the Pre-Subscription Agreement dated August
15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First
Landlink Asia Development Corporation in accordance
with the following cash and property contributions of the
parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one
(1) million shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for
450,200 shares in First Landlink Asia
Development Corporation at a par value of
P100.00 per share;
2) A four-storey building described in Transfer
Certificate of Title No. 15587 in the name of
Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000
shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by
Transfer Certificate of Title No. 15587 in the name of
Masagana Telamart, Inc. valued at P30,000,000.00
for 300,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00
per share.
2) Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof is
(sic) hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby
ordered to pay the amount of P70,000,000.00 that was
advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of
P20,000,000.00 loaned them by the Ongs upon the finality
of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.
SO ORDERED.[9]
An interesting sidelight of the CA decision was its description of the
rescission made by the Tius as the height of ingratitude and as pulling a fast
one on the Ongs. The CA moreover found the Tius guilty of withholding
FLADC funds from the Ongs and diverting corporate income to their own
MATTERCO account.[10] These were findings later on affirmed in our own
February 1, 2002 Decision which is the subject of the instant motion for
reconsideration.[11]
 But there was also a strange aspect of the CA decision. The CA
concluded that both the Ongs and the Tius were in pari delicto (which would
not have legally entitled them to rescission) but, for practical considerations,
that is, their inability to work together, it was best to separate the two groups
by rescinding the Pre-Subscription Agreement, returning the original
investment of the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed
separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al.,
the Ongs argued that the Tius may not properly avail of rescission under
Article 1191 of the Civil Code considering that the Pre-Subscription
Agreement did not provide for reciprocity of obligations; that the rights over
the subject matter of the rescission (capital assets and properties) had been
acquired by a third party (FLADC); that they did not commit a substantial and
fundamental breach of their agreement since they did not prevent the Tius
from assuming the positions of Vice-President and Treasurer of FLADC, and
that the failure to credit the 300,000 shares corresponding to the 1,902.30
square-meter property covered by TCT No. 134066 (formerly 15587) was
due to the refusal of the Tius to pay the required transfer taxes to secure the
approval of the SEC for the property contribution and, thereafter, the
issuance of title in FLADCs name. They also argued that the liquidation of
FLADC may not legally be ordered by the appellate court even for so called
practical considerations or even to prevent further squabbles and numerous
litigations, since the same are not valid grounds under the Corporation
Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on
their P70 million and P20 million advances to FLADC and David S. Tiu,
respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al.,
the Tius, on the other hand, contended that the rescission should have been
limited to the restitution of the parties respective investments and not the
liquidation of FLADC based on the erroneous perception by the court
that: the Masagana Citimall was threatened with incompletion since FLADC
was in financial distress; that the Tius invited the Ongs to invest in FLADC to
settle its P190 million loan from PNB; that they violated the Pre-Subscription
Agreement when it was the Lichaucos and not the Tius who executed the
deed of assignment over the 151 square-meter property commensurate to
49,800 shares in FLADC thereby failing to pay the price for the said
shares;that they did not turn over to the Ongs the entire amount of FLADC
funds; that they were diverting rentals from lease contracts due to FLADC to
their own MATTERCO account; that the P70 million paid by the Ongs was an
advance and not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the management of
the mall and prevent the Ongs from enjoying the profits of their P190 million
investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of
the instant motions), affirming the assailed decision of the Court of Appeals
but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed
from the time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn
interest at ten percent (10%) per annum to be computed from
the date of the FLADC Board Resolution which is June 19,
1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated
their respective obligations under the Pre-Subscription Agreement. The Ongs
prevented the Tius from assuming the positions of Vice-President and
Treasurer of the corporation. On the other hand, the Decision established
that the Tius failed to turn over FLADC funds to the Ongs and that the Tius
diverted rentals due to FLADC to their MATTERCO account. Consequently, it
held that rescission was not possible since both parties were in pari
delicto. However, this Court agreed with the Court of Appeals that the remedy
of specific performance, as espoused by the Ongs, was not practical and
sound either and would only lead to further squabbles and numerous
litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for
Issuance of a Writ of Execution on the grounds that: (a) the SEC order had
become executory as early as September 11, 1998 pursuant to Sections 1
and 12, Rule 43 of the Rules of Court; (b) any further delay would be
injurious to the rights of the Tius since the case had been pending for more
than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under
RA 8799 (Securities Regulation Code). The Ongs filed their opposition,
contending that the Decision dated February 1, 2002 was not yet final and
executory; that no good reason existed to issue a warrant of execution; and
that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over
pending cases involving intra-corporate disputes already submitted for final
resolution upon the effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of
Execution, the Ongs filed their own Motion for Reconsideration; Alternatively,
Motion for Modification (of the February 1, 2002 Decision) on March 15,
2002, raising two main points: (a) that specific performance and not
rescission was the proper remedy under the premises; and (b) that,
assuming rescission to be proper, the subject decision of this Court should
be modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the
proper remedy), movants Ong argue that their alleged breach of the Pre-
Subscription Agreement was, at most, casual which did not justify the
rescission of the contract. They stress that providing appropriate offices for
David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively,
had no bearing on their obligations under the Pre-Subscription Agreement
since the said obligation (to provide executive offices) pertained to FLADC
itself. Such obligation arose from the relations between the said officers and
the corporation and not any of the individual parties such as the Ongs.
Likewise, the alleged failure of the Ongs to credit shares of stock in favor of
the Tius for their property contributions also pertained to the corporation and
not to the Ongs. Just the same, it could not be done in view of the Tius
refusal to pay the necessary transfer taxes which in turn resulted in the
inability to secure SEC approval for the property contributions and the
issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in
entering into the Pre-Subscription Agreement in 1994 was to raise the P190
million desperately needed for the payment of FLADCs loan to PNB. Hence,
in this light, the alleged failure to provide office space for the two corporate
officers was no more than an inconsequential infringement. For rescission to
be justified, the law requires that the breach of contract should be so
substantial or fundamental as to defeat the primary objective of the parties in
making the agreement. At any rate, the Ongs claim that it was the Tius who
were guilty of fundamental violations in failing to remit funds due to FLADC
and diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both
parties were guilty of violating the Pre-Subscription Agreement, neither of
them could resort to rescission under the principle of pari delicto. In addition,
since the cash and other contributions now sought to be returned already
belong to FLADC, an innocent third party, said remedy may no longer be
availed of under the law.
On their second point (assuming rescission to be proper, the Ongs
should be given their proportionate share of the mall), movants Ong
vehemently take exception to the second item in the dispositive portion of the
questioned Decision insofar as it decreed that whatever remains of the
assets of FLADC and the management thereof (after liquidation) shall be
transferred to the Tius. They point out that the mall itself, which would have
been foreclosed by PNB if not for their timely investment of P190 million in
1994 and which is now worth about P1 billion mainly because of their efforts,
should be included in any partition and distribution. They (the Ongs) should
not merely be given interest on their capital investments. The said portion of
our Decision, according to them, amounted to the unjust enrichment of the
Tius and ran contrary to our own pronouncement that the act of the Tius in
unilaterally rescinding the agreement was the height of ingratitude and an
attempt to pull a fast one as it would prevent the Ongs from enjoying the
fruits of their P190 million investment in FLADC. It also contravenes this
Courts assurance in the questioned Decision that the Ongs and Tius will
have a bountiful return of their respective investments derived from the
profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated
March 8, 2002, pointing out that there was no violation of the Pre-
Subscription Agreement on the part of the Ongs;that, after more than seven
years since the mall began its operations, rescission had become not only
impractical but would also adversely affect the rights of innocent parties; and
that it would be highly inequitable and unfair to simply return the P100 million
investment of the Ongs and give the remaining assets now amounting to
about P1 billion to the Tius.
 The Tius, in their opposition to the Ongs motion for reconsideration,
counter that the arguments therein are a mere re-hash of the contentions in
the Ongs petition for review and previous motion for reconsideration of the
Court of Appeals decision. The Tius compare the arguments in said
pleadings to prove that the Ongs do not raise new issues, and, based on
well-settled jurisprudence,[12] the Ongs present motion is therefore pro-
forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held
oral arguments on the respective positions of the parties. On February 27,
2003, Dr. Willie Ong and the rest of the movants Ong filed their respective
memoranda. On February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion
for reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission,[13]this Court, through then Chief Justice
Felix V. Makasiar, said that its members may and do change their minds,
after a re-study of the facts and the law, illuminated by a mutual exchange of
views.[14] After a thorough re-examination of the case, we find that our
Decision of February 1, 2002 overlooked certain aspects which, if not
corrected, will cause extreme and irreparable damage and prejudice to the
Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should
not be blindly applied to meritorious motions for reconsideration. As long as
the same adequately raises a valid ground[15] (i.e., the decision or final order
is contrary to law), this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security Bank and Trust
Company vs. Cuenca,[16] we ruled that a motion for reconsideration is
not pro-forma for the reason alone that it reiterates the arguments earlier
passed upon and rejected by the appellate court. We explained there that a
movant may raise the same arguments, if only to convince this Court that its
ruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only
repeats the arguments in the previous pleadings) will not apply if said
arguments were not squarely passed upon and answered in the decision
sought to be reconsidered. In the case at bar, no ruling was made on some
of the petitioner Ongs arguments. For instance, no clear ruling was made on
why an order distributing corporate assets and property to the stockholders
would not violate the statutory preconditions for corporate dissolution or
decrease of authorized capital stock. Thus, it would serve the ends of justice
to entertain the subject motion for reconsideration since some important
issues therein, although mere repetitions, were not considered or clearly
resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally
rescind the Pre-Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of
500,000 shares with the Tius owning 450,200 shares representing the paid-
up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became necessary
to give each group equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement. The authorized capital stock was thus increased
from 500,000 shares to 2,000,000 shares with a par value of P100 each, with
the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more
shares in addition to their 450,200 shares to complete 1,000,000 shares.
Thus, the subject matter of the contract was the 1,000,000 unissued shares
of FLADC stock allocated to the Ongs. Since these were unissued shares,
the parties Pre-Subscription Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that the parties refer
to it as a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of
the contracting parties since the subject matter of the transaction is property
owned by the corporation its shares of stock. Thus, the subscription contract
(denominated by the parties as a Pre-Subscription Agreement) whereby the
Ongs invested P100 million for 1,000,000 shares of stock was, from the
viewpoint of the law, one between the Ongs and FLADC, not between the
Ongs and the Tius. Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not selling any of their
own shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on
the ground of breach of contract filed by the Tius in their personal capacities
will not prosper. Assuming it had valid reasons to do so, only FLADC (and
certainly not the Tius) had the legal personality to file suit rescinding the
subscription agreement with the Ongs inasmuch as it was the real party in
interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a party
who has not taken part in the transaction cannot sue or be sued for
performance or for cancellation thereof, unless he shows that he has a real
interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are
two contracts embodied in the Pre-Subscription Agreement: a shareholders
agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and
FLADC regarding the subscription of the parties to the corporation. They
point out that these two component parts form one whole agreement and that
their terms and conditions are intrinsically related and dependent on each
other. Thus, the breach of the shareholders agreement, which was allegedly
the consideration for the subscription contract, was also a breach of the
latter.
Aside from the fact that this is an entirely new angle never raised in any
of their previous pleadings until after the oral arguments on January 29,
2003, we find this argument too strained for comfort. It is obviously intended
to remedy and cover up the Tius lack of legal personality to rescind an
agreement in which they were personally not parties-in-interest.
Assuming arguendo that there were two sub-agreements embodied in the
Pre-Subscription Agreement, this Court fails to see how the shareholders
agreement between the Ongs and Tius can, within the bounds of reason, be
interpreted as the consideration of the subscription contract between FLADC
and the Ongs. There was nothing in the Pre-Subscription Agreement even
remotely suggesting such alleged interdependence. Be that as it may,
however, the Tius are nevertheless not the proper parties to raise this point
because they were not parties to the subscription contract between FLADC
and the Ongs. Thus, they are not in a position to claim that the shareholders
agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say
that. Though FLADC was represented by the Tius in the subscription
contract, FLADC had a separate juridical personality from the Tius. The case
before us does not warrant piercing the veil of corporate fiction since there is
no proof that the corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must also fail
because such an argument disregards the separate juridical personality of
FLADC.
The Tius allege that they were prevented from participating in the
management of the corporation. There is evidence that the Ongs did prevent
the rightfully elected Treasurer, Cely Tiu, from exercising her function as
such. The records show that the President, Wilson Ong, supervised the
collection and receipt of rentals in the Masagana Citimall; [19] that he ordered
the same to be deposited in the bank; [20] and that he held on to the cash and
properties of the corporation.[21] Section 25 of the Corporation Code prohibits
the President from acting concurrently as Treasurer of the corporation. The
rationale behind the provision is to ensure the effective monitoring of each
officers separate functions.
However, although the Tius were adversely affected by the Ongs
unwillingness to let them assume their positions, rescission due to breach of
contract is definitely the wrong remedy for their personal grievances. The
Corporation Code, SEC rules and even the Rules of Court provide for
appropriate and adequate intra-corporate remedies, other than
rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met.A contrary doctrine will
tread on extremely dangerous ground because it will allow just any
stockholder, for just about any real or imagined offense, to demand
rescission of his subscription and call for the distribution of some part of the
corporate assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate
and extraordinary remedy of rescission of the subject agreement based on a
less than substantial breach of subscription contract. Not only are they not
parties to the subscription contract between the Ongs and FLADC; they also
have other available and effective remedies under the law.
 All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on breach of contract,
said action will nevertheless still not prosper since rescission will violate the
Trust Fund Doctrine and the procedures for the valid distribution of assets
and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case
of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions to the capital
stock of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. [23] This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in
the Corporation Code, which allows the distribution of corporate capital only
in three instances: (1) amendment of the Articles of Incorporation to reduce
the authorized capital stock,[24] (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings,
[25]
and (3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares[26] and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent
requirements therefor are complied with.[27]
The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers or directors
of the corporation, or even, for that matter, on the earnest desire of the
court a quo to prevent further squabbles and future litigations unless the
indispensable conditions and procedures for the protection of corporate
creditors are followed. Otherwise, the corporate peace laudably hoped for by
the court will remain nothing but a dream because this time, it will be the
creditors turn to engage in squabbles and litigations should the court order
an unlawful distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of
the instances when distribution of capital assets and property of the
corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result
in the premature liquidation of the corporation without the benefit of prior
dissolution in accordance with Sections 117, 118, 119 and 120 of the
