G.R. No.

L-42780 January 17, 1936

MANILA GAS CORPORATION, plaintiff-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

DeWitt, Perkins and Ponce Enrile for appellant.

Office of the Solicitor-General Hilado for appellee.

MALCOLM, J.:

This is an action brought by the Manila Gas Corporation against the Collector of Internal Revenue for
the recovery of P56,757.37, which the plaintiff was required by the defendant to deduct and
withhold from the various sums paid it to foreign corporations as dividends and interest on bonds
and other indebtedness and which the plaintiff paid under protest. On the trial court dismissing the
complaint, with costs, the plaintiff appealed assigning as the principal errors alleged to have been
committed the following:

1. The trial court erred in holding that the dividends paid by the plaintiff corporation were subject to
income tax in the hands of its stockholders, because to impose the tax thereon would be to impose a
tax on the plaintiff, in violation of the terms of its franchise, and would, moreover, be oppressive and
inequitable.

2. The trial court erred in not holding that the interest on bonds and other indebtedness of the
plaintiff corporation, paid by it outside of the Philippine Islands to corporations not residing therein,
were not, on the part of the recipients thereof, income from Philippine sources, and hence not
subject to Philippine income tax.

The facts, as stated by the appellant and as accepted by the appellee, may be summarized as follows:
The plaintiff is a corporation organized under the laws of the Philippine Islands. It operates a gas
plant in the City of Manila and furnishes gas service to the people of the metropolis and surrounding
municipalities by virtue of a franchise granted to it by the Philippine Government. Associated with
the plaintiff are the Islands Gas and Electric Company domiciled in New York, United States, and the
General Finance Company domiciled in Zurich, Switzerland. Neither of these last mentioned
corporations is resident in the Philippines.

For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paid by the plaintiff
to the Islands Gas and Electric Company in the capacity of stockholders upon which withholding
income taxes were paid to the defendant totalling P40,460.03 For the same years interest on bonds
in the sum of P411,600 was paid by the plaintiff to the Islands Gas and Electric Company upon which
withholding income taxes were paid to the defendant totalling P12,348. Finally for the stated time
period, interest on other indebtedness in the sum of P131,644,90 was paid by the plaintiff to the
Islands Gas and Electric Company and the General Finance Company respectively upon which
withholding income taxes were paid to the defendant totalling P3,949.34.

Some uncertainty existing regarding the place of payment, we will not go into this factor of the case
at this point, except to remark that the bonds and other tokens of indebtedness are not to be found
in the record. However, Exhibits E, F, and G, certified correct by the Treasurer of the Manila Gas
Corporation, purport to prove that the place of payment was the United States and Switzerland.

The appeal naturally divides into two subjects, one covered by the first assigned error, and the other
by the second assigned error. We shall discuss these subjects and errors in order.

1. Appellant first contends that the dividends paid by it to its stockholders, the Islands Gas and
Electric Company , were not subject to tax because to impose a tax thereon would be to do so on the
plaintiff corporation, in violation of the terms of its franchise and would, moreover, be oppressive
and inequitable. This argument is predicated on the constitutional provision that no law impairing
the obligation of contracts shall be enacted. The particular portion of the franchise which is invoked
provides:
The grantee shall annually on the fifth day of January of each year pay to the City of Manila and the
municipalities in the Province of Rizal in which gas is sold, two and one half per centum of the gross
receipts within said city and municipalities, respectively, during the preceding year. Said payment
shall be in lieu of all taxes, Insular, provincial and municipal, except taxes on the real estate,
buildings, plant, machinery, and other personal property belonging to the grantee.

The trial judge was of the opinion that the instant case was governed by our previous decision in the
case of Philippine Telephone and Telegraph Co., vs. Collector of Internal Revenue ([1933], 58 Phil.
639). In this view we concur. It is true that the tax exemption provision relating to the Manila Gas
Corporation hereinbefore quoted differs in phraseology from the tax exemption provision to be
found in the franchise of the Telephone and Telegraph Company, but the ratio decidendi of the two
cases is substantially the same. As there held and as now confirmed, a corporation has a personality
distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive
dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of
a domestic corporation, which are paid and delivered in cash to foreign corporations as stockholders,
are subject to the payment in the income tax, the exemption clause in the charter of the corporation
notwithstanding.

For the foreign reasons, we are led to sustain the decision of the trial court and to overrule
appellant's first assigned error.