Corporation Code.[28] The Tius maintain that rescinding the subscription
contract is not synonymous to corporate liquidation because all rescission
will entail would be the simple restoration of the status quo ante and a return
to the two groups of their cash and property contributions. We wish it were
that simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation. The Tius
merely refer in cavalier fashion to the end-result of rescission (which
incidentally is 100% favorable to them) but turn a blind eye to its unfair,
inequitable and disastrous effect on the corporation, its creditors and the
Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that
rescission of the agreement will not result in an unauthorized liquidation of
the corporation because their case is actually a petition to decrease capital
stock pursuant to Section 38 of the Corporation Code. Section 122 of the law
provides that (e)xcept by decrease of capital stock, no corporation shall
distribute any of its assets or property except upon lawful dissolution and
after payment of all its debts and liabilities. The Tius claim that their case for
rescission, being a petition to decrease capital stock, does not violate the
liquidation procedures under our laws. All that needs to be done, according to
them, is for this Court to order (1) FLADC to file with the SEC a petition to
issue a certificate of decrease of capital stock and (2) the SEC to approve
said decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to
decrease capital stock because such action never complied with the formal
requirements for decrease of capital stock under Section 33 of the
Corporation Code. No majority vote of the board of directors was ever
taken. Neither was there any stockholders meeting at which the approval of
stockholders owning at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurers affidavit and no proof that said
decrease will not prejudice the creditors rights. On the contrary, all their
pleadings contained were alleged acts of violations by the Ongs to justify an
order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of
the corporation to compel FLADC to file at the SEC a petition for the
issuance of a certificate of decrease of stock. Decreasing a corporations
authorized capital stock is an amendment of the Articles of Incorporation. It is
a decision that only the stockholders and the directors can make, considering
that they are the contracting parties thereto. In this case, the Tius are
actually not just asking for a review of the legality and fairness of a corporate
decision. They want this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not voluntarily
agreed upon by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent
of FLADCs directors and stockholders is a violation of the business judgment
rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount to wanton
destruction to the rights of the minority, as when plaintiffs aver that the
defendants (members of the board), have concluded a transaction among
themselves as will result in serious injury to the plaintiffs stockholders. [29]
The reason behind the rule is aptly explained by Dean Cesar L.
Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the
board mainly because, courts are not in the business of business, and
the laissez faire rule or the free enterprise system prevailing in our social and
economic set-up dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are ill-equipped to
make business decisions. More importantly, the social contract in the
corporate family to decide the course of the corporate business has been
vested in the board and not with courts.[30]
Apparently, the Tius do not realize the illegal consequences of seeking
rescission and control of the corporation to the exclusion of the Ongs. Such
an act infringes on the law on reduction of capital stock. Ordering the return
and distribution of the Ongs capital contribution without dissolving the
corporation or decreasing its authorized capital stock is not only against the
law but is also prejudicial to corporate creditors who enjoy absolute priority of
payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is
not difficult to understand. If rescission is denied, will injustice be inflicted on
any of the parties? The answer is no because the financial interests of both
the Tius and the Ongs will remain intact and safe within FLADC. On the other
hand, if rescission is granted, will any of the parties suffer an injustice?
Definitely yes because the Ongs will find themselves out in the streets with
nothing but the money they had in 1994 while the Tius will not only enjoy a
windfall estimated to be anywhere from P450 million to P900 million [31] but will
also take over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on,
our Decision dated February 1, 2002, stated that both groups were in pari
delicto, meaning, that both the Tius and the Ongs committed breaches of the
Pre-Subscription Agreement. This may be true to a certain extent but, judging
from the comparative gravity of the acts separately committed by each group,
we find that the Ongs acts were relatively tame vis--vis those committed by
the Tius in not surrendering FLADC funds to the corporation and diverting
corporate income to their own MATTERCO account. The Ongs were right in
not issuing to the Tius the shares corresponding to the four-story building and
the 1,902.30 square-meter lot because no title for it could be issued in
FLADCs name, owing to the Tius refusal to pay the transfer taxes. And as far
as the 151 square-meter lot was concerned, why should FLADC issue
additional shares to the Tius for property already owned by the corporation
and which, in the final analysis, was already factored into the shareholdings
of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of
Appeals, to pull a fast one on the Ongs because that was where the problem
precisely started. It is clear that, when the finances of FLADC improved
considerably after the equity infusion of the Ongs, the Tius started planning
to take over the corporation again and exclude the Ongs from it. It appears
that the Tius refusal to pay transfer taxes might not have really been at all
unintentional because, by failing to pay that relatively small amount which
they could easily afford, the Tius should have expected that they were not
going to be given the corresponding shares. It was, from every angle, the
perfect excuse for blackballing the Ongs. In other words, the Tius created a
problem then used that same problem as their pretext for showing their
partners the door. In the process, they stood to be rewarded with a bonanza
of anywhere between P450 million to P900 million in assets (from an
investment of only P45 million which was nearly foreclosed by PNB), to the
extreme and irreparable damage of the Ongs, FLADC and its creditors.
 After all is said and done, no one can close his eyes to the fact that the
Masagana Citimall would not be what it has become today were it not for the
timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts
about it.
Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution can truly
pave the way for both groups to enjoy the fruits of their investments
assuming good faith and honest intentions we cannot allow the rescission of
the subject subscription agreement. The Ongs shortcomings were far from
serious and certainly less than substantial; they were in fact remediable and
correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and
tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of
petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,
Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration,
dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The
Petition for Confirmation of the Rescission of the Pre-Subscription Agreement
docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of
merit. The unilateral rescission by the Tius of the subject Pre-Subscription
Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15,
2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D.
Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being
moot.
Accordingly, the Decision of this Court, dated February 1, 2002,
affirming with modification the decision of the Court of Appeals, dated
October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby
REVERSED.
Costs against the petitioner Tius.
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL
REYES, petitioners, vs. COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA
NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M.
ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL,
INC., respondents.
DECISION
TINGA, J.:
Presented in the case at bar is the apparently straight-forward but
complicated question: What should be the basis of quorum for a stockholders
meetingthe outstanding capital stock as indicated in the articles of
incorporation or that contained in the companys stock and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP
No. 41473[1] promulgated on 18 August 1997, affirming the SEC Order dated
20 June 1996, and the Resolution[2] of the Court of Appeals dated 31 October
1997 which denied petitioners motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders shares and seventy-six (76)
common shares as its initial capital stock subscription reflected in the articles
of incorporation. However, private respondents and their predecessors who
were in control of PMMSI registered the companys stock and transfer book
for the first time in 1978, recording thirty-three (33) common shares as the
only issued and outstanding shares of PMMSI. Sometime in 1979, a special
stockholders meeting was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common shares, representing
more than two-thirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed
a petition with the Securities and Exchange Commission (SEC) for the
registration of their property rights over one hundred (120) founders shares
and twelve (12) common shares owned by their father. The SEC hearing
officer held that the heirs of Acayan were entitled to the claimed shares and
called for a special stockholders meeting to elect a new set of officers. [3] The
SEC En Banc affirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a
new set of directors. Private respondents thereafter filed a petition with the
SEC questioning the validity of the 06 May 1992 stockholders meeting,
alleging that the quorum for the said meeting should not be based on the 165
issued and outstanding shares as per the stock and transfer book, but on the
initial subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was dismissed.
[4]
Appeal was made to the SEC En Banc, which granted said appeal, holding
that the shares of the deceased incorporators should be duly represented by
their respective administrators or heirs concerned. The SEC directed the
parties to call for a stockholders meeting on the basis of the stockholdings
reflected in the articles of incorporation for the purpose of electing a new set
of officers for the corporation.[5]
Petitioners, who are PMMSI stockholders, filed a petition for review with
the Court of Appeals.[6] Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and
Renato Cervantes, stockholders and directors of PMMSI, earlier filed another
petition for review of the same SEC En Bancs orders. The petitions were
thereafter consolidated.[7] The consolidated petitions essentially raised the
following issues, viz: (a) whether the basis the outstanding capital stock and
accordingly also for determining the quorum at stockholders meetings it
should be the 1978 stock and transfer book or if it should be the 1952 articles
of incorporation; and (b) whether the Court of Appeals gravely erred in
applying the Espejo Decision to the benefit of respondents. [8]The Espejo
Decision is the decision of the SEC en banc in SEC Case No. 2289 which
ordered the recording of the shares of Jose Acayan in the stock and transfer
book.
The Court of Appeals held that for purposes of transacting business, the
quorum should be based on the outstanding capital stock as found in the
articles of incorporation.[9] As to the second issue, the Court of Appeals held
that the ruling in the Acayan case would ipso facto benefit the private
respondents, since to require a separate judicial declaration to recognize the
shares of the original incorporators would entail unnecessary delay and
expense. Besides, the Court of Appeals added, the incorporators have
already proved their stockholdings through the provisions of the articles of
incorporation.[10]
In the instant petition, petitioners claim that the 1992 stockholders
meeting was valid and legal. They submit that reliance on the 1952 articles of
incorporation for determining the quorum negates the existence and validity
of the stock and transfer book which private respondents themselves
prepared. In addition, they posit that private respondents cannot avail of the
benefits secured by the heirs of Acayan, as private respondents must show
and prove entitlement to the founders and common shares in a separate and
independent action/proceeding.
In private respondents Memorandum[11] dated 08 March 2000, they point
out that the instant petition raises the same facts and issues as those raised
in G.R. No. 131315[12], which was denied by the First Division of this Court on
18 January 1999 for failure to show that the Court of Appeals committed any
reversible error. They add that as a logical consequence, the instant petition
should be dismissed on the ground of res judicata. Furthermore, private
respondents claim that in view of the applicability of the rule on res judicata,
petitioners counsel should be cited for contempt for violating the rule against
forum-shopping.[13]
For their part, petitioners claim that the principle of res judicata does not
apply to the instant case. They argue that the instant petition is separate and
distinct from G.R. No. 131315, there being no identity of parties, and more
importantly, the parties in the two petitions have their own distinct rights and
interests in relation to the subject matter in litigation. For the same reasons,
they claim that counsel for petitioners cannot be found guilty of forum-
shopping.[14]
In their Manifestation and Motion[15] dated 22 September 2004, private
respondents moved for the dismissal of the instant petition in view of the
dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of
the Entry of Judgment[16] issued by the First Division dated 01 December
1999.
The petition must be denied, not on res judicata, but on the ground that
like the petition in G.R. No. 131315 it fails to impute reversible error to the
challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or
decided; a thing or matter settled by judgment. [17] The doctrine
of res judicata provides that a final judgment, on the merits rendered by a
court of competent jurisdiction is conclusive as to the rights of the parties and
their privies and constitutes an absolute bar to subsequent actions involving
the same claim, demand, or cause of action. [18] The elements of res
judicata are (a) identity of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted and relief prayed for,
the relief being founded on the same facts; and (c) the identity in the two (2)
particulars is such that any judgment which may be rendered in the other
action will, regardless of which party is successful, amount to res judicata in
the action under consideration.[19]
There is no dispute as to the identity of subject matter since the crucial
point in both cases is the propriety of including the still unproven shares of
respondents for purposes of determining the quorum. Petitioners, however,
deny that there is identity of parties and causes of actions between the two
petitions.
The test often used in determining whether causes of action are
identical is to ascertain whether the same facts or evidence would support
and establish the former and present causes of action. [20] More significantly,
there is identity of causes of action when the judgment sought will be
inconsistent with the prior judgment. [21] In both petitions, petitioners assert
that the Court of Appeals Decision effectively negates the existence and
validity of the stock and transfer book, as well as automatically grants private
respondents shares of stocks which they do not own, or the ownership of
which remains to be unproved. Petitioners in the two petitions rely on the
entries in the stock and transfer book as the proper basis for computing the
quorum, and consequently determine the degree of control one has over the
company. Essentially, the affirmance of the SEC Order had the effect of
diminishing their control and interests in the company, as it allowed the
participation of the individual private respondents in the election of officers of
the corporation.
Absolute identity of parties is not a
condition sine qua non for res judicata to applya shared identity of interest is
sufficient to invoke the coverage of the principle. [22] However, there is no
identity of parties between the two cases. The parties in the two petitions
have their own rights and interests in relation to the subject matter in
litigation. As stated by petitioners in their Reply to Respondents
Memorandum,[23] there are no two separate actions filed, but rather, two
separate petitions for review on certiorari filed by two distinct parties with the
Court and represented by their own counsels, arising from an adverse
consolidated decision promulgated by the Court of Appeals in one action or
proceeding.[24] As such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel
guilty of violating the rules against forum-shopping. In
the Verification/Certification[25] portion of the petition, petitioners clearly stated
that there was then a pending motion for reconsideration of the 18 August
1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R.
SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a
motion for clarification. Moreover, the records indicate that petitioners filed
their Manifestation[26] dated 20 January 1998, informing the Court of their
receipt of the petition in G.R. No. 131315 in compliance with their duty to
inform the Court of the pendency of another similar petition. The Court finds
that petitioners substantially complied with the rules against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the
same issues and arguments as those in G.R. No. 131315 which the First
Division has long denied with finality. The First Division found the petition
before it inadequate in failing to raise any reversible error on the part of the
Court of Appeals. We reach a similar conclusion as regards the present
petition.
The crucial issue in this case is whether it is the companys stock and
transfer book, or its 1952 Articles of Incorporation, which determines
stockholders shareholdings, and provides the basis for computing the
quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the
charter of the corporation and the contractual relationships between the State
and the corporation, the stockholders and the State, and between the
corporation and its stockholders.[27] When PMMSI was incorporated, the
prevailing law was Act No. 1459, otherwise known as The Corporation Law.
Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are
residents of the Philippines, may form a private corporation for any lawful
purpose or purposes by filing with the Securities and Exchange Commission
articles of incorporation duly executed and acknowledged before a notary
public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in lawful money
of the Philippines, and the number of shares into which it is divided, and if
such stock be in whole or in part without par value then such fact shall be
stated; Provided, however, That as to stock without par value the articles of
incorporation need only state the number of shares into which said capital
stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of
shares of no-par stock actually subscribed, the amount or number of shares
of no-par stock subscribed by each and the sum paid by each on his
subscription. . . .[28]
A review of PMMSIs articles of incorporation [29] shows that the
corporation complied with the requirements laid down by Act No. 1459. It
provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND
PESOS (P90,000.00) divided into two classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
....
8. That the amount of the entire capital stock which has been actually
subscribed is TWENTY ONE THOUSAND SIX HUNDRED PESOS
(P21,600.00) and the following persons have subscribed for the number of
shares and amount of capital stock set out after their respective names: SUBSCRIBER SUBSCRIBED AMOUNT
SUBSCRIBED
No. of Shares
SUBSCRIBER SUBSCRIBED AMOUNT SUBSCRIBED Par Value