2. In support of its second assignment of error, appellant contends that, as the Islands Gas and
Electric Company and the General Finance Company are domiciled in the United States and
Switzerland respectively, and as the interest on the bonds and other indebtedness earned by said
corporations has been paid in their respective domiciles, this is not income from Philippine sources
within the meaning of the Philippine Income Tax Law. Citing sections 10 (a) and 13 (e) of Act No.
2833, the Income Tax Law, appellant asserts that their applicability has been squarely determined by
decisions of this court in the cases of Manila Railroad Co. vs. Collector of Internal Revenue (No.
31196, promulgated December 2, 1929, nor reported), and Philippine Railway Co. vs. Posadas (No.
38766, promulgated October 30, 1933 [58 Phil., 968]) wherein it was held that interest paid to non-
resident individuals or corporations is not income from Philippine sources, and hence not subject to
the Philippine Income Tax. The Solicitor-General answers with the observation that the cited
decisions interpreted the Income Tax Law before it was amended by Act No. 3761 to cover the
interest on bonds and other obligations or securities paid "within or without the Philippine Islands."
Appellant rebuts this argument by "assuming, for the sake of the argument, that by the amendment
introduced to section 13 of Act No. 2833 by Act No. 3761 the Legislature intended the interest from
Philippine sources and so is subject to tax," but with the necessary sequel that the amendatory
statute is invalid and unconstitutional as being the power of the Legislature to enact.

Taking first under observation that last point, it is to be observed that neither in the pleadings, the
decision of the trial court, nor the assignment of errors, was the question of the validity of Act No.
3761 raised. Under such circumstances, and no jurisdictional issue being involved, we do not feel that
it is the duty of the court to pass on the constitutional question, and accordingly will refrain from
doing so. (Cadwaller-Gibson Lumber Co. vs. Del Rosario [1913], 26 Phil., 192; Macondray and
Co. vs. Benito and Ocampo, P. 137, ante; State vs. Burke [1912], 175 Ala., 561.)

As to the applicability of the local cases cited and of the Porto Rican case of Domenech vs. United
Porto Rican Sugar co. ([1932], 62 F. [2d], 552), we need only observe that these cases announced
good law, but that each he must be decided on its particular facts. In other words, in the opinion of
the majority of the court, the facts at bar and the facts in those cases can be clearly differentiated.
Also, in the case at bar there is some uncertainty concerning the place of payment, which under one
view could be considered the Philippines and under another view the United States and Switzerland,
but which cannot be definitely determined without the necessary documentary evidence before, us.

The approved doctrine is that no state may tax anything not within its jurisdiction without violating
the due process clause of the constitution. The taxing power of a state does not extend beyond its
territorial limits, but within such it may tax persons, property, income, or business. If an interest in
property is taxed, the situs of either the property or interest must be found within the state. If an
income is taxed, the recipient thereof must have a domicile within the state or the property or
business out of which the income issues must be situated within the state so that the income may be
said to have a situs therein. Personal property may be separated from its owner, and he may be
taxed on its account at the place where the property is although it is not the place of his own
domicile and even though he is not a citizen or resident of the state which imposes the tax. But debts
owing by corporations are obligations of the debtors, and only possess value in the hands of the
creditors. (Farmers Loan Co. vs. Minnesota [1930], 280 U.S., 204; Union Refrigerator Transit
Co. vs. Kentucky [1905], 199 U.S., 194 State Tax on Foreign held Bonds [1873, 15 Wall., 300;
Bick vs. Beach [1907], 206 U. S., 392; State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161
Wis., 111; United States Revenue Act of 1932, sec. 143.)

These views concerning situs for taxation purposes apply as well to an organized, unincorporated
territory or to a Commonwealth having the status

G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate
of liquidation of the assets of the corporation reciting, among other things, that by virtue of a
resolution of the stockholders adopted on September 17, 1960, dissolving the corporation, they have
distributed among themselves in proportion to their shareholdings, as liquidating dividends, the
assets of said corporation, including real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied
registration on seven grounds, of which the following were disputed by the stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the disposition of the assets of
the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled
ground No. 7 and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the
three grounds on which the denial of the registration of the certificate of liquidation was predicated
hinges on whether or not that certificate merely involves a distribution of the corporation's assets or
should be considered a transfer or conveyance.

Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a
distribution of the assets of the corporation which has ceased to exist for having been dissolved. This
is apparent in the minutes for dissolution attached to the document. Not being a conveyance the
certificate need not contain a statement of the number of parcel of land involved in the distribution
in the acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed
thereon should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it
correct to require appellants to pay the amount of P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He concurred in

the view expressed by the register of deed to the effect that the certificate of liquidation in question,
though it involves a distribution of the corporation's assets, in the last analysis represents a transfer
of said assets from the corporation to the stockholders. Hence, in substance it is a transfer or
conveyance.

We agree with the opinion of these two officials. A corporation is a juridical person distinct from the
members composing it. Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from its members. While shares of stock constitute personal property
they do not represent property of the corporation. The corporation has property of its own which
consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1,
123 N.W. 743). A share of stock only typifies an aliquot part of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and equity (Hall &
Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of
the capital of the corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession
of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35
Ohio St., 474). The stockholder is not a co-owner or tenant in common of the corporate property
(Halton v. Hohnston, 166 Ala 317, 51 So 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by the
stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a
partition of community property, but rather a transfer or conveyance of the title of its assets to the
individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the
assets of the corporation, is to transfer their title from the corporation to the stockholders in
proportion to their shareholdings, and this is in effect the purpose which they seek to obtain from
the Register of Deeds of Manila, that transfer cannot be effected without the corresponding deed
of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider
the certificate of liquidation as one in the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.