No. of Shares Par Value

P 1,200.00
Crispulo J. Onrubia 12 Common
Crispulo J. Onrubia 120 Founders P 2,400.00

Juan H. Acayan 12 " 1,200.00

Juan H. Acayan 120 " 2, 400.00

Martin P. Sagarbarria 8" 800.00

Martin P. Sagarbarria 100 " 2, 000.00

Mauricio G. Gallaga 8" 800.00

Mauricio G. Gallaga 50 " 1, 000.00

Luis Renteria 8" 800.00

Luis Renteria 50 " 1, 000.00

Faustina M. de Onrubia 12 " 1,200.00

Faustina M. de Onrubia 140 " 2, 800.00

Mrs. Ramon Araneta 8" 800.00

Mrs. Ramon Araneta 40 " 800.00

Carlos M. Onrubia 8" 800.00

Carlos M. Onrubia 80 " 1,600.00

76 P 7,600.00[30]
700 P 14,000.00

There is no gainsaying that the contents of the articles of incorporation

are binding, not only on the corporation, but also on its shareholders. In the
instant case, the articles of incorporation indicate that at the time of
incorporation, the incorporators were bona fide stockholders of seven
hundred (700) founders shares and seventy-six (76) common shares. Hence,
at that time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records
the names and addresses of all stockholders arranged alphabetically, the
installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; a statement of every alienation, sale
or transfer of stock made, the date thereof and by and to whom made; and
such other entries as may be prescribed by law.[31] A stock and transfer book
is necessary as a measure of precaution, expediency and convenience since
it provides the only certain and accurate method of establishing the various
corporate acts and transactions and of showing the ownership of stock and
like matters.[32] However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or should
be written therein.[33] In fact, it is generally held that the records and minutes
of a corporation are not conclusive even against the corporation but
are prima facie evidence only,[34] and may be impeached or even contradicted
by other competent evidence. [35] Thus, parol evidence may be admitted to
supply omissions in the records or explain ambiguities, or to contradict such
records.[36]
In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation
Code of the Philippines supplanted Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members
entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or
in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or majority of the members in the
case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this code, means the total shares of stock issued to
subscribers or stockholders whether or not fully or partially paid (as long as
there is binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders shares or common shares.
[37]
In the instant case, two figures are being pitted against each other those
contained in the articles of incorporation, and those listed in the stock and
transfer book.
To base the computation of quorum solely on the obviously deficient, if
not inaccurate stock and transfer book, and completely disregarding the
issued and outstanding shares as indicated in the articles of incorporation
would work injustice to the owners and/or successors in interest of the said
shares. This case is one instance where resort to documents other than the
stock and transfer books is necessary. The stock and transfer book of
PMMSI cannot be used as the sole basis for determining the quorum as it
does not reflect the totality of shares which have been subscribed, more so
when the articles of incorporation show a significantly larger amount of
shares issued and outstanding as compared to that listed in the stock and
transfer book. As aptly stated by the SEC in its Order dated 15 July 1996:[38]
It is to be explained, that if at the onset of incorporation a corporation has
771 shares subscribed, the Stock and Transfer Book should likewise reflect
771 shares. Any sale, disposition or even reacquisition of the company of its
own shares, in which it becomes treasury shares, would not affect the total
number of shares in the Stock and Transfer Book. All that will change are the
entries as to the owners of the shares but not as to the amount of shares
already subscribed.
This is precisely the reason why the Stock and Transfer Book was not given
probative value. Did the shares, which were not recorded in the Stock and
Transfer Book, but were recorded in the Articles of Iincorporation just vanish
into thin air? . . . .[39]
As shown above, at the time the corporation was set-up, there were
already seven hundred seventy-six (776) issued and outstanding shares as
reflected in the articles of incorporation. No proof was adduced as to any
transaction effected on these shares from the time PMMSI was incorporated
up to the time the instant petition was filed, except for the thirty-three (33)
shares which were recorded in the stock and transfer book in 1978, and the
additional one hundred thirty-two (132) in 1982. But obviously, the shares so
ordered recorded in the stock and transfer book are among the shares
reflected in the articles of incorporation as the shares subscribed to by the
incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by
the corporation merely because the corporate officers failed to keep its
records accurately.[40] A corporations records are not the only evidence of the
ownership of stock in a corporation. [41] In an American case,[42] persons
claiming shareholders status in a professional corporation were listed as
stockholders in the amendment to the articles of incorporation. On that basis,
they were in all respects treated as shareholders. In fact, the acts and
conduct of the parties may even constitute sufficient evidence of ones status
as a shareholder or member.[43] In the instant case, no less than the articles
of incorporation declare the incorporators to have in their name the founders
and several common shares. Thus, to disregard the contents of the articles
of incorporation would be to pretend that the basic document which legally
triggered the creation of the corporation does not exist and accordingly to
allow great injustice to be caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals gravely erred in applying the
Espejo decision to the benefit of respondents. The Court believes that the
more precise statement of the issue is whether in its assailed Decision, the
Court of Appeals can declare private respondents as the heirs of the
incorporators, and consequently register the founders shares in their name.
However, this issue as recast is not actually determinative of the present
controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally
divested them of their shares in PMMSI as recorded in the stock and transfer
book and instantly created inexistent shares in favor of private respondents.
We do not agree.
The assailed Decision merely declared that a separate judicial
declaration to recognize the shares of the original incorporators would entail
unnecessary delay and expense on the part of the litigants, considering that
the incorporators had already proved ownership of such shares as shown in
the articles of incorporation.[44] There was no declaration of who the individual
owners of these shares were on the date of the promulgation of the Decision.
As properly stated by the SEC in its Order dated 20 June 1996, to which the
appellate courts Decision should be related, if at all, the ownership of these
shares should only be subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the respective shares of the
legal heirs of the deceased incorporators.[45]
WHEREFORE, the petition is DENIED and the assailed Decision is
AFFIRMED. Costs against petitioners.
G.R. No. 137592 December 12, 2001
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.
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7,
19971 and the Resolution dated February 16, 19992 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. 539.3
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of
Truth),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. 5No 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.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.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
respondent's corporate name.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. Petitioner's 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
INTERPRETATION 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 PETITIONER'S RIGHTS.9
Invoking the case of Legarda v. Court of Appeals,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.11 An exception to the foregoing is where the reckless or gross
negligence of the counsel deprives the client of due process of law. 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
client's 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. 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. 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. 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. 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.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.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
petitioner's 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.;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."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.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.,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.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.
G.R. No. 157900 July 22, 2013
ZUELLIG FREIGHT AND CARGO SYSTEMS, Petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION AND RONALDO V. SAN
MIGUEL, Respondents.
DECISION
BERSAMIN, J.:
The mere change in the corporate name is not considered under the law as
the creation of a new corporation; hence, the renamed corporation remains
liable for the illegal dismissal of its employee separated under that guise.
The Case
Petitioner employer appeals the decision promulgated on November 6,
2001,1 whereby the Court of Appeals (CA) dismissed its petition for certiorari
and upheld the adverse decision of the National Labor Relations Commission
(NLRC) finding respondent Ronaldo V. San Miguel to have been illegally
dismissed.
Antecedents
San Miguel brought a complaint for unfair labor practice, illegal dismissal,
non-payment of salaries and moral damages against petitioner, formerly
known as Zeta Brokerage Corporation (Zeta). 2 He alleged that he had been a
checker/customs representative of Zeta since December 16, 1985; that in
January 1994, he and other employees of Zeta were informed that Zeta
would cease operations, and that all affected employees, including him,
would be separated; that by letter dated February 28, 1994, Zeta informed
him of his termination effective March 31, 1994; that he reluctantly accepted
his separation pay subject to the standing offer to be hired to his former
position by petitioner; and that on April 15, 1994, he was summarily
terminated, without any valid cause and due process.
San Miguel contended that the amendments of the articles of incorporation of
Zeta were for the purpose of changing the corporate name, broadening the
primary functions, and increasing the capital stock; and that such
amendments could not mean that Zeta had been thereby dissolved. 3
On its part, petitioner countered that San Miguels termination from Zeta had
been for a cause authorized by the Labor Code; that its non-acceptance of
him had not been by any means irregular or discriminatory; that its
predecessor-in-interest had complied with the requirements for termination
due to the cessation of business operations; that it had no obligation to
employ San Miguel in the exercise of its valid management prerogative; that
all employees had been given sufficient time to make their decision whether
to accept its offer of employment or not, but he had not responded to its offer
within the time set; that because of his failure to meet the deadline, the offer
had expired; that he had nonetheless been hired on a temporary basis; and
that when it decided to hire another employee instead of San Miguel, such
decision was not arbitrary because of seniority considerations. 4
Decision of the Labor Arbiter
On November 15, 1999, Labor Arbiter Francisco A. Robles rendered a
decision holding that San Miguel had been illegally dismissed, 5 to wit:
Contrary to respondents claim that Zeta ceased operations and closed its
business, we believe that there was merely a change of business name and
primary purpose and upgrading of stocks of the corporation. Zuellig and Zeta
are therefore legally the same person and entity and this was admitted by
Zuelligs counsel in its letter to the VAT Department of the Bureau of Internal
Revenue on 08 June 1994 (Reply, Annex "A"). As such, the termination of
complainants services allegedly due to cessation of business operations of
Zeta is deemed illegal. Notwithstanding his receipt of separation benefits
from respondents, complainant is not estopped from questioning the legality
of his dismissal.6
xxxx
WHEREFORE, in view of the foregoing, complainant is found to have been
illegally dismissed. Respondent Zuellig Freight and Cargo Systems, Inc. is
hereby ordered to pay complainant his backwages from April 1, 1994 up to
November 15, 1999, in the amount of THREE HUNDRED TWENTY FOUR
THOUSAND SIX HUNDRED FIFTEEN PESOS (P324,615.00).
The same respondent is ordered to pay the complainant Ronaldo San Miguel
attorneys fees equivalent to ten percent (10%) of the total award.
All other claims are dismissed.
SO ORDERED.7
Decision of the NLRC
Petitioner appealed, but the NLRC issued a resolution on April 4,
2001,8 affirming the decision of the Labor Arbiter.
The NLRC later on denied petitioners motion for reconsideration via its
resolution dated June 15, 2001.9
Decision of the CA
Petitioner then filed a petition for certiorari in the CA, imputing to the NLRC
grave abuse of discretion amounting to lack or excess of jurisdiction, as
follows:
1. In failing to consider the circumstances attendant to the cessation
of business of Zeta;
2. In failing to consider that San Miguel failed to meet the deadline
Zeta fixed for its employees to accept the offer of petitioner for re-
employment;
3. In failing to consider that San Miguels employment with petitioner
from April 1 to 15, 1994 could in no way be interpreted as a
continuation of employment with Zeta;
4. In admitting in evidence the letter dated January 21, 1994 of
petitioners counsel to the Bureau of Internal Revenue; and
5. In awarding attorneys fees to San Miguel based on Article 2208 of
the Civil Code and Article 111 of the Labor Code.
On November 6, 2002, the CA promulgated its assailed decision dismissing
the petition for certiorari,10 viz:
A careful perusal of the records shows that the closure of business operation
was not validly made. Consider the Certificate of Filing of the Amended
Articles of Incorporation which clearly shows that petitioner Zuellig is actually
the former Zeta as per amendment dated January 21, 1994. The same
observation can be deduced with respect to the Certificate of Filing of
Amended By-Laws dated May 10, 1994. As aptly pointed out by private
respondent San Miguel, the amendment of the articles of incorporation
merely changed its corporate name, broadened its primary purpose and
increased its authorized capital stocks. The requirements contemplated in
Article 283 were not satisfied in this case. Good faith was not established by
mere registration with the Securities and Exchange Commission (SEC) of the
Amended Articles of Incorporation and ByLaws. The factual milleu of the
case, considered in its totality, shows that there was no closure to speak of.
The termination of services allegedly due to cessation of business operations
of Zeta was illegal. Notwithstanding private respondent San Miguels receipt
of separation benefits from petitioner Zuellig, the former is not estopped from
questioning the legality of his dismissal.
Petitioner Zuelligs allegation that the five employees who refused to receive
the termination letters were verbally informed that they had until 6:00 p.m. of
March 1, 1994 to receive the termination letters and sign the employment
contracts, otherwise the former would be constrained to withdraw its offer of
employment and seek for replacements in order to ensure the smooth
operations of the new company from its opening date, is of no moment in
view of the foregoing circumstances. There being no valid closure of
business operations, the dismissal of private respondent San Miguel on
alleged authorized cause of cessation of business pursuant to Article 283 of
the Labor Code, was utterly illegal. Despite verbal notice that the employees
had until 6:00 p.m. of March 1, 1994 to receive the termination letters and
sign the employment contracts, the dismissal was still illegal for the said
condition is null and void. In point of facts and law, private respondent San
Miguel remained an employee of petitioner Zuellig. If at all, the alleged
closure of business operations merely operates to suspend employment
relation since it is not permanent in character.
Where there is no showing of a clear, valid, and legal cause for the
termination of employment, the law considers the matter a case of illegal
dismissal and the burden is on the employer to prove that the termination
was for a valid or authorized cause.
Findings of facts of the NLRC, particularly when both the NLRC and Labor
Arbiter are in agreement, are deemed binding and conclusive upon the
Supreme Court.
As regards the second and last argument advanced by petitioner Zuellig that
private respondent San Miguel is not entitled to attorneys fees, this Court
finds no reason to disturb the ruling of the public respondent NLRC.
Petitioner Zuellig maintains that the factual backdraft (sic) of this petition
does not call for the application of Article 2208 of the Civil Code and Article
111 of the Labor Code as private respondents wages were not withheld. On
the other hand, public respondent NLRC argues that paragraphs 2 and 3,
Article 2208 of the Civil Code and paragraph (a), Article 111 of the Labor
Code justify the award of attorneys fees. NLRC was saying to the effect that
by petitioner Zuelligs act of illegally dismissing private respondent San
Miguel, the latter was compelled to litigate and thus incurred expenses to
protect his interest. In the same passion, private respondent San Miguel
contends that petitioner Zuellig acted in gross and evident bad faith in
refusing to satisfy his plainly valid, just and demandable claim.
After careful and judicious evaluation of the arguments advanced to support
the propriety or impropriety of the award of attorneys fees to private
respondent San Miguel, this Court finds the resolutions of public respondent
NLRC supported by laws and jurisprudence. It does not need much
imagination to see that by reason of petitioner Zuelligs feigned closure of
business operations, private respondent San Miguel incurred expenses to
protect his rights and interests. Therefore, the award of attorneys fees is in
order.
WHEREFORE, in view of the foregoing, the resolutions dated April 4, 2001
and June 15, 2001 of the National Labor Relations Commission affirming the
November 15, 1999 decision of the Labor
Arbiter in NLRC NCR 05-03639-94 (CA No. 022861-00) are hereby
AFFIRMED and the instant petition for certiorari is hereby DENIED and
ordered DISMISSED.
SO ORDERED.
Hence, petitioner appeals.
Issues
Petitioner asserts that the CA erred in holding that the NLRC did not act with
grave abuse of discretion in ruling that the closure of the business operation
of Zeta had not been bona fide, thereby resulting in the illegal dismissal of
San Miguel; and in holding that the NLRC did not act with grave abuse of
discretion in ordering it to pay San Miguel attorneys fees. 11
In his comment,12 San Miguel counters that the CA correctly found no grave
abuse of discretion on the part of the NLRC because the ample evidence on
record showed that he had been illegally terminated; that such finding
accorded with applicable laws and jurisprudence; and that he was entitled to
back wages and attorneys fees.
In its reply,13 petitioner reiterates that the cessation of Zetas business, which
resulted in the severance of San Miguel from his employment, was valid; that
the CA erred in upholding the NLRCs finding that San Miguel had been
illegally terminated; that his acknowledgment of the validity of his separation
from Zeta by signing a quitclaim and waiver estopped him from claiming that
it had subsequently employed him; and that the award of attorneys fees had
no basis in fact and in law.
Ruling
The petition for review on certiorari is denied for its lack of merit.
First of all, the outcome reached by the CA that the NLRC did not commit any
grave abuse of discretion was borne out by the records of the case. We
cannot undo such finding without petitioner making a clear demonstration to
the Court now that the CA gravely erred in passing upon the petition for
certiorari of petitioner.
Indeed, in a special civil action for certiorari brought against a court or quasi-
judicial body with jurisdiction over a case, petitioner carries the burden of
proving that the court or quasi-judicial body committed not a merely
reversible error but a grave abuse of discretion amounting to lack or excess
of jurisdiction in issuing the impugned order.14 Showing mere abuse of
discretion is not enough, for it is necessary to demonstrate that the abuse of
discretion was grave. Grave abuse of discretion means either that the judicial
or quasi-judicial power was exercised in an arbitrary or despotic manner by
reason of passion or personal hostility, or that the respondent judge, tribunal
or board evaded a positive duty, or virtually refused to perform the duty
enjoined or to act in contemplation of law, such as when such judge, tribunal
or board exercising judicial or quasi-judicial powers acted in a capricious or
whimsical manner as to be equivalent to lack of jurisdiction. 15 Under the
circumstances, the CA committed no abuse of discretion, least of all grave,
because its justifications were supported by the records and by the
applicable laws and jurisprudence.
Secondly, it is worthy to point out that the Labor Arbiter, the NLRC, and the
CA were united in concluding that the cessation of business by Zeta was not
a bona fide closure to be regarded as a valid ground for the termination of
employment of San Miguel within the ambit of Article 283 of the Labor Code.
The provision pertinently reads:
Article 283. Closure of establishment and reduction of personnel. The
employer may also terminate the employment of any employee due to the
installation of labor-saving devices, redundancy, retrenchment to prevent
losses or the closing or cessation of operation of the establishment or
undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the
Department of Labor and Employment at least one (1) month before the
intended date thereof. x x x.
The unanimous conclusions of the CA, the NLRC and the Labor Arbiter,
being in accord with law, were not tainted with any abuse of discretion, least
of all grave, on the part of the NLRC. Verily, the amendments of the articles
of incorporation of Zeta to change the corporate name to Zuellig Freight and
Cargo Systems, Inc. did not produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined and delineated the
different modes of dissolving a corporation, and amendment of the articles of
incorporation was not one of such modes. The effect of the change of name
was not a change of the corporate being, for, as well stated in Philippine First
Insurance Co., Inc. v. Hartigan:16 "The changing of the name of a corporation
is no more the creation of a corporation than the changing of the name of a
natural person is begetting of a natural person. The act, in both cases, would
seem to be what the language which we use to designate it imports a
change of name, and not a change of being."
The consequences, legal and otherwise, of the change of name were benefits to which he had been legally entitled was unjustified, thereby
similarly dealt with in P.C. Javier & Sons, Inc. v. Court of Appeals, 17 with the entitling him to recover attorney's fees.
Court holding thusly:
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals
From the foregoing documents, it cannot be denied that petitioner promulgated on November 6, 2002; and ORDERS petitioner to pay the costs
corporation was aware of First Summa Savings and Mortgage Banks of suit.
change of corporate name to PAIC Savings and Mortgage Bank, Inc.
Knowing fully well of such change, petitioner corporation has no valid reason SO ORDERED.
not to pay because the IGLF loans were applied with and obtained from First
Summa Savings and Mortgage Bank. First Summa Savings and Mortgage
Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same
bank to which petitioner corporation is indebted. A change in the corporate
name does not make a new corporation, whether effected by a special act or
under a general law. It has no effect on the identity of the corporation, or on
its property, rights, or liabilities. The corporation, upon to change in its name,
is in no sense a new corporation, nor the successor of the original INDUSTRIAL REFRACTORIES CORPORATION OF THE
corporation. It is the same corporation with a different name, and its PHILIPPINES, petitioner, vs. COURT OF APPEALS, SECURITIES
character is in no respect changed. (Bold underscoring supplied for AND EXCHANGE COMMISSION and REFRACTORIES
emphasis) CORPORATION OF THE PHILIPPINES, respondents.