G.R. No. 58168 December 19, 1989

CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-

CORPUZ, assisted be her husband, Dr. Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES
MAGSAYSAY-DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix of the
Estate of the late Genaro F. Magsaysay respondents.

FERNAN, C.J.:

In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of
the Court of Appeals dated July l3, 1981, 1 affirming that of the Court of First Instance of Zambales
and Olongapo City which denied petitioners' motion to intervene in an annulment suit filed by herein
private respondent, and [2] its resolution dated September 7, 1981, denying their motion for
reconsideration.

Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly
denied their motion for intervention.

The facts are not controverted.

On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate
of the late Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo
an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank
(FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she
and her husband acquired, thru conjugal funds, a parcel of land with improvements, known as
"Pequena Island", covered by TCT No. 3258; that after the death of her husband, she discovered [a]
an annotation at the back of TCT No. 3258 that "the land was acquired by her husband from his
separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly
executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and
TCT No. 22431 issued in the name of SUBIC; and [c] the registration of Deed of Mortgage dated April
28, 1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the
foregoing acts were void and done in an attempt to defraud the conjugal partnership considering
that the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not obtained,
the change made by the Register of Deeds of the titleholders was effected without the approval of
the Commissioner of Land Registration and that the late Senator did not execute the purported Deed
of Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation.
She further alleged that the assignment in favor of SUBIC was without consideration and
consequently null and void. She prayed that the Deed of Assignment and the Deed of Mortgage be
annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title
in her favor.

On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on
the ground that on June 20, 1978, their brother conveyed to them one-half (1/2 ) of his
shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around 41 % of the total
outstanding shares of such stocks of SUBIC, they have a substantial and legal interest in the subject
matter of litigation and that they have a legal interest in the success of the suit with respect to SUBIC.

On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no
legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees
of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality
separate and distinct from its stockholders.

On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings
of the lower court. The appellate court further stated that whatever claims the petitioners have
against the late Senator or against SUBIC for that matter can be ventilated in a separate proceeding,
such that with the denial of the motion for intervention, they are not left without any remedy or
judicial relief under existing law.

Petitioners' motion for reconsideration was denied. Hence, the instant recourse.

Petitioners anchor their right to intervene on the purported assignment made by the late Senator of
a certain portion of his shareholdings to them as evidenced by a Deed of Sale dated June 20,
1978. 2 Such transfer, petitioners posit, clothes them with an interest, protected by law, in the matter
of litigation.

Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853
(1927), 3petitioners strongly argue that their ownership of 41.66% of the entire outstanding capital
stock of SUBIC entitles them to a significant vote in the corporate affairs; that they are affected by
the action of the widow of their late brother for it concerns the only tangible asset of the corporation
and that it appears that they are more vitally interested in the outcome of the case than SUBIC.

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below. In the case of Batama Farmers'
Cooperative Marketing Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12
of the Rules of Court, to be permitted to intervene in a pending action, the party must have a legal
interest in the matter in litigation, or in the success of either of the parties or an interest against
both, or he must be so situated as to be adversely affected by a distribution or other disposition of
the property in the custody of the court or an officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b] consideration must be given as to whether the adjudication
of the rights of the original parties may be delayed or prejudiced, or whether the intervenor's rights
may be protected in a separate proceeding or not. Both requirements must concur as the first is not
more important than the second. 5

The interest which entitles a person to intervene in a suit between other parties must be in the
matter in litigation and of such direct and immediate character that the intervenor will either gain or
lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of the
action could be allowed to intervene, proceedings will become unnecessarily complicated, expensive
and interminable. And this is not the policy of the law. 6

The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without
the establishment of which plaintiff could not recover. 7

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,

conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the profits thereof
and in the properties and assets thereof on dissolution, after payment of the corporate debts and
obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property, his
interest in the corporate property being equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the corporation as a distinct legal
person. 8

Petitioners further contend that the availability of other remedies, as declared by the Court of
appeals, is totally immaterial to the availability of the remedy of intervention.