In short, Zeta and petitioner remained one and the same corporation. The DECISION
change of name did not give petitioner the license to terminate employees of
Zeta like San Miguel without just or authorized cause. The situation was not AUSTRIA-MARTINEZ, J.:
similar to that of an enterprise buying the business of another company
where the purchasing company had no obligation to rehire terminated
Filed before us is a petition for review on certiorari under Rule 45 of the
employees of the latter.18 Petitioner, despite its new name, was the mere
Rules of Court assailing the Decision of the Court of Appeals in CA-G.R. SP
continuation of Zeta's corporate being, and still held the obligation to honor
No. 35056, denying due course and dismissing the petition filed by Industrial
all of Zeta's obligations, one of which was to respect San Miguel's security of
Refractories Corp. of the Philippines (IRCP).
tenure. The dismissal of San Miguel from employment on the pretext that
petitioner, being a different corporation, had no obligation to accept him as its
Respondent Refractories Corporation of the Philippines (RCP) is a
employee, was illegal and ineffectual.
corporation duly organized on October 13, 1976 for the purpose of engaging
in the business of manufacturing, producing, selling, exporting and otherwise
And, lastly, the CA rightfully upheld the NLRC's affirmance of the grant of
dealing in any and all refractory bricks, its by-products and derivatives. On
attorney's fees to San Miguel. Thereby, the NLRC did not commit any grave
June 22, 1977, it registered its corporate and business name with the Bureau
abuse of its discretion, considering that San Miguel had been compelled to
of Domestic Trade.
litigate and to incur expenses to protect his rights and interest. In Producers
Bank of the Philippines v. Court of Appeals,19 the Court ruled that attorney's
Petitioner IRCP on the other hand, was incorporated on August 23,
fees could be awarded to a party whom an unjustified act of the other party
1979 originally under the name Synclaire Manufacturing Corporation. It
compelled to litigate or to incur expenses to protect his interest. It was plain
amended its Articles of Incorporation on August 23, 1985 to change its
that petitioner's refusal to reinstate San Miguel with backwages and other
corporate name to Industrial Refractories Corp. of the Philippines. It is
engaged in the business of manufacturing all kinds of ceramics and other
products, except paints and zincs.
Both companies are the only local suppliers of monolithic gunning mix. [1]
Discovering that petitioner was using such corporate name, respondent
RCP filed on April 14, 1988 with the Securities and Exchange Commission
(SEC) a petition to compel petitioner to change its corporate name on the
ground that its corporate name is confusingly similar with that of petitioners
such that the public may be confused or deceived into believing that they are
one and the same corporation.[2]
The SEC decided in favor of respondent RCP and rendered judgment
on July 23, 1993 with the following dispositive portion:
WHEREFORE, judgment is hereby rendered in favor of the petitioner and
against the respondent declaring the latters corporate name Industrial
Refractories Corporation of the Philippines as deceptively and confusingly
similar to that of petitioners corporate name Refractories Corporation of the
Philippines. Accordingly, respondent is hereby directed to amend its Articles
of Incorporation by deleting the name Refractories Corporation of the
Philippines in its corporate name within thirty (30) days from finality of this
Decision. Likewise, respondent is hereby ordered to pay the petitioner the
sum of P50,000.00 as attorneys fees.[3]
Petitioner appealed to the SEC En Banc, arguing that it does not have
any jurisdiction over the case, and that respondent RCP has no right to the
exclusive use of its corporate name as it is composed of generic or common
words.[4]
In its Decision dated July 23, 1993, the SEC En Banc modified the
appealed decision in that petitioner was ordered to delete or drop from its
corporate name only the word Refractories.[5]
Petitioner IRCP elevated the decision of the SEC En Banc through a
petition for review on certiorari to the Court of Appeals which then rendered
the herein assailed decision. The appellate court upheld the jurisdiction of the
SEC over the case and ruled that the corporate names of petitioner IRCP
and respondent RCP are confusingly or deceptively similar, and that
respondent RCP has established its prior right to use the word Refractories
as its corporate name.[6] The appellate court also found that the petition was
filed beyond the reglementary period.[7]
Hence, herein petition which we must deny.
Petitioner contends that the petition before the Court of Appeals was
timely filed. It must be noted that at the time the SEC En Banc rendered its
decision on May 10, 1994, the governing rule on appeals from quasi-judicial
agencies like the SEC was Supreme Court Circular No. 1-91. As provided
therein, the remedy should have been a petition for review filed before the
Court of Appeals within fifteen (15) days from notice, raising questions of
fact, of law, or mixed questions of fact and law. [8] A motion for reconsideration
suspends the running of the period.[9]
In the case at bench, there is a discrepancy between the dates provided
by petitioner and respondent. Petitioner alleges the following dates of receipt
and filing:[10]
June 10, 1994 Receipt of SECs Decision dated May 10, 1994
June 20, 1994 Filing of Motion for Reconsideration
September 1, 1994 Receipt of SECs Order dated August 3,
1994 denying petitioners motion for
reconsideration
September 2, 1994 Filing of Motion for extension of time
September 6, 1994 Filing of Petition
Respondent RCP, however, asserts that the foregoing dates are
incorrect as the certifications issued by the SEC show that petitioner received
the SECs Decision dated May 10, 1994 on June 9, 1994, filed the motion for
reconsideration via registered mail on June 25, 1994, and received the Order
dated August 3, 1994 on August 15, 1994. [11] Thus, the petition was filed
twenty-one (21) days beyond the reglementary period provided in Supreme
Court Circular No. 1-91.[12]
If reckoned from the dates supplied by petitioner, then the petition was
timely filed. On the other hand, if reckoned from the dates provided by
respondent RCP, then it was filed way beyond the reglementary period. On
this score, we agree with the appellate courts finding that petitioner failed to
rebut respondent RCPs allegations of material dates of receipt and filing. [13]In
addition, the certifications were executed by the SEC officials based on their
official records[14] which enjoy the presumption of regularity.[15] As such, these
are prima facie evidence of the facts stated therein.[16] And based on such
dates, there is no question that the petition was filed with the Court of
Appeals beyond the fifteen (15) day period. On this ground alone, the instant
petition should be denied as the SEC En Bancs decision had already
attained finality and the SECs findings of fact, when supported by substantial
evidence, is final.[17]
Nevertheless, to set the matters at rest, we shall delve into the other
issues posed by petitioner.
Petitioners arguments, substantially, are as follows: (1) jurisdiction is
vested with the regular courts as the present case is not one of the instances
provided in P.D. 902-A; (2) respondent RCP is not entitled to use the generic
name refractories; (3) there is no confusing similarity between their corporate
names; and (4) there is no basis for the award of attorneys fees. [18]
Petitioners argument on the SECs jurisdiction over the case is utterly
myopic. The jurisdiction of the SEC is not merely confined to the adjudicative
functions provided in Section 5 of P.D. 902-A, as amended. [19] By express
mandate, it has absolute jurisdiction, supervision and control over all
corporations.[20] It also exercises regulatory and administrative powers to
implement and enforce the Corporation Code, [21] one of which is Section 18,
which provides:
SEC. 18. 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
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.
It is the SECs duty 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, and it has authority to de-register at all times and
under all circumstances corporate names which in its estimation are likely to
generate confusion.[22] Clearly therefore, the present case falls within the
ambit of the SECs regulatory powers.[23]
Likewise untenable is petitioners argument that there is no confusing or
deceptive similarity between petitioner and respondent RCPs corporate
names. Section 18 of the Corporation Code expressly prohibits the use of
a corporate name which 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. The policy
behind the foregoing prohibition is to avoid fraud upon the public that will
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 corporation.[24]
Pursuant thereto, the Revised Guidelines in the Approval of Corporate
and Partnership Names[25] specifically requires that: (1) a corporate name
shall not be identical, misleading or confusingly similar to one already
registered by another corporation with the Commission; [26] and (2) if the
proposed name is similar to the name of a registered firm, the proposed
name must contain at least one distinctive word different from the name of
the company already registered.[27]
As held in Philips Export B.V. vs. Court of Appeals,[28] to fall within the
prohibition of the law, two requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the
use of such corporate name;
and
(2) the proposed name is either: (a) identical, or (b) deceptively or
confusingly similar to that of any existing corporation or to any
other name already protected by law; or (c) patently deceptive,
confusing or contrary to existing law.
As regards the first requisite, it has been held that the right to the
exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption.[29] In this case, respondent
RCP was incorporated on October 13, 1976 and since then has been using
the corporate name Refractories Corp. of the Philippines. Meanwhile,
petitioner was incorporated on August 23, 1979 originally under the name
Synclaire Manufacturing Corporation. It only started using the name
Industrial Refractories Corp. of the Philippines when it amended its Articles of
Incorporation on August 23, 1985, or nine (9) years after respondent RCP
started using its name. Thus, being the prior registrant, respondent RCP has
acquired the right to use the word Refractories as part of its corporate name.
Anent the second requisite, in determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such as to
mislead a person using ordinary care and discrimination and the Court must
look to the record as well as the names themselves. [30] Petitioners corporate
name is Industrial Refractories Corp. of the Phils., while respondents is
Refractories Corp. of the Phils. Obviously, both names contain the identical
words Refractories, Corporation and Philippines. The only word that
distinguishes petitioner from respondent RCP is the word Industrial which
merely identifies a corporations general field of activities or operations. We
need not linger on these two corporate names to conclude that they are
patently similar that even with reasonable care and observation, confusion
might arise.[31] It must be noted that both cater to the same clientele, i.e. the
steel industry. In fact, the SEC found that there were instances when different
steel companies were actually confused between the two, especially since
they also have similar product packaging. [32] Such findings are accorded not
only great respect but even finality, and are binding upon this Court, unless it
is shown that it had arbitrarily disregarded or misapprehended evidence
before it to such an extent as to compel a contrary conclusion had such
evidence been properly appreciated. [33] And even without such proof of
actual confusion between the two corporate names, it suffices that confusion
is probable or likely to occur.[34]
Refractory materials are described as follows:
Refractories are structural materials used at high temperatures to [sic]
industrial furnaces. They are supplied mainly in the form of brick of standard
sizes and of special shapes. Refractories also include refractory cements,
bonding mortars, plastic firebrick, castables, ramming mixtures, and other
bulk materials such as dead-burned grain magneside, chrome or ground
ganister and special clay.[35]
While the word refractories is a generic term, its usage is not widespread and
is limited merely to the industry/trade in which it is used, and its continuous
use by respondent RCP for a considerable period has made the term so
closely identified with it. [36] Moreover, as held in the case of Ang Kaanib sa
Iglesia ng Dios kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs.
Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng
Katotohanan, petitioners appropriation of respondent's corporate name
cannot find justification under the generic word rule. [37] A contrary ruling
would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public. [38]
Finally, we find the award of P50,000.00 as attorney's fees to be fair and
reasonable. Article 2208 of the Civil Code allows the award of such fees
when its claimant is compelled to litigate with third persons or to incur
expenses to protect its just and valid claim. In this case, despite its
undertaking to change its corporate name in case another firm has acquired
a prior right to use such name, [39] it refused to do so, thus compelling
respondent to undergo litigation and incur expenses to protect its corporate
name.
WHEREFORE, the instant petition for review on certiorari is
hereby DENIED for lack of merit.
Costs against petitioner.
SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF
APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH
INVESTMENT BANK OF THE PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the
Decision[1] of the Court of Appeals of 30 March 1999 affirming Resolutions
No. 94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated
11 August 1994 and 11 April 1995, respectively, which in turn affirmed
Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic
Investment Bank of the Philippines (AIIBP) dated 13 December 1993, finding
petitioner guilty of Dishonesty in the Performance of Official Duties and/or
Conduct Prejudicial to the Best Interest of the Service and dismissing him
from the service, and its Resolution[2] of 15 December 1999 dismissing
petitioners Motion for Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the
first employees of the Philippine Amanah Bank (PAB) when it was created by
virtue of Presidential Decree No. 264 on 02 August 1973. He rose through
the ranks, working his way up from his initial designation as security guard, to
settling clerk, bookkeeper, credit investigator, project analyst, appraiser/
inspector, and eventually, loans analyst.[3]
In February 1988, while still designated as appraiser/investigator,
Sawadjaan was assigned to inspect the properties offered as collaterals by
Compressed Air Machineries and Equipment Corporation (CAMEC) for a
credit line of Five Million Pesos (P5,000,000.00). The properties consisted of
two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-
130671 and No. C-52576. On the basis of his Inspection and Appraisal
Report,[4] the PAB granted the loan application. When the loan matured on 17
May 1989, CAMEC requested an extension of 180 days, but was granted
only 120 days to repay the loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01
July 1989.[6]
In January 1990, Congress passed Republic Act 6848 creating the
AIIBP and repealing P.D. No. 264 (which created the PAB). All assets,
liabilities and capital accounts of the PAB were transferred to the AIIBP,[7] and
the existing personnel of the PAB were to continue to discharge their
functions unless discharged.[8] In the ensuing reorganization, Sawadjaan was
among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now
referred to as the AIIBP, discovered that TCT No. N-130671 was spurious,
the property described therein non-existent, and that the property covered by
TCT No. C-52576 had a prior existing mortgage in favor of one Divina
Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an
Investigating Committee to look into the CAMEC transaction, which had cost
the bank Six Million Pesos (P6,000,000.00) in losses. [9] The subsequent
events, as found and decided upon by the Court of Appeals, [10] are as follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank
[AIIBP] Chairman Roberto F. De Ocampo charging him with Dishonesty in
the Performance of Official Duties and/or Conduct Prejudicial to the Best
Interest of the Service and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the
Investigating Committee that he could not submit himself to the jurisdiction of
the Committee because of its alleged partiality. For his failure to appear
before the hearing set on 17 September 1993, after the hearing of 13
September 1993 was postponed due to the Manifestation of even date filed
by petitioner, the Investigating Committee declared petitioner in default and
the prosecution was allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a decision, the
pertinent portions of which reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and
assigned tasks as appraiser/inspector, which resulted to the prejudice and
substantial damage to the Bank, respondent should be held liable therefore.
At this juncture, however, the Investigating Committee is of the considered
opinion that he could not be held liable for the administrative offense of
dishonesty considering the fact that no evidence was adduced to show that
he profited or benefited from being remiss in the performance of his duties.
The record is bereft of any evidence which would show that he received any
amount in consideration for his non-performance of his official duties.
This notwithstanding, respondent cannot escape liability. As adverted to
earlier, his failure to perform his official duties resulted to the prejudice and
substantial damage to the Islamic Bank for which he should be held liable for
the administrative offense of CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that
respondent SAPPARI SAWADJAAN be meted the penalty of SIX (6)
MONTHS and ONE (1) DAY SUSPENSION from office in accordance with
the Civil Service Commissions Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP]
adopted Resolution No. 2309 finding petitioner guilty of Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest
of the Service and imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP]
adopted the Resolution No. 2332 on 20 February 1994 reducing the penalty
imposed on petitioner from dismissal to suspension for a period of six (6)
months and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System
Protection Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the
appeal for lack of merit and affirming Resolution No. 2309 dated 13
December 1993 of the Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying
petitioners Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme
Court on the following assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the
Philippines has committed a grave abuse of discretion amounting to excess
or lack of jurisdiction when it initiated and conducted administrative
investigation without a validly promulgated rules of procedure in the
adjudication of administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave
abuse of discretion amounting to lack of jurisdiction when it prematurely and
falsely assumed jurisdiction of the case not appealed to it, but to the Merit
System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in
finding petitioner Sawadjaan of having deliberately reporting false information
and therefore guilty of Dishonesty and Conduct Prejudicial to the Best
Interest of the Service and penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this
petition to this Honorable Court pursuant to Revised Administrative Circular
No. 1-95, which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that
petitioner raises for the first time the alleged failure of the Islamic Bank
[AIIBP] to promulgate rules of procedure governing the adjudication and
disposition of administrative cases involving its personnel. It is a rule that
issues not properly brought and ventilated below may not be raised for the
first time on appeal, save in exceptional circumstances (Casolita, Sr. v. Court
of Appeals, 275 SCRA 257) none of which, however, obtain in this case.
Granting arguendo that the issue is of such exceptional character that the
Court may take cognizance of the same, still, it must fail. Section 26 of
Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have
the broadest powers to manage the Islamic Bank, x x x The Board shall
adopt policy guidelines necessary to carry out effectively the provisions of
this Charter as well as internal rules and regulations necessary for the
conduct of its Islamic banking business and all matters related to personnel
organization, office functions and salary administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled
Prescribing Procedure and Sanctions to Ensure Speedy Disposition of
Administrative Cases directs, all administrative agencies to adopt and include
in their respective Rules of Procedure provisions designed to abbreviate
administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the
Islamic Bank [AIIBP] to promulgate rules of procedure before administrative
discipline may be imposed upon its employees. The internal rules of
procedures ordained to be adopted by the Board refers to that necessary for
the conduct of its Islamic banking business and all matters related to
personnel organization, office functions and salary administration. On the
contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic
Bank the broadest powers to manage the Islamic Bank. This grant of broad
powers would be an idle ceremony if it would be powerless to discipline its
employees.
The second assignment of error must likewise fail. The issue is raised for the
first time via this petition for certiorari. Petitioner submitted himself to the
jurisdiction of the CSC. Although he could have raised the alleged lack of
jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of
the CSC, he did not do so. By filing the Motion for Reconsideration, he is
estopped from denying the CSCs jurisdiction over him, as it is settled rule
that a party who asks for an affirmative relief cannot later on impugn the
action of the tribunal as without jurisdiction after an adverse result was meted
to him. Although jurisdiction over the subject matter of a case may be
objected to at any stage of the proceedings even on appeal, this particular
rule, however, means that jurisdictional issues in a case can be raised only
during the proceedings in said case and during the appeal of said case
(Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is a petition
[for] certiorari and not an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC
Resolution No. 93-2387 dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the
civil service appealable to the Commission pursuant to Section 47 of Book V
of the Code (i.e., Administrative Code of 1987) including personnel actions
such as contested appointments shall now be appealed directly to the
Commission and not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was
categorically held:
. . . The functions of the MSPB relating to the determination of administrative
disciplinary cases were, in other words, re-allocated to the Commission itself.
Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain
whether a court (in this case, administrative agency) has jurisdiction or not,
the provisions of the law should be inquired into. Furthermore, `the
jurisdiction of the court must appear clearly from the statute law or it will not
be held to exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the
provision of law abovecited, the Civil Service Commission clearly has
jurisdiction over the Administrative Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in
petitioners proposition that he should not be liable, as in the first place, he
was not qualified to perform the functions of appraiser/investigator because
he lacked the necessary training and expertise, and therefore, should not
have been found dishonest by the Board of Directors of Islamic Bank [AIIBP]
and the CSC. Petitioner himself admits that the position of
appraiser/inspector is one of the most serious [and] sensitive job in the
banking operations. He should have been aware that accepting such a
designation, he is obliged to perform the task at hand by the exercise of more
than ordinary prudence. As appraiser/investigator, he is expected, among
others, to check the authenticity of the documents presented by the borrower
by comparing them with the originals on file with the proper government
office. He should have made it sure that the technical descriptions in the
location plan on file with the Bureau of Lands of Marikina, jibe with that
indicated in the TCT of the collateral offered by CAMEC, and that the
mortgage in favor of the Islamic Bank was duly annotated at the back of the
copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner
failed to do, for which he must be held liable. That he did not profit from his
false report is of no moment. Neither the fact that it was not deliberate or
willful, detracts from the nature of the act as dishonest. What is apparent is
he stated something to be a fact, when he really was not sure that it was so.
WHEREFORE, above premises considered, the instant Petition is
DISMISSED, and the assailed Resolutions of the Civil Service Commission
are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his
change of address,[11] but apparently neglected to notify his client of this fact.
Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New
Trial[12] in the Court of Appeals based on the following grounds: fraud,
accident, mistake or excusable negligence and newly discovered evidence.
He claimed that he had recently discovered that at the time his employment
was terminated, the AIIBP had not yet adopted its corporate by-laws. He
attached a Certification[13] by the Securities and Exchange Commission
(SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-
laws to the SEC, and that its registration was being held in abeyance
pending certain corrections being made thereon. Sawadjaan argued that
since the AIIBP failed to file its by-laws within 60 days from the passage of
Rep. Act No. 6848, as required by Sec. 51 of the said law, the bank and its
stockholders had already forfeited its franchise or charter, including its
license to exist and operate as a corporation, [14] and thus no longer have the
legal standing and personality to initiate an administrative case.

Sawadjaans counsel subsequently adopted his motion, but requested
that it be treated as a motion for reconsideration. [15] This motion was denied
by the court a quo in its Resolution of 15 December 1999.[16]
Still disheartened, Sawadjaan filed the present petition
for certiorari under Rule 65 of the Rules of Court challenging the above
Decision and Resolution of the Court of Appeals on the ground that the
court a quo erred: i) in ignoring the facts and evidences that the alleged
Islamic Bank has no valid by-laws; ii) in ignoring the facts and evidences that
the Islamic Bank lost its juridical personality as a corporation on 16 April
1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank
and its alleged Board of Directors have no jurisdiction to act in the manner
they did in the absence of a valid by-laws; iv) in not correcting the acts of the
Civil Service Commission who erroneously rendered the assailed
Resolutions No. 94-4483 and No. 95-2754 as a result of fraud, falsification
and/or misrepresentations committed by Farouk A. Carpizo and his group,
including Roberto F. de Ocampo; v) in affirming an unconscionably harsh
and/or excessive penalty; and vi) in failing to consider newly discovered
evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for
Additional Extension of Time to File a Reply (to the Comments of
Respondent Al-Amanah Investment Bank of the Philippines), [17] Reply (to
Respondents Consolidated Comment,)[18] and Reply (to the Alleged
Comments of Respondent Al-Amanah Islamic Bank of the Philippines). [19] On
13 October 2000, he informed this Court that he had terminated his lawyers
services, and, by himself, prepared and filed the following: 1) Motion for New
Trial;[20] 2) Motion to Declare Respondents in Default and/or Having Waived
their Rights to Interpose Objection to Petitioners Motion for New Trial;
[21]
3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio
J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for
Being in Contempt of Court & to Inhibit them from Appearing in this Case
Until they Can Present Valid Evidence of Legal Authority; [22] 4)
Opposition/Reply (to Respondent AIIBPs Alleged Comment); [23] 5) Ex-
Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of
Court and the Issuance of a Commitment Order/Warrant for His Arrest; [24] 6)
Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned
Counsel as Legal Counsel for the Respondent Islamic Bank with Opposition
to Petitioners Motion to Punish Undersigned Counsel for Contempt of Court
for the Issuance of a Warrant of Arrest); [25] 7) Memorandum for Petitioner;
[26]
8) Opposition to SolGens Motion for Clarification with Motion for Default
and/or Waiver of Respondents to File their Memorandum; [27] 9) Motion for
Contempt of Court and Inhibition/Disqualification with Opposition to OGCCs
Motion for Extension of Time to File Memorandum; [28] 10) Motion for
Enforcement (In Defense of the Rule of Law);[29] 11) Motion and Opposition
(Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales,
Alda G. Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of
Court and the Issuance of a Warrant for their Arrest; and Opposition to their
Alleged Manifestation and Motion Dated February 5, 2002); [30] 12) Motion for
Reconsideration of Item (a) of Resolution dated 5 February 2002 with
Supplemental Motion for Contempt of Court; [31] 13) Motion for
Reconsideration of Portion of Resolution Dated 12 March 2002; [32] 14) Ex-
Parte Urgent Motion for Extension of Time to File Reply Memorandum (To:
CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs
Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time
to File Reply Memorandum (To: AIIBPs Memorandum); [34] and 16) Reply
Memorandum (To: OGCCs Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for its
procedural and substantive flaws.
The general rule is that the remedy to obtain reversal or modification of
the judgment on the merits is appeal. This is true even if the error, or one of
the errors, ascribed to the court rendering the judgment is its lack of
jurisdiction over the subject matter, or the exercise of power in excess
thereof, or grave abuse of discretion in the findings of fact or of law set out in
the decision.[36]
The records show that petitioners counsel received the Resolution of the
Court of Appeals denying his motion for reconsideration on 27 December
1999. The fifteen day reglamentary period to appeal under Rule 45 of the
Rules of Court therefore lapsed on 11 January 2000. On 23 February 2000,
over a month after receipt of the resolution denying his motion for
reconsideration, the petitioner filed his petition for certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a
substitute for the lost remedy of appeal,[37] and though there are
instances[38] where the extraordinary remedy of certiorari may be resorted to
despite the availability of an appeal, [39] we find no special reasons for making
out an exception in this case.
 Even if we were to overlook this fact in the broader interests of justice
and treat this as a special civil action for certiorari under Rule 65,[40] the
petition would nevertheless be dismissed for failure of the petitioner to show
grave abuse of discretion. Petitioners recurrent argument, tenuous at its very
best, is premised on the fact that since respondent AIIBP failed to file its by-
laws within the designated 60 days from the effectivity of Rep. Act No. 6848,
all proceedings initiated by AIIBP and all actions resulting therefrom are a
patent nullity. Or, in his words, the AIIBP and its officers and Board of
Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate
the Islamic Bank, file administrative charges and investigate petitioner in the
manner they did and allegedly passed Board Resolution No. 2309 on
December 13, 1993 which is null and void for lack of an (sic) authorized and
valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming,
erroneously, a null and void Resolution No. 2309 dated December 13, 1993
of the Board of Directors of Al-Amanah Islamic Investment Bank of the
Philippines in CSC Resolution No. 94-4483 dated August 11, 1994. A motion
for reconsideration thereof was denied by the CSC in its Resolution No. 95-
2754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and misrepresentations of the alleged
Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk
A. Carpizo and his group at the alleged Islamic Bank. [41]
Nowhere in petitioners voluminous pleadings is there a showing that the
court a quo committed grave abuse of discretion amounting to lack or excess
of jurisdiction reversible by a petition for certiorari. Petitioner already raised
the question of AIIBPs corporate existence and lack of jurisdiction in his
Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was
denied by the Court of Appeals. Despite the volume of pleadings he has
submitted thus far, he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where
it conducts business, has shareholders, corporate officers, a board of
directors, assets, and personnel. It is, in fact, here represented by the Office
of the Government Corporate Counsel, the principal law office of
government-owned corporations, one of which is respondent bank. [42] At the
very least, by its failure to submit its by-laws on time, the AIIBP may be
considered a de facto corporation[43] whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to which such
corporations may be a party.[44]
Moreover, a corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC
Rules on Suspension/Revocation of the Certificate of Registration of
Corporations,[45] details the procedures and remedies that may be availed of
before an order of revocation can be issued. There is no showing that such a
procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a
corporate controversy, but a labor dispute; and it is an employers basic right
to freely select or discharge its employees, if only as a measure of self-
protection against acts inimical to its interest. [46] Regardless of whether AIIBP
is a corporation, a partnership, a sole proprietorship, or a sari-saristore, it is
an undisputed fact that AIIBP is the petitioners employer. AIIBP chose to
retain his services during its reorganization, controlled the means and
methods by which his work was to be performed, paid his wages, and,
eventually, terminated his services.[47]
And though he has had ample opportunity to do so, the petitioner has
not alleged that he is anything other than an employee of AIIBP. He has
neither claimed, nor shown, that he is a stockholder or an officer of the
corporation. Having accepted employment from AIIBP, and rendered his
services to the said bank, received his salary, and accepted the promotion
given him, it is now too late in the day for petitioner to question its existence
and its power to terminate his services. One who assumes an obligation to
an ostensible corporation as such, cannot resist performance thereof on the
ground that there was in fact no corporation.[48]
Even if we were to consider the facts behind petitioner Sawadjaans
dismissal from service, we would be hard pressed to find error in the decision
of the AIIBP.
 As appraiser/investigator, the petitioner was expected to conduct an
ocular inspection of the properties offered by CAMEC as collaterals and
check the copies of the certificates of title against those on file with the
Registry of Deeds. Not only did he fail to conduct these routine checks, but
he also deliberately misrepresented in his appraisal report that after
reviewing the documents and conducting a site inspection, he found the
CAMEC loan application to be in order. Despite the number of pleadings he
has filed, he has failed to offer an alternative explanation for his actions.
When he was informed of the charges against him and directed to
appear and present his side on the matter, the petitioner sent instead a
memorandum questioning the fairness and impartiality of the members of the
investigating committee and refusing to recognize their jurisdiction over him.
Nevertheless, the investigating committee rescheduled the hearing to give
the petitioner another chance, but he still refused to appear before it.
Thereafter, witnesses were presented, and a decision was rendered
finding him guilty of dishonesty and dismissing him from service. He sought a
reconsideration of this decision and the same committee whose impartiality
he questioned reduced their recommended penalty to suspension for six
months and one day. The board of directors, however, opted to dismiss him
from service.
On appeal to the CSC, the Commission found that Sawadjaans failure
to perform his official duties greatly prejudiced the AIIBP, for which he should
be held accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in
the performance of his duties as appraiser/inspector. Had respondent
performed his duties as appraiser/inspector, he could have easily noticed that
the property located at Balintawak, Caloocan City covered by TCT No. C-
52576 and which is one of the properties offered as collateral by CAMEC is
encumbered to Divina Pablico. Had respondent reflected such fact in his
appraisal/inspection report on said property the ISLAMIC BANK would not
have approved CAMECs loan of P500,000.00 in 1987 and CAMECs P5
Million loan in 1988, respondent knowing fully well the Banks policy of not
accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he
failed to check and verify from the Registry of Deeds of Marikina the
authenticity of the property located at Mayamot, Antipolo, Rizal covered by
TCT No. N-130671 and which is one of the properties offered as collateral by
CAMEC for its P5 Million loan in 1988. If he only visited and verified with the
Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could
have easily discovered that TCT No. N-130671 is fake and the property
described therein non-existent.
...
This notwithstanding, respondent cannot escape liability. As adverted to
earlier, his failure to perform his official duties resulted to the prejudice and
substantial damage to the ISLAMIC BANK for which he should be held liable
for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.[49]
From the foregoing, we find that the CSC and the court a quo committed
no grave abuse of discretion when they sustained Sawadjaans dismissal
from service. Grave abuse of discretion implies such capricious and
whimsical exercise of judgment as equivalent to lack of jurisdiction, or, in
other words, where the power is exercised in an arbitrary or despotic manner
by reason of passion or personal hostility, and it must be so patent and gross
as to amount to an evasion of positive duty or to a virtual refusal to perform
the duty enjoined or to act at all in contemplation of law.[50] The records show
that the respondents did none of these; they acted in accordance with the
law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of
Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-
2754 of the Civil Service Commission, and its Resolution of 15 December
1999 are hereby AFFIRMED. Costs against the petitioner.
 The subject matter of these consolidated petitions is the decision of the Court
of Appeals in CA-G.R. CV No. 66195 which modified the decision of the then
Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs
complaint (petitioner in G.R. No. 84197) against all defendants (respondents
in G.R. No. 84197) was dismissed but in all other respects the trial court's
decision was affirmed.