We cannot give credit to such averment. As earlier stated, that the movant's interest may be
protected in a separate proceeding is a factor to be considered in allowing or disallowing a motion
for intervention. It is significant to note at this juncture that as per records, there are four pending
cases involving the parties herein, enumerated as follows: [1] Special Proceedings No. 122122 before
the CFI of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al. v. Subic Land Corp.,
et al.", involving the validity of the transfer by the late Genaro Magsaysay of one-half of his
shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of Zambales, Branch
III, "Adelaida Rodriguez-Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors",
seeking to annul the purported Deed of Assignment in favor of SUBIC and its annotation at the back
of TCT No. 3258 in the name of respondent's deceased husband; [3] SEC Case No. 001770, filed by
respondent praying, among other things that she be declared in her capacity as the surviving spouse
and administratrix of the estate of Genaro Magsaysay as the sole subscriber and stockholder of
SUBIC. There, petitioners, by motion, sought to intervene. Their motion to reconsider the denial of
their motion to intervene was granted; [4] SP No. Q-26739 before the CFI of Rizal, Branch IV,
petitioners herein filing a contingent claim pursuant to Section 5, Rule 86, Revised Rules of
Court. 9 Petitioners' interests are no doubt amply protected in these cases.

Neither do we lend credence to petitioners' argument that they are more interested in the outcome
of the case than the corporation-assignee, owing to the fact that the latter is willing to compromise
with widow-respondent and since a compromise involves the giving of reciprocal concessions, the
only conceivable concession the corporation may give is a total or partial relinquishment of the
corporate assets. 10

Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of
litigation.

The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to
intervene on the strength of the transfer of shares allegedly executed by the late Senator. The
corporation did not keep books and records. 11 Perforce, no transfer was ever recorded, much less
effected as to prejudice third parties. The transfer must be registered in the books of the corporation
to affect third persons. The law on corporations is explicit. Section 63 of the Corporation Code
provides, thus: "No transfer, however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of shares
transferred."

And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred from
intervening inasmuch as their rights can be ventilated and amply protected in another proceeding.

WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.

SO ORDERED.

G.R. No. 151438 July 15, 2005

JARDINE DAVIES, INC., Petitioners,

vs.
JRB REALTY, INC., Respondent.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No.
54201 affirming in toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific
performance; and the Resolution dated January 11, 2002 denying the motion for reconsideration
thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its
parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was
needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the
respondents Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G.
Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders
Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net total selling price of
99,586.00.2 Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to
deliver 30,000 kcal or 120,000 BTUH3 were installed by Aircon. When the units with rotary
compressors were installed, they could not deliver the desired cooling temperature. Despite several
adjustments and corrective measures, the respondent conceded that Fedders Air Conditioning USAs
technology for rotary compressors for big capacity conditioners like those installed at the Blanco
Center had not yet been perfected. The parties thereby agreed to replace the units with
reciprocating/semi-hermetic compressors instead. In a Letter dated March 26, 1981,4 Aircon stated
that it would be replacing the units currently installed with new ones using rotary compressors, at
the earliest possible time. Regrettably, however, it could not specify a date when delivery could be
effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the
units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper
ads,5 that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and
exclusive licensee of Fedders Air Conditioning USA in the Philippines for the manufacture,
distribution, sale, installation and maintenance of Fedders air conditioners. The respondent
requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the
ten-year period of prescription was fast approaching, to expire on March 13, 1990, the respondent
then instituted, on January 29, 1990, an action for specific performance with damages against Aircon
& Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial &
Merchandising Corporation and petitioner Jardine Davies, Inc.6 The latter was impleaded as
defendant, considering that Aircon was a subsidiary of the petitioner. The respondent prayed that
judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense deliver, install and
place in operation two
brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders
USAs technology perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the
second floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not only the sums of 415,118.95
for unsaved electricity from 21st October 1981 to 7th January 1990 and 99,287.77 for repair costs
of the two service units from 7th March 1987 to 11th January 1990, with legal interest thereon from
the filing of this Complaint until fully reimbursed, but also like unsaved electricity costs and like repair
costs therefrom until Prayer No. 1 above shall have been complied with;

3. Ordering defendants to jointly and severally pay plaintiffs 150,000.00 attorneys fees and other
costs of litigation, as well as exemplary damages in an amount not less than or equal to Prayer 2
above; and

4. Granting plaintiff such other and further relief as shall be just and equitable in the premises. 7

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction
over Aircon because the latter ceased operations, as its corporate life ended on December 31,
1986.8 Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in default.9

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders Air
Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation, jointly and severally:

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

2. To reimburse plaintiff the amount of 556,551.55 as and for the unsaved electricity bills from
October 21, 1981 up to April 30, 1995; and another amount of 185,951.67 as and for repair costs;

3. To pay plaintiff 50,000.00 as and for attorneys fees; and

4. Cost of suit.10

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it
liable because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that it had
a personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL
BREACH OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY JARDINES SUBSIDIARY.

II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE
COURT OF APPEALS ERRED IN NOT DECLARING AIRCONS OBLIGATION TO DELIVER THE TWO (2)
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH.

III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE
COURT OF APPEALS ERRED IN NOT DECLARING JRBS CAUSES OF ACTION AS HAVING BEEN BARRED
BY LACHES.

IV.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE
COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY
EXPENSES.

V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEYS FEES.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES.11

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are accorded
high respect, even finality at times. However, considering that the factual findings of the CA and the
RTC were based on speculation and conjectures, unsupported by substantial evidence, the Court
finds that the instant case falls under one of the excepted instances. There is, thus, a need to correct
the error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:

Plaintiffs documentary evidence shows that at the time it contracted with Aircon on March 13, 1980
(Exhibit "D") and on the date the revised agreement was reached on March 26, 1981, Aircon was a
subsidiary of Jardine. The phrase "A subsidiary of Jardine Davies, Inc." was printed on Aircons
letterhead of its March 13, 1980 contract with plaintiff (Exhibit "D-1"), as well as the Aircons
letterhead of Jardines Director and Senior Vice-President A.G. Morrison and Aircons President in his
March 26, 1981 letter to plaintiff (Exhibit "J-2") confirming the revised agreement. Aircons
newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 (Exhibits "E," "F" and
"L") also show that defendant Jardine publicly represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardines
December 31, 1986 and 1985 Financial Statements that "The company acts as general manager of its
subsidiaries" (Exhibit "P"). Jardines Consolidated Balance Sheet as of December 31, 1979 filed with
the SEC listed Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit "P-1"). Also, Aircons
reportorial General Information Sheet as of April 1980 and April 1981 filed with the SEC show that
Jardine was 94.34% owner of Aircon (Exhibits "Q" and "R") and that out of seven members of the
Board of Directors of Aircon, four (4) are also of Jardine.

Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed
Aircon & Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" (TSN, September
22, 1995, p. 12). She also testified that Jardine nominated, elected, and appointed the controlling
majority of the Board of Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to disregard the fiction of
corporate entity and treat defendant Aircon as part of the instrumentality of co-defendant Jardine.12

The respondent court arrived at the same conclusion basing its ruling on the following documents, to
wit:

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);
(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco (Exh. J);

(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);

(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as one of its
subsidiaries (Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);

(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1).13

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

We find merit in the petition.

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

being invested by law with a personality separate and distinct from its stockholders and from other
corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful
purpose, the law will regard it as an association of persons or in case of two corporations, merge
them into one, when this corporate legal entity is used as a cloak for fraud or illegality. 14 This is the
doctrine of piercing the veil of corporate
fiction which applies only when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.15 The rationale behind piercing a corporations identity is to
remove the barrier between the corporation from the persons comprising it to thwart the fraudulent
and illegal schemes of those who use the corporate personality as a shield for undertaking certain
proscribed activities.16

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircons
corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,17 the Court categorically
held that a subsidiary has an independent and separate juridical personality, distinct from that of its
parent company; hence, any claim or suit against the latter does not bind the former, and vice versa.
In applying the doctrine, the following requisites must be established: (1) control, not merely
majority or complete stock control; (2) such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest acts in contravention of plaintiffs legal rights; and (3) the aforesaid control and breach of
duty must proximately cause the injury or unjust loss complained of. 18

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired
Aircons majority of capital stock. It, however, does not exercise complete control over Aircon;
nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no
management agreement exists between the petitioner and Aircon, and the latter is an entirely
different entity from the petitioner.19

Jardine Davies, Inc., incorporated as early as June 28, 1946,20 is primarily a financial and trading
company. Its Articles of Incorporation states among many others that the purposes for which the said
corporation was formed, are as follows:

(a) To carry on the business of merchants, commission merchants, brokers, factors, manufacturers,
and agents;

(b) Upon complying with the requirements of law applicable thereto, to act as agents of companies
and underwriters doing and engaging in any and all kinds of insurance business.21

On the other hand, Aircon, incorporated on December 27, 1952,22 is a manufacturing firm. Its Articles
of Incorporation states that its purpose is mainly -
To carry on the business of manufacturers of commercial and household appliances and accessories
of any form, particularly to manufacture, purchase, sell or deal in air conditioning and refrigeration
products of every class and description as well as accessories and parts thereof, or other kindred
articles; and to erect, or buy, lease, manage, or otherwise acquire manufactories, warehouses, and
depots for manufacturing, assemblage, repair and storing, buying, selling, and dealing in the
aforesaid appliances, accessories and products. 23

The existence of interlocking directors, corporate officers and shareholders, which the respondent
court considered, is not enough justification to pierce the veil of corporate fiction, in the absence of
fraud or other public policy considerations.24 But even when there is dominance over the affairs of
the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is
used to defeat public convenience, justify wrong, protect fraud or defend crime.25 To warrant resort
to this extraordinary remedy, there must be proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice.26 Any piercing of the corporate veil has to be done
with caution.27 The wrongdoing must be clearly and convincingly established. It cannot just be
presumed.28

In the instant case, there is no evidence that Aircon was formed or utilized with the intention of
defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the
acts of Aircon in this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units for the second floor
of the Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the
performance of the air conditioning units did not satisfy the respondent despite several adjustments
and corrective measures. In a Letter29dated October 22, 1980, the respondent even conceded that
Fedders Air Conditioning USA has not yet perhaps perfected its technology of rotary compressors,
and agreed to change the compressors with the semi-hermetic type. Thus, Aircon substituted the
units with serviceable ones which delivered the cooling temperature needed for the law office. After
enjoying ten (10) years of its cooling power, respondent cannot now complain about the
performance of these units, nor can it demand a replacement thereof.