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

WHEREFORE, judgment is rendered against defendant

G.R. No. 84197 July 28, 1989 Jacob S. Lim requiring Lim to pay plaintiff the amount of
P311,056.02, with interest at the rate of 12% per annum
PIONEER INSURANCE & SURETY CORPORATION, petitioner, compounded monthly; plus 15% of the amount awarded to
vs. plaintiff as attorney's fees from July 2,1966, until full payment
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY is made; plus P70,000.00 moral and exemplary damages.
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents. It is found in the records that the cross party plaintiffs
incurred additional miscellaneous expenses aside from
G.R. No. 84157 July 28, 1989 Pl51,000.00,,making a total of P184,878.74. Defendant
Jacob S. Lim is further required to pay cross party plaintiff,
JACOB S. LIM, petitioner, Bormaheco, the Cervanteses one-half and Maglana the
vs. other half, the amount of Pl84,878.74 with interest from the
COURT OF APPEALS, PIONEER INSURANCE AND SURETY filing of the cross-complaints until the amount is fully paid;
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., plus moral and exemplary damages in the amount of
INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO P184,878.84 with interest from the filing of the cross-
MAGLANA, respondents. complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each of
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation. the two Cervanteses.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim. Furthermore, he is required to pay P20,000.00 to
Bormaheco and the Cervanteses, and another P20,000.00
to Constancio B. Maglana as attorney's fees.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

xxx xxx xxx

Leonardo B. Lucena for Constancio Maglana.