Moreover, it was reversible error to award the respondent the amount of 556,551.55 representing
the alleged 30% unsaved electricity costs and 185,951.67 as maintenance cost without showing any
basis for such award. To justify a grant of actual or compensatory damages, it is necessary to prove
with a reasonable degree of certainty, premised upon competent proof and on the best evidence
obtainable by the injured party, the actual amount of loss.30 The respondent merely based its cause
of action on Aircons alleged representation that Fedders air conditioners with rotary compressors
can save as much as 30% on electricity compared to other brands. Offered in evidence were
newspaper advertisements published on April 12 and 26, 1981. The respondent then recorded its
electricity consumption from October 21, 1981 up to April 3, 1995 and computed 30% thereof, which
amounted to 556,551.55. The Court rules that this amount is highly speculative and merely
hypothetical, and for which the petitioner can not be held accountable.

First. The respondent merely relied on the newspaper advertisements showing the Fedders window-
type air conditioners, which are far different from the big capacity air conditioning units installed at
Blanco Center.

Second. After such print advertisements, the respondent informed Aircon that it was going to install
an electric meter to register its electric consumption so as to determine the electric costs not saved
by the presently installed units with semi-hermetic compressors. Contrary to the allegations of the
respondent that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon
agreed to the respondents proposition. It was a unilateral act on the part of the respondent, which
Aircon did not oblige or commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates representing the respondents
self-serving claim of unsaved electricity cost, which is too speculative and conjectural to merit
consideration. No other proofs, reports or bases of comparison showing that Fedders Air
Conditioning USA could indeed cut down electricity cost by 30% were adduced.

Likewise, there is no basis for the award of 185,951.67 representing maintenance cost. The
respondent merely submitted a schedule31 prepared by the respondents accountant, listing the
alleged repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not also
be given probative weight, considering that there are no proofs of receipts, vouchers, etc., which
would substantiate the amounts paid for such services. Absent any more convincing proof, the Court
finds that the respondents claims are without basis, and cannot, therefore, be awarded.

We sustain the petitioners separateness from that of Aircon in this case. It bears stressing that the
petitioner was never a party to the contract. Privity of contracts take effect only between parties,
their successors-in-interest, heirs and assigns.32 The petitioner, which has a
separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of Appeals,
affirming the decision of the Regional Trial Court is REVERSED and SET ASIDE. The complaint of the
respondent is DISMISSED. Costs against the respondent.

SO ORDERED.

G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,

vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

PANGANIBAN, J.:

May corporate treasurer, by herself and without any authorization from he board of directors, validly
sell a parcel of land owned by the corporation?. May the veil of corporate fiction be pierced on the
mere ground that almost all of the shares of stock of the corporation are owned by said treasurer
and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for Review
on Certiorari before us, assailing the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV
No. 46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati,
Metro Manila, Branch 633 in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the
Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION

ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received from plaintiff-appellant. There is no
pronouncement as to costs. 4

The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. 5

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that
on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee
Motorich Sales Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the
Acropolis Greens Subdivision located in the District of Murphy, Quezon City. Metro Manila,
containing an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909)
2876: that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the
downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid on
or before March 2, 1989; that on March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich Sales Corporation requesting for a
computation of the balance to be paid: that said letter was coursed through defendant-appellee's
broker. Linda Aduca, who wrote the computation of the balance: that on March 2, 1989, plaintiff-
appellant was ready with the amount corresponding to the balance, covered by Metrobank Cashier's
Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiff-
appellant and defendant-appellee Motorich Sales Corporation were supposed to meet in the office of
plaintiff-appellant but defendant-appellee's treasurer, Nenita Lee Gruenberg, did not appear; that
defendant-appellee Motorich Sales Corporation despite repeated demands and in utter disregard of
its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a
necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said
defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary
party in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation: that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales
Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the
subject property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new
title in the name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee
Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to
execute a formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and
nominal damages which may be assessed against defendants-appellees in the sum of Five Hundred
Thousand (500,000.00) Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and
Motorich Sales Corporation's unjustified and unwarranted failure to execute the required Transfer of
Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant, defendants-
appellees should be assessed exemplary damages in the sum of One Hundred Thousand
(P100,000.00) Pesos; that by reason of defendants-appellees' bad faith in refusing to execute a
Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity
to construct a residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and
that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it has been
constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand
(P100,000.00) Pesos plus appearance fee for every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg
interposed as affirmative defense that the President and Chairman of Motorich did not sign the
agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on the
agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature,
that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew
this from the very beginning as it was presented a copy of the Transfer of Rights (Annex B of
amended complaint) at the time the Agreement (Annex B of amended complaint) was signed; that
plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the
P100,000.00 as earnest money; that granting, without admitting, the enforceability of the
agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the stipulated period
(up to March 2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant
that the Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment;
thus they agreed that if the payment be in check, they will meet at a bank designated by plaintiff-
appellant where they will encash the check and sign the Transfer of Rights/Deed. However, plaintiff-
appellant informed Mrs. Gruenberg of the alleged availability of the check, by phone, only after
banking hours.

On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing
plaintiff-appellant's complaint, ruling that:

The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of
absolute sale in accordance with the agreement of February 14, 1989: and if so, whether plaintiff is
entitled to damage.
As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was
indeed authorized by defendant corporation. Motorich Sales, to dispose of that property covered by
T.C.T. No. (362909) 2876. Since the property is clearly owned by the corporation. Motorich Sales,
then its disposition should be governed by the requirement laid down in Sec. 40. of the Corporation
Code of the Philippines, to wit:

Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal
combination and monopolies, a corporation may by a majority vote of its board of directors . . . sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and
assets including its goodwill . . . when authorized by the vote of the stockholders representing at
least two third (2/3) of the outstanding capital stock . . .

No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was
there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff
should have been on the look out under these circumstances. More so, plaintiff himself [owns]
several corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on
corporation matters.

Regarding the question of damages, the Court likewise, does not find substantial evidence to hold
defendant Nenita Lee Gruenberg liable considering that she did not in anyway misrepresent herself
to be authorized by the corporation to sell the property to plaintiff (tsn dated September 27, 1991, p.
8).

In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at
instance for lack of merit.

"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)

For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of
Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del
Pilar. Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG,
hereinafter referred to as the TRANSFEROR;

and

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and
by virtue of the laws of the Philippines, with principal office address at Sumulong Highway, Barrio
Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter referred
to as the TRANSFEREE.

WITNESSETH, That:

WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the
ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a TRANSFER OF
RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the
Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as
follows:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square
meter; subject to the following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be paid upon
the execution of this agreement and shall form part of the total purchase price;

b. Balance shall be payable on or before March 2, 1989;

2. That the monthly amortization for the month of February 1989 shall be for the account of the
Transferor; and that the monthly amortization starting March 21, 1989 shall be for the account of the
Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-described property and that
there [are] no existing liens and/or encumbrances of whatsoever nature;

In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest
money shall be forfeited in favor of the Transferor.

That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at
Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS

TRANSFEROR TRANSFEREE

[SGD.] [SGD.]

By. NENITA LEE GRUENBERG By: ANDRES T. CO

Treasurer President

Signed In the presence of:

[SGD.] [SGD.]

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

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

2. Plaintiff is entitled to damages. 7

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of
the RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refund
P100,000 to petitioner, the amount remitted as "downpayment" or "earnest money." Hence, this
petition before us.8

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case

II. Whether or not the appellate court may consider matters which the parties failed to raise in the
lower court

III. Whether or not there is a valid and enforceable contract between the petitioner and the
respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution
of answer in the transcript of stenographic note[s].

V. Whether or not respondents are liable for damages and attorney's fees 9

The Court synthesized the foregoing and will thus discuss them seriatim as follows:

1. Was there a valid contract of sale between petitioner and Motorich?

2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?

3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of stenographic

notes material to the disposition of this case?

4. Are respondents liable for damages and attorney's fees?

The Court's Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered
through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg.
Petitioner insists that "[w]hen Gruenberg and Co affixed their signatures on the contract they both
consented to be bound by the terms thereof." Ergo, petitioner contends that the contract is binding
on the two corporations. We do not agree.

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot
owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind
Motorich, because it never authorized or ratified such sale.

A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express authorization from the
corporation's board of directors. 10 Section 23 of BP 68, otherwise known as the Corporation Code of
the Philippines, provides;

Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and
qualified.

Indubitably, a corporation may act only through its board of directors or, when authorized either by
its bylaws or by its board resolution, through its officers or agents in the normal course of business.
The general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. 11 Thus, this
Court has held that "a corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has been conferred upon
him, and this includes powers which have been intentionally conferred, and also such powers as, in
the usual course of the particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually pertaining to the particular
officer or agent, and such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred." 12

Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent,
whether the assumed agency be a general or special one bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind
the corporation in a sale of its assets. 14

In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita
Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently, petitioner had the burden
of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in the
transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court
contained no proof of such authority. 16 It has not shown any provision of said respondent's articles
of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power.

That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility
of ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume
that she, by virtue of her position, was authorized to sell the property of the corporation. Selling is
obviously foreign to a corporate treasurer's function, which generally has been described as "to
receive and keep the funds of the corporation, and to disburse them in accordance with the authority
given him by the board or the properly authorized officers." 17

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary
purpose of Motorich is marketing, distribution, export and import in relation to a general
merchandising business. 18Unmistakably, its treasurer is not cloaked with actual or apparent
authority to buy or sell real property, an activity which falls way beyond the scope of her general
authority.