WHEREFORE, in view of all above, the complaint of plaintiff

Pioneer against defendants Bormaheco, the Cervanteses
and Constancio B. Maglana, is dismissed. Instead, plaintiff is
GUTIERREZ, JR., J.:
required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees
 and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B.
Maglana the amount of P20,000.00 as attorney's fees and
costs.
No moral or exemplary damages is awarded against plaintiff
for this action was filed in good faith. The fact that the
properties of the Bormaheco and the Cervanteses were
attached and that they were required to file a counterbond in
order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be
saddled with moral or exemplary damages. Furthermore, the
rights exercised were provided for in the Rules of Court, and
it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance Company,
Inc., the third-party defendant, for it only secured the
attachment prayed for by the plaintiff Pioneer. If an insurance
company would be liable for damages in performing an act
which is clearly within its power and which is the reason for
its being, then nobody would engage in the insurance
business. No further claim or counter-claim for or against
anybody is declared by this Court. (Rollo - G.R. No. 24197,
pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the
airline business as owner-operator of Southern Air Lines (SAL) a single
proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim
entered into and executed a sales contract (Exhibit A) for the sale and
purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare
parts for the total agreed price of US $109,000.00 to be paid in installments.
One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June
7,1965 while the other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer,
petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond
No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the
balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
Constancio Maglana (respondents in both petitions) contributed some funds
used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to
expand his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by
Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors
principally agree and bind themselves jointly and severally to indemnify and
hold and save harmless Pioneer from and against any/all damages, losses,
costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become
surety upon the bond/note and to pay, reimburse and make good to Pioneer,
its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL
executed in favor of Pioneer as deed of chattel mortgage as security for the
latter's suretyship in favor of the former. It was stipulated therein that Lim
transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was
duly registered with the Office of the Register of Deeds of the City of Manila
and with the Civil Aeronautics Administration pursuant to the Chattel
Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.
Lim defaulted on his subsequent installment payments prompting JDA to
request payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana,
however, filed a third party claim alleging that they are co-owners of the
aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
application for a writ of preliminary attachment against Lim and respondents,
the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-
claims against Lim alleging that they were not privies to the contracts signed
by Lim and, by way of counterclaim, sought for damages for being exposed
to litigation and for recovery of the sums of money they advanced to Lim for
the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay
Pioneer but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that
the plaintiffs complaint against all the defendants was dismissed. In all other
respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY
ERRED WHEN IT DISMISSED THE APPEAL OF
PETITIONER ON THE SOLE GROUND THAT PETITIONER
HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA
AND THAT IT CANNOT REPRESENT A REINSURER TO
RECOVER THE AMOUNT FROM HEREIN PRIVATE
RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT.
(Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that
plaintiff Pioneer had reinsured its risk of liability under the
surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00.
Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery
of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to
institute the instant action as it does not stand to be
benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the
reinsurer to recover the amount from defendants, hence, it
instituted the action is utterly devoid of merit. Plaintiff did not
even present any evidence that it is the attorney-in-fact of
the reinsurance company, authorized to institute an action for
and in behalf of the latter. To qualify a person to be a real
party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of
the right sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been held that
the real party in interest is the party who would be benefited
or injured by the judgment or the party entitled to the avails
of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy
or a future, contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine
Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1
NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669,
quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already
been paid by the reinsurer the sum of P295,000.00 the
bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received
by plaintiff Pioneer from its reinsurer, the former was able to
foreclose extra-judicially one of the subject airplanes and its
spare engine, realizing the total amount of P37,050.00 from
the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in
the amount of P33,383.72 considering that the total amount
it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount in
 excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance
company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well
settled is the rule that no person should unjustly enrich
himself at the expense of another (Article 22, New Civil
Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based
its finding that petitioner was paid by its reinsurer in the aforesaid amount, as
this matter has never been raised by any of the parties herein both in their
answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its
reinsurer, still none of the respondents had any interest in the matter since
the reinsurance is strictly between the petitioner and the re-insurer pursuant
to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents
Bormaheco and Maglana; and (4) the principle of unjust enrichment is not
applicable considering that whatever amount he would recover from the co-
indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance
money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the
issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with
respect to so much of its obligations to JDA as has been
paid with reinsurance money?
2. If the answer to the preceding question is in the negative,
has Pioneer still any claim against defendants, considering
the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R. No.
84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under
the surety bond it had executed in favor of JDA, collected the
proceeds of such reinsurance in the sum of P295,000, and
paid with the said amount the bulk of its alleged liability to
JDA under the said surety bond, it is plain that on this score
it no longer has any right to collect to the extent of the said
amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the amount
paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers
opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as
the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in
the complaint that Pioneer is suing as attorney-in- fact of the
reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own
name an action for the benefit of the reinsurers. It is well-
settled that an action brought by an attorney-in-fact in his
own name instead of that of the principal will not prosper,
and this is so even where the name of the principal is
disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be
prosecuted in the name of the real party in
interest.' This provision is mandatory. The
real party in interest is the party who would
be benefitted or injured by the judgment or is
the party entitled to the avails of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest,
that there is no law permitting an action to
 be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil.
Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23
SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29.
Since Pioneer has collected P295,000.00 from the
reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is
the amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid and
effective. But since the amount realized from the sale of the
mortgaged chattels are P35,000.00 for one of the airplanes
and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer
has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that
cropped up was the effect of payment made by the reinsurers to the
petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as
insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the
same rights by subrogation as are acquired in similar cases
where the original insurer pays a loss (Universal Ins. Co. v.
Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies
are in general applicable to actions or contracts of
reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins.
Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he
has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated
to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or
loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines,
Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently
applied in Manila Mahogany Manufacturing Corporation v. Court of
Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that
the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the
one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the
insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in
dismissing the petitioner's complaint as against the respondents for the
reason that the petitioner was not the real party in interest in the complaint
and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the
evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12,
Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable
to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after the
execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the
spare parts involved, agreed to issue the bond provided that
the same would be mortgaged to it, but this was not possible
because the planes were still in Japan and could not be
mortgaged here in the Philippines. As soon as the aircrafts
were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the
mortgaged properties have impaired and
rendered insufficient the security under the
chattel mortgage and there is thus no other
sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel
mortgage there is no other security for the claim sought to be
enforced by this action, which necessarily means that the
indemnity agreement had ceased to have any force and
effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed
the chattel mortgage on the planes and spare parts, no
longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The
indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as
indemnitors, would be entitled to be subrogated to the right
of Pioneer should they make payments to the latter. Articles
2067 and 2080 of the New Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's
election of the remedy of foreclosure precludes any further
action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and
last installments to JDA and Pioneer as surety having made
of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil
Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant
suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance
and any agreement to the contrary is void.' Cruz, et al. v.
Filipinas Investment & Finance Corp. No. L- 24772, May
27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped
from through the contention that Pioneer is not the vendor
but JDA. The reason is that Pioneer is actually exercising the
rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed
on the ground that these defendants and defendant Maglana
are not the vendee but indemnitors. Pascual, et al. v.
Universal Motors Corporation, G.R. No. L- 27862, Nov.
20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the
change of their maturity dates discharged these defendants
from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish
the original obligations thru novations thus discharging the
indemnitors.
The principal hereof shall be paid in eight
equal successive three months interval
installments, the first of which shall be due
and payable 25 August 1965, the remainder
of which ... shall be due and payable on the
26th day x x x of each succeeding three
months and the last of which shall be due
and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA, modifying
the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight
equal successive three month interval
installments the first of which shall be due
and payable 4 September 1965, the
remainder of which ... shall be due and
payable on the 4th day ... of each
succeeding months and the last of which
shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported
promissory notes bearing maturity dates different from that
fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the
rest of the installments, the 15th of each succeeding three
months, that of the last installment being July 15, 1967.
These restructuring of the obligations with regard to their
maturity dates, effected twice, were done without the
knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and
defendant Maglana knew of and consented to the
modification of the obligations. But if that were so, there
would have been the corresponding documents in the form
of a written notice to as well as written conformity of these
defendants, and there are no such document. The
consequence of this was the extinguishment of the
obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable
by analogy are the rulings of the Supreme Court in the case
of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and
the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil.
532, 538.
Art. 2079. An extension granted to the
debtor by the creditor without the consent of
the guarantor extinguishes the guaranty The
mere failure on the part of the creditor to
demand payment after the debt has become
due does not of itself constitute any
extension time referred to herein, (New Civil
Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563,
M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G.
1571.
Pioneer's liability as surety to JDA had already prescribed
when Pioneer paid the same. Consequently, Pioneer has no
more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of
an express stipulation in the surety bond, the failure of JDA
to present its claim to Pioneer within ten days from default of
Lim or SAL on every installment, released Pioneer from
liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement
from these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor
shall not entitle him to reimbursement from
his co-debtors if such payment is made after
the obligation has prescribed or became
illegal.
 These defendants are entitled to recover damages and
attorney's fees from Pioneer and its surety by reason of the
filing of the instant case against them and the attachment
and garnishment of their properties. The instant action is
clearly unfounded insofar as plaintiff drags these defendants
and defendant Maglana.' (Record on Appeal, pp. 363-369,
Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-
investors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be
treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form?
This Petition presents these fundamental questions which
we believe were resolved erroneously by the Court of
Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of
the failure of respondents Bormaheco, Spouses Cervantes, Constancio
Maglana and petitioner Lim to incorporate, a de facto partnership among
them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their
contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the
petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74
as correctly found by the trial court, with interest from the
filing of the cross-complaints until the amount is fully paid.
Defendant Lim should pay one-half of the said amount to
Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that
defendant Lim had duly received the amount of Pl51,000.00
from defendants Bormaheco and Maglana representing the
latter's participation in the ownership of the subject airplanes
and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum
of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights
of the stockholders in a defectively incorporated association
should be governed by the supposed charter and the laws of
the state relating thereto and not by the rules governing
partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md.
446, 94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy the position of
partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl.
615, Ann. Cas. 1913A 1065). Thus, where persons associate
themselves together under articles to purchase property to
carry on a business, and their organization is so defective as
to come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their rights
as members of the company to the property acquired by the
company will be recognized (Smith v. Schoodoc Pond
Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29
Mich. 369). So, where certain persons associated
themselves as a corporation for the development of land for
irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the
difference in the proportionate value of the land conveyed by
him, and no stock was ever issued in the corporation, it was
treated as a trustee for the associates in an action between
them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal.
 446). However, such a relation does not necessarily exist,
for ordinarily persons cannot be made to assume the relation
of partners, as between themselves, when their purpose is
that no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed.
688), and it should be implied only when necessary to do
justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner
with other subscribers who engage in business under the
name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership
and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted
by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23).
(Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-
suited for his failure to appear during the pretrial despite notification. In his
answer, the petitioner denied having received any amount from respondents
Bormaheco, the Cervanteses and Maglana. The trial court and the appellate
court, however, found through Exhibit 58, that the petitioner received the
amount of P151,000.00 representing the participation of Bormaheco and Atty.
Constancio B. Maglana in the ownership of the subject airplanes and spare
parts. The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This
gives credence to the cross-claims of the respondents to the effect that they
were induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to
Francisco Cervantes and Maglana to expand his airline
business. Lim was to procure two DC-3's from Japan and
secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes his
share of P75,000.00 for delivery to Lim which Cervantes did
and Lim acknowledged receipt thereof. Cervantes, likewise,
delivered his share of the undertaking. Lim in an undertaking
sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement
and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused,
failed and still refuses to set up the corporation or return the
money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer,
counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced
the answering defendants to purchase two airplanes and
spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed
corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary
to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the
alleged chattel mortgage and surety bond agreement in his
personal capacity as the alleged proprietor of the SAL. The
answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when
the herein plaintiff chattel mortgage (sic) allegedly executed
by defendant Lim, thereby forcing them to file an adverse
claim in the form of third party claim. Notwithstanding
repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession
of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate
sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply
with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the supposed losses of the
proposed corporation. The record shows that the petitioner was acting on his
own and not in behalf of his other would-be incorporators in transacting the
sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned
decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. 97816 July 24, 1992
MERRILL LYNCH FUTURES, INC., petitioner,
vs.
HON. COURT OF APPEALS, and the SPOUSES PEDRO M. LARA and
ELISA G. LARA, respondents.
NARVASA, C.J.:
The capacity of a foreign corporation to maintain an action in the Philippines
against residents thereof, is the principal question in the appellate
proceedings at bar. The issue arises from the undisputed facts now to be
briefly narrated.
On November 23, 1987, Merrill Lynch Futures, Inc. (hereafter, simply ML
FUTURES) filed a complaint with the Regional Trial Court at Quezon City
against the Spouses Pedro M. Lara and Elisa G. Lara for the recovery of a
debt and interest thereon, damages, and attorney's fees. 1 In its complaint
ML FUTURES described itself as
a) a non-resident foreign corporation, not doing business in
the Philippines, duly organized and existing under and by
virtue of the laws of the state of Delaware, U.S.A.;" as well
as
b) a "futures commission merchant" duly licensed to act as
such in the futures markets and exchanges in the United
States, . . essentially functioning as a broker . . (executing)
orders to buy and sell futures contracts received from its
customers on U.S. futures exchanges.
It also defined a "futures contract" as a "contractual commitment to buy and
sell a standardized quantity of a particular item at a specified future
settlement date and at a price agreed upon, with the purchase or sale being
executed on a regulated futures exchange."
In its complaint ML FUTURES alleged the following:
1) that on September 28, 1983 it entered into a Futures Customer Agreement
with the defendant spouses (Account No. 138-12161), in virtue of which it
agreed to act as the latter's broker for the purchase and sale of futures
contracts in the U.S.;
2) that pursuant to the contract, orders to buy and sell futures contracts were
transmitted to ML FUTURES by the Lara Spouses "through the facilities of
Merrill Lynch Philippines, Inc., a Philippine corporation and a company
servicing plaintiffs customers; 2
3) that from the outset, the Lara Spouses "knew and were duly advised that
Merrill Lynch Philippines, Inc. was not a broker in futures contracts," and that
it "did not have a license from the Securities and Exchange Commission to
operate as a commodity trading advisor (i.e., 'an entity which, not being a
broker, furnishes advice on commodity futures to persons who trade in
futures contracts');
4) that in line with the above mentioned agreement and through said Merrill
Lynch Philippines, Inc., the Lara Spouses actively traded in futures contracts,
including "stock index futures" for four years or so, i.e., from 1983 to October,
1987, 3 there being more or less regular accounting and corresponding
remittances of money (or crediting or debiting) made between the spouses
and ML FUTURES;
5) that because of a loss amounting to US$160,749.69 incurred in respect of
three (3) transactions involving "index futures," and after setting this off
against an amount of US$75,913.42 then owing by ML FUTURES to the Lara
Spouses, said spouses became indebted to ML FUTURES for the ensuing
balance of US$84,836.27, which the latter asked them to pay;
6) that the Lara Spouses however refused to pay this balance, "alleging that
the transactions were null and void because Merrill Lynch Philippines, Inc.,
the Philippine company servicing accounts of plaintiff, . . had no license to
operate as a 'commodity and/or financial futures broker.'"
On the foregoing essential facts, ML FUTURES prayed (1) for a preliminary
attachment against defendant spouses' properties "up to the value of at least
P2,267,139.50," and (2) for judgment, after trial, sentencing the spouses to
pay ML FUTURES:
a) the Philippine peso equivalent of $84,836.27 at the
applicable exchanged rate on date of payment, with legal
interest from date of demand until full payment;
b) exemplary damages in the sum of at least P500,000.00;
and
c) attorney's fees and expenses of litigation as may be
proven at the trial.
Preliminary attachment issued ex parte on December 2, 1987, and the
defendant spouses were duly served with summons.
They then filed a motion to dismiss dated December 18, 1987 on the grounds
that:
(1) plaintiff ML FUTURES had "no legal capacity to sue" and
(2) its "complaint states no cause of action since . . (it) is not
the real party in interest."
In that motion to dismiss, the defendant spouses averred that:
a) although not licensed to do so, ML FUTURES had been doing business in
the Philippines "at least for the last four (4) years," this being clear from the
very allegations of the complaint; consequently, ML FUTURES is prohibited
by law "to maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines;" and
b) they had never been informed that Merrill Lynch Philippines, Inc. was not
licensed to do business in this country; and contrary to the allegations of the
complaint, all their transactions had actually been with MERRILL LYNCH
PIERCE FENNER & SMITH, INC., and not with ML FUTURES (Merrill Lynch
Futures, Inc.), in proof of which they attached to their motion to dismiss
copies of eight (8) agreements, receipts or reminders, etc., executed on
standard printed forms of said Merrill Lynch Pierce Fenner & Smith Inc. 4
ML FUTURES filed an OPPOSITION to the defendant spouses' motion to
dismiss. In that motion
a) it drew attention to paragraph 4 of its complaint, admitted by defendants,
that the latter "have been actively trading in futures contracts . . . in U.S.
futures exchanges from 1983 to 1987," and ask, "If the trading . . . (was)
made in U.S., how could plaintiff be doing business in the Philippines?"
b) it also drew attention to a printed form of "Merrill Lynch Futures, Inc." filled
out and signed by defendant spouses when they opened an account with ML
Futures, in order to supply information about themselves, including their
bank's name
(1) in which appear the following epigraph:
"Account introduced by Merrill Lynch
International, Inc.," and the following
statements, to wit:
This Commodity Trading Advisor (Merrill Lynch, Pierce,
Fenner & Smith Philippines, Inc.) is prohibited by the
Philippine Securities and Exchange Commission from
accepting funds in the trading advisor's name from a client of
Merrill Lynch Futures, Inc. for trading commodity interests.
All funds in this trading program must be placed with Merrill
Lynch Futures, Inc.;
and
 . . . It is agreed between MERRILL LYNCH, PIERCE,
FENNER & SMITH INC., and other account carrying
MERRILL LYNCH entities and their customers that all legal
relationships between them will be governed by applicable
laws in countries outside the Philippines where sale and
purchase transactions take place.
c) and it argued that
(1) it is not permitted for defendant spouses to present
"evidence" in connection with a motion to dismiss based on
failure of the complaint to state a cause of action;
(2) even if the documents appended to the motion to dismiss
be considered as admissible "evidence," the same would be
immaterial since the documents refer to a different account
number: 138-12136, the defendants' account number with
ML FUTURES being 138-12161;
(3) it is a lie for the defendant spouses to assert that they
were never informed that Merrill Lynch Philippines, Inc. had
not been licensed to do business in the Philippines; and
(4) defendant spouses should not be allowed to "invoke the
aid of the court with unclean hands.
The defendant spouses filed a REPLY reaffirming their lack of awareness
that Merrill Lynch Philippines, Inc. (formerly registered as Merrill Lynch,
Pierce, Fenner & Smith Philippines, Inc.) 5 did not have a license, claiming