Art. 1874 and 1878 of the Civil Code of the Philippines provides:

Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of
the latter shall be in writing: otherwise, the sale shall be void.

Art. 1878. Special powers of attorney are necessary in the following case:

xxx xxx xxx

(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;

xxx xxx xxx.

Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its
"acceptance of benefits," as evidenced by the receipt issued by Respondent Gruenberg. 19 Petitioner
is clutching at straws.

As a general rule, the acts of corporate officers within the scope of their authority are binding on the
corporation. But when these officers exceed their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is estopped from disclaiming them." 20

In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or
made it appear to any third person that she had the authority, to sell its land or to receive the
earnest money. Neither was there any proof that Motorich ratified, expressly or impliedly, the
contract. Petitioner rests its argument on the receipt which, however, does not prove the fact of
ratification. The document is a hand-written one, not a corporate receipt, and it bears only Nenita
Gruenberg's signature. Certainly, this document alone does not prove that her acts were authorized
or ratified by Motorich.

Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the
obligation which is established." As found by the trial court 21 and affirmed by the Court of
Appeals, 22 there is no evidence that Gruenberg was authorized to enter into the contract of sale, or
that the said contract was ratified by Motorich. This factual finding of the two courts is binding on
this Court. 23 As the consent of the seller was not obtained, no contract to bind the obligor was
perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel
of land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is
void under Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract
cannot be ratified. 24

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the
latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned
all or almost all or 99.866% to be accurate, of the subscribed capital stock" 25 of Motorich, petitioner
argues that Gruenberg needed no authorization from the board to enter into the subject
contract. 26 It adds that, being solely owned by the Spouses Gruenberg, the company can treated as a
close corporation which can be bound by the acts of its principal stockholder who needs no specific
authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly, 27 not having done so during the
trial, but only when it filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court cannot
entertain said issue at this late stage of the proceedings. It is well-settled the points of law, theories
and arguments not brought to the attention of the trial court need not be, and ordinarily will not be,
considered by a reviewing court, as they cannot be raised for the first time on appeal. 29 Allowing
petitioner to change horses in midstream, as it were, is to run roughshod over the basic principles of
fair play, justice and due process.

Second, even if the above mentioned argument were to be addressed at this time, the Court still
finds no reason to uphold it. True, one of the advantages of a corporate form of business
organization is the limitation of an investor's liability to the amount of the investment. 30 This feature
flows from the legal theory that a corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may be used only for legitimate
purposes. 31 On equitable considerations, the veil can be disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as
a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another
corporation. 32

Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a
fraud or an illegal act or as vehicle for the evasion of an existing obligation, the circumvention of
statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of
individuals." 33

We stress that the corporate fiction should be set aside when it becomes a shield against liability for
fraud, illegality or inequity committed on third persons. The question of piercing the veil of corporate
fiction is essentially, then, a matter of proof. In the present case, however, the Court finds no reason
to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said
corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or
illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality
or inequity at the expense of third persons like petitioner.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:

Sec. 96. Definition and Applicability of Title. A close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. . . . .

The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision stating
that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in
favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or
making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent
Motorich is not a close corporation. 35 Motorich does not become one either, just because Spouses
Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere
ownership by a single stockholder or by another corporation of all or capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate personalities." 36 So, too, a
narrow distribution of ownership does not, by itself, make a close corporation.

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court ruled that ".
. . petitioner corporation is classified as a close corporation and, consequently, a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for
the action of its president." 38 But the factual milieu in Dulay is not on all fours with the present case.
In Dulay, the sale of real property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. 39 In the present case, Motorich is not a close
corporation, as previously discussed, and the agreement was entered into by the corporate treasurer
without the knowledge of the board of directors.

The Court is not unaware that there are exceptional cases where "an action by a director, who singly
is the controlling stockholder, may be considered as a binding corporate act and a board action as
nothing more than a mere formality." 40 The present case, however, is not one of them.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of
Respondent Motorich. 41Since Nenita is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo that the corporate veil of Motorich is
to be disregarded, the subject parcel of land would then be treated as conjugal property of Spouses
Gruenberg, because the same was acquired during their marriage. There being no indication that said
spouses, who appear to have been married before the effectivity of the Family Code, have agreed to
a different property regime, their property relations would be governed by conjugal partnership of
gains. 42 As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot
because "[t]here is no co-ownership between the spouses in the properties of the conjugal
partnership of gains. Hence, neither spouse can alienate in favor of another his or interest in the
partnership or in any property belonging to it; neither spouse can ask for a partition of the properties
before the partnership has been legally dissolved." 43

Assuming further, for the sake of argument, that the spouses' property regime is the absolute
community of property, the sale would still be invalid. Under