that they learned of this only from inquiries with the Securities and Exchange
Commission which elicited the information that it had denied said
corporation's application to operate as a commodity futures trading advisor
a denial subsequently affirmed by the Court of Appeals (Merrill Lynch
Philippines, Inc. v. Securities & Exchange Commission, CA-G.R. No. 10821-
SP, Nov. 19, 1987). The spouses also submitted additional documents
(Annexes J to R) involving transactions with Merrill Lynch Pierce Fenner &
Smith, Inc., dating back to 1980, stressing that all but one of the documents
"refer to Account No. 138-12161 which is the very account that is involved in
the instant complaint."
ML FUTURES filed a Rejoinder alleging it had given the spouses a
disclosure statement by which the latter were made aware that the
transactions they were agreeing on would take place outside of the
Philippines, and that "all funds in the trading program must be placed with
Merrill Lynch Futures, Inc."
On January 12, 1988, the Trial Court promulgated an Order sustaining the
motion to dismiss, directing the dismissal of the case and discharging the writ
of preliminary attachment. It later denied ML FUTURES's motion for
reconsideration, by Order dated February 29, 1988. ML FUTURES appealed
to the Court of Appeals. 6
In its own decision promulgated on November 27, 1990, 7 the Court of
Appeals affirmed the Trial Court's judgment. It declared that the Trial Court
had seen "through the charade in the representation of MLPI and the plaintiff
that MLPI is only a trading advisor and in fact it is a conduit in the plaintiff's
business transactions in the Philippines as a basis for invoking the provisions
of Section 133 of the Corporation Code," 8 viz.:
Sec. 133. Doing business without a license. No foreign
corporation transacting business in the Philippines without a
license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any
court or administrative agency in the Philippines; but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
It also declared that the evidence established that plaintiff had in fact
been "doing business" in this country in legal contemplation,
adverting to Mentholatum v. Mangaliman, 72 Phil. 524, 528-530, and
Section 1 of Republic Act No. 5455 reading as follows: 9
Sec. 1. Definition and scope of this ACT . (1) As used in this
Act, the term "investment" shall mean equity participation in
any enterprise formed, organized, or existing under the laws
of the Philippines; and the phrase "doing business" shall
INCLUDE soliciting orders, purchases, service contracts,
opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors who are
 domiciled in the Philippines or who in any calendar year stay
in the Philippines for a period or periods totalling one
hundred eighty days or more; participating in the
management, supervision or control of any domestic
business firm, entity or corporation in the Philippines; AND
ANY OTHER ACT OR ACTS THAT IMPLY A CONTINUITY
OF COMMERCIAL DEALINGS OR ARRANGEMENTS AND
CONTEMPLATE TO THAT EXTENT THE PERFORMANCE
OF ACTS OR WORKS, OR THE EXERCISE OF SOME
FUNCTIONS NORMALLY INCIDENT TO, AND IN
PROGRESSIVE PROSECUTION OF COMMERCIAL GAIN
OR OF THE PURPOSE AND OBJECT OF THE BUSINESS
ORGANIZATION.
As regards the claim that it was error for the Trial Court to place reliance on
the decision of the Court of Appeals in CA-G.R. No. 10821-SP sustaining
the finding of the Securities & Exchange Commission that ML FUTURES was
doing business in the Philippines since that judgment was not yet final and
ML FUTURES was not a party to that proceeding, the Court of Appeals ruled
that there was no need to belabor the point considering that there was, in any
event, "adequate proof of the activities of MLPI . . . which manifestly show
that the plaintiff (ML FUTURES) performed a series of business acts,
consummated contracts and undertook transactions for the period from 1983
to October 1987," "and because ML FUTURES had done so without license,
it consequently had "no legal personality to bring suit in Philippine courts."
Its motion for reconsideration having been denied, 10 ML FUTURES has
appealed to this Court on certiorari. Here, it submits the following issues for
resolution:
(a) Whether or not the annexes appended by the Laras to
their Motion to Dismiss and Reply filed with the Regional
Trial Court, but never authenticated or offered, constitute
admissible evidence.
(b) Whether or not in the proceedings below, ML FUTURES
has been accorded procedural due process.
(c) Whether or not the annexes, assuming them to be
admissible, established that ML FUTURES was doing
business in the Philippines without a license.
As just stated, the Lara Spouse's motion to dismiss was founded on two (2)
grounds: (a) that the plaintiff has no legal capacity to sue, and (b) that the
complaint states no cause of action (Sec. 1 [d], and [g], Rule 16, Rules of
Court).
As regards the second ground, i.e., that the complaint states no cause of
action, the settled doctrine of course is that said ground must appear on the
face of the complaint, and its existence may be determined only by the
allegations of the complaint, consideration of other facts being proscribed,
and any attempt to prove extraneous circumstances not being allowed. 11 The
test of the sufficiency of the facts alleged in a complaint as constituting a
cause of action is whether or not, admitting the facts alleged, the court might
render a valid judgment upon the same in accordance with the prayer of the
complaint. 12 Indeed, it is error for a judge to conduct a preliminary hearing
and receive evidence on the affirmative defense of failure of the complaint to
state a cause of action. 13
The other ground for dismissal relied upon, i.e., that the plaintiff has no legal
capacity to sue may be understood in two senses: one, that the plaintiff is
prohibited or otherwise incapacitated by law to institute suit in Philippine
Courts, 14 or two, although not otherwise incapacitated in the sense just
stated, that it is not a real party in interest. 15 Now, the Lara Spouses contend
that ML Futures has no capacity to sue them because the transactions
subject of the complaint were had by them, not with the plaintiff ML
FUTURES, but with Merrill Lynch Pierce Fenner & Smith, Inc. Evidence is
quite obviously needed in this situation, for it is not to be expected that said
ground, or any facts from which its existence may be inferred, will be found in
the averments of the complaint. When such a ground is asserted in a motion
to dismiss, the general rule governing evidence on motions applies. The rule
is embodied in Section 7, Rule 133 of the Rules of Court.
Sec. 7. Evidence on motion. When a motion is based on
facts not appearing of record the court may hear the matter
on affidavits or depositions presented by the respective
parties, but the court may direct that the matter be heard
wholly or partly on oral testimony or depositions.
There was, to be sure, no affidavit or deposition attached to the Lara
Spouses' motion to dismiss or thereafter proffered in proof of the averments
of their motion. The motion itself was not verified. What the spouses did do
was to refer in their motion to documents which purported to establish that it
was not with ML FUTURES that they had theretofore been dealing, but
another, distinct entity, Merrill Lynch, Pierce, Fenner & Smith, Inc., copies of
which documents were attached to the motion. It is significant that ML
FUTURES raised no issue relative to the authenticity of the documents thus
annexed to the Laras' motion. In fact, its arguments subsumed the
genuineness thereof and even adverted to one or two of them. Its objection
was centered on the propriety of taking account of those documents as
evidence, considering the established principle that no evidence should be
received in the resolution of a motion to dismiss based on an alleged failure
of the complaint to state a cause of action.
There being otherwise no question respecting the genuineness of the
documents, nor of their relevance to at least one of the grounds for dismissal
i.e., the prohibition on suits in Philippine Courts by foreign corporations
doing business in the country without license it would have been a
superfluity for the Court to require prior proof of their authenticity, and no
error may be ascribed to the Trial Court in taking account of them in the
determination of the motion on the ground, not that the complaint fails to
state a cause of action as regards which evidence is improper and
impermissible but that the plaintiff has no legal capacity to sue
respecting which proof may and should be presented.
Neither may ML FUTURES argue with any degree of tenability that it had
been denied due process in the premises. As just pointed out, it was very
clear from the outset that the claim of lack of its capacity to sue was being
made to rest squarely on the documents annexed thereto, and ML FUTURES
had more than ample opportunity to impugn those documents and require
their authentication, but did not do so. To sustain its theory that there should
have been identification and authentication, and formal offer, of those
documents in the Trial Court pursuant to the rules of evidence would be to
give unwarranted importance to technicality and make it prevail over the
substance of the issue.
The first question then, is, as ML FUTURES formulates it, whether or not the
annexes, assuming them to be admissible, establish that (a) ML FUTURES is
prohibited from suing in Philippine Courts because doing business in the
country without a license, and that (b) it is not a real party in interest since
the Lara Spouses had not been doing business with it, but with another
corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc.
The Court is satisfied that the facts on record adequately establish that ML
FUTURES, operating in the United States, had indeed done business with
the Lara Spouses in the Philippines over several years, had done so at all
times through Merrill Lynch Philippines, Inc. (MLPI), a corporation organized
in this country, and had executed all these transactions without ML
FUTURES being licensed to so transact business here, and without MLPI
being authorized to operate as a commodity futures trading advisor. These
are the factual findings of both the Trial Court and the Court of Appeals.
These, too, are the conclusions of the Securities & Exchange Commission
which denied MLPI's application to operate as a commodity futures trading
advisor, a denial subsequently affirmed by the Court of Appeals. Prescinding
from the proposition that factual findings of the Court of Appeals are
generally conclusive this Court has been cited to no circumstance of
substance to warrant reversal of said Appellate Court's findings or
conclusions in this case.
The Court is satisfied, too, that the Laras did transact business with ML
FUTURES through its agent corporation organized in the Philippines, it being
unnecessary to determine whether this domestic firm was MLPI (Merrill
Lynch Philippines, Inc.) or Merrill Lynch Pierce Fenner & Smith (MLPI's
alleged predecessor). The fact is that ML FUTURES did deal with futures
contracts in exchanges in the United States in behalf and for the account of
the Lara Spouses, and that on several occasions the latter received account
documents and money in connection with those transactions.
Given these facts, if indeed the last transaction executed by ML FUTURES in
the Laras's behalf had resulted in a loss amounting to US $160,749.69; that
in relation to this loss, ML FUTURES had credited the Laras with the amount
of US$75,913.42 which it (ML FUTURES) then admittedly owed the
spouses and thereafter sought to collect the balance, US$84,836.27, but
the Laras had refused to pay (for the reasons already above stated), the
crucial question is whether or not ML FUTURES may sue in Philippine Courts
to establish and enforce its rights against said spouses, in light of the
undeniable fact that it had transacted business in this country without being
licensed to do so. In other words, if it be true that during all the time that they
were transacting with ML FUTURES, the Laras were fully aware of its lack of
license to do business in the Philippines, and in relation to those transactions
had made payments to, and received money from it for several years, the
question is whether or not the Lara Spouses are now estopped to impugn ML
FUTURES' capacity to sue them in the courts of the forum.
The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a contract
with it. 16 And the "doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations;" 17 "one who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity." 18 The principle "will be applied to prevent
a person contracting with a foreign corporation from later taking advantage of
its noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract (Sherwood v. Alvis, 83 Ala 115, 3 So
307, limited and distinguished in Dudley v. Collier, 87 Ala 431, 6 So 304;
Spinney v. Miller, 114 Iowa 210, 86 NW 317), where such person has acted
as agent for the corporation and has violated his fiduciary obligations as
such, and where the statute does not provide that the contract shall be void,
but merely fixes a special penalty for violation of the statute. . . ." 19
The doctrine was adopted by this Court as early as 1924 in Asia Banking
Corporation v. Standard Products Co., 20in which the following
pronouncement was made: 21
The general rule that in the absence of fraud of person who
has contracted or otherwise dealt with an association in such
a way as to recognize and in effect admit its legal existence
as a corporate body is thereby estopped to deny its
corporate existence in any action leading out of or involving
such contract or dealing, unless its existence is attacked for
causes which have arisen since making the contract or other
dealing relied on as an estoppel and this applies to foreign
as well as domestic corporations. (14 C.J .7; Chinese
Chamber of Commerce vs. Pua Te Ching, 14 Phil. 222).
There would seem to be no question that the Laras received benefits
generated by their business relations with ML FUTURES. Those business
relations, according to the Laras themselves, spanned a period of seven (7)
years; and they evidently found those relations to be of such profitability as
warranted their maintaining them for that not insignificant period of time;
otherwise, it is reasonably certain that they would have terminated their
dealings with ML FUTURES much, much earlier. In fact, even as regards
their last transaction, in which the Laras allegedly suffered a loss in the sum
of US$160,749.69, the Laras nonetheless still received some monetary
advantage, for ML FUTURES credited them with the amount of
US$75,913.42 then due to them, thus reducing their debt to US$84,836.27.
Given these facts, and assuming that the Lara Spouses were aware from the
outset that ML FUTURES had no license to do business in this country and
MLPI, no authority to act as broker for it, it would appear quite inequitable for
the Laras to evade payment of an otherwise legitimate indebtedness due and
owing to ML FUTURES upon the plea that it should not have done business
in this country in the first place, or that its agent in this country, MLPI, had no
license either to operate as a "commodity and/or financial futures broker."
Considerations of equity dictate that, at the very least, the issue of whether
the Laras are in truth liable to ML FUTURES and if so in what amount, and
whether they were so far aware of the absence of the requisite licenses on
the part of ML FUTURES and its Philippine correspondent, MLPI, as to be
estopped from alleging that fact as defense to such liability, should be
ventilated and adjudicated on the merits by the proper trial court.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No.
16478 dated November 27, 1990 and its Resolution of March 7, 1991 are
REVERSED and SET ASIDE, and the Regional Trial Court at Quezon City,
Branch 84, is ORDERED to reinstate Civil Case No. Q-52360 and forthwith
conduct a hearing to adjudicate the issues set out in the preceding paragraph
on the merits.
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN,
PHILIPPINE FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour
Services, Inc., through its managing director, wrote a letter to the Philippine
Football Federation (Federation), through its president private respondent
Henri Kahn, wherein the former offered its services as a travel agency to the
latter.[1] The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and
officials of the Federation to the South East Asian Games in Kuala Lumpur
as well as various other trips to the People's Republic of China and
Brisbane. The total cost of the tickets amounted to P449,654.83. For the
tickets received, the Federation made two partial payments, both in
September of 1989, in the total amount of P176,467.50. [2]
On 4 October 1989, petitioner wrote the Federation, through the private
respondent a demand letter requesting for the amount of P265,894.33. [3] On
30 October 1989, the Federation, through the Project Gintong Alay, paid the
amount of P31,603.00.[4]
On 27 December 1989, Henri Kahn issued a personal check in the
amount of P50,000 as partial payment for the outstanding balance of the
Federation.[5] Thereafter, no further payments were made despite repeated
demands.
This prompted petitioner to file a civil case before the Regional Trial
Court of Manila. Petitioner sued Henri Kahn in his personal capacity and as
President of the Federation and impleaded the Federation as an alternative
defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance
for the tickets purchased by the Federation on the ground that Henri Kahn
allegedly guaranteed the said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not denying the
allegation that the Federation owed the amount P207,524.20, representing
the unpaid balance for the plane tickets, he averred that the petitioner has no
cause of action against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he did not
guarantee payment but merely acted as an agent of the Federation which
has a separate and distinct juridical personality.[7]
On the other hand, the Federation failed to file its answer, hence, was
declared in default by the trial court.[8]
In due course, the trial court rendered judgment and ruled in favor of the
petitioner and declared Henri Kahn personally liable for the unpaid obligation
of the Federation. In arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it
been duly established that defendant Federation is a corporation. The
trouble, however, is that neither the plaintiff nor the defendant Henri Kahn
has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant
Philippine Football Federation is a sports association xxx." This has not been
denied by defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically
the assertion of the plaintiff that it is a mere sports association, if it were a
domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no
power to enter into, or to ratify, a contract. The contract entered into by its
officers or agents on behalf of such association is not binding on, or
enforceable against it. The officers or agents are themselves personally
liable.
x x x[9]
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay
the plaintiff the principal sum of P207,524.20, plus the interest thereon at the
legal rate computed from July 5, 1990, the date the complaint was filed, until
the principal obligation is fully liquidated; and another sum of P15,000.00 for
attorney's fees.
The complaint of the plaintiff against the Philippine Football Federation and
the counterclaims of the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.[10]
 Only Henri Kahn elevated the above decision to the Court of
Appeals. On 21 December 1994, the respondent court rendered a decision
reversing the trial court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby
REVERSED and SET ASIDE and another one is rendered dismissing the
complaint against defendant Henri S. Kahn.[11]
In finding for Henri Kahn, the Court of Appeals recognized the juridical
existence of the Federation. It rationalized that since petitioner failed to prove
that Henri Kahn guaranteed the obligation of the Federation, he should not
be held liable for the same as said entity has a separate and distinct
personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer
pleaded that the Federation be held liable for the unpaid obligation. The
same was denied by the appellate court in its resolution of 8 February 1995,
where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly
declaring in the dispositive portion thereof the Philippine Football Federation
(PFF) as liable for the unpaid obligation, it should be remembered that the
trial court dismissed the complaint against the Philippine Football Federation,
and the plaintiff did not appeal from this decision. Hence, the Philippine
Football Federation is not a party to this appeal and consequently, no
judgment may be pronounced by this Court against the PFF without violating
the due process clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the plaintiff's
failure to appeal therefrom. The alternative prayer is therefore similarly
DENIED.[12]
Petitioner now seeks recourse to this Court and alleges that the
respondent court committed the following assigned errors: [13]
A. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A
CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO
REPRESENTED THE PFF AS HAVING A CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT HENRI KAHN
PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH
PETITIONER AND CONTRACTED THE OBLIGATION IN
BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND
ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT
KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE
COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the
existence of the Philippine Football Federation as a juridical person. In the
assailed decision, the appellate court recognized the existence of the
Federation. In support of this, the CA cited Republic Act 3135, otherwise
known as the Revised Charter of the Philippine Amateur Athletic Federation,
and Presidential Decree No. 604 as the laws from which said Federation
derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D.
No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and functions granted to
these associations. Section 14 of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National
Sports' Association shall have the following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and
government;
2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and
personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due
consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports
associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The
National sports associations shall have the following functions, powers, and
duties:
1. Adopt a Constitution and By-Laws for their internal organization and
government which shall be submitted to the Department and any amendment
thereto shall take effect upon approval by the
Department:Provided, however, That no team, school, club, organization, or
entity shall be admitted as a voting member of an association unless 60 per
cent of the athletes composing said team, school, club, organization, or entity
are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose
subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real
and personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the
Olympic and Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due
consultation with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations
clearly indicate that these entities may acquire a juridical personality. The
power to purchase, sell, lease and encumber property are acts which may
only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national
sports associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical
personality, the State must give its consent either in the form of a special law
or a general enabling act. We cannot agree with the view of the appellate
court and the private respondent that the Philippine Football Federation
came into existence upon the passage of these laws. Nowhere can it be
found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football
Federation. These laws merely recognized the existence of national sports
associations and provided the manner by which these entities may acquire
juridical personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A
National Association shall be organized for each individual sports in the
Philippines in the manner hereinafter provided to constitute the Philippine
Amateur Athletic Federation. Applications for recognition as a National
Sports' Association shall be filed with the executive committee together with,
among others, a copy of the constitution and by-laws and a list of the
members of the proposed association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied
that said association will promote the purposes of this Act and particularly
section three thereof. No application shall be held pending for more than
three months after the filing thereof without any action having been taken
thereon by the executive committee. Should the application be rejected, the
reasons for such rejection shall be clearly stated in a written communication
to the applicant. Failure to specify the reasons for the rejection shall not
affect the application which shall be considered as unacted upon: Provided,
however, That until the executive committee herein provided shall have been
formed, applications for recognition shall be passed upon by the duly elected
members of the present executive committee of the Philippine Amateur
Athletic Federation. The said executive committee shall be dissolved upon
the organization of the executive committee herein provided: Provided,
further, That the functioning executive committee is charged with the
responsibility of seeing to it that the National Sports' Associations are formed
and organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or
recognition as a national sports association for each individual sport in the
Philippines shall be filed with the Department together with, among others, a
copy of the Constitution and By-Laws and a list of the members of the
proposed association.
The Department shall give the recognition applied for if it is satisfied that the
national sports association to be organized will promote the objectives of this
Decree and has substantially complied with the rules and regulations of the
Department: Provided, That the Department may withdraw accreditation or
recognition for violation of this Decree and such rules and regulations
formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have exclusive technical control
over the development and promotion of the particular sport for which they are
organized.
Clearly the above cited provisions require that before an entity may be
considered as a national sports association, such entity must be recognized
by the accrediting organization, the Philippine Amateur Athletic Federation
under R.A. 3135, and the Department of Youth and Sports Development
under P.D. 604. This fact of recognition, however, Henri Kahn failed to
substantiate. In attempting to prove the juridical existence of the Federation,
Henri Kahn attached to his motion for reconsideration before the trial court a
copy of the constitution and by-laws of the Philippine Football
Federation. Unfortunately, the same does not prove that said Federation has
indeed been recognized and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and Sports
Development. Accordingly, we rule that the Philippine Football Federation is
not a national sports association within the purview of the aforementioned
laws and does not have corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn should
be held liable for the unpaid obligations of the unincorporated Philippine
Football Federation. It is a settled principal in corporation law that any person
acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for
contract entered into or for other acts performed as such agent. [14] As
president of the Federation, Henri Kahn is presumed to have known about
the corporate existence or non-existence of the Federation. We cannot
subscribe to the position taken by the appellate court that even assuming
that the Federation was defectively incorporated, the petitioner cannot deny
the corporate existence of the Federation because it had contracted and
dealt with the Federation in such a manner as to recognize and in effect
admit its existence.[15] The doctrine of corporation by estoppel is mistakenly
applied by the respondent court to the petitioner. The application of the
doctrine applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant ground of defective
incorporation.[16] In the case at bar, the petitioner is not trying to escape
liability from the contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET
ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil
Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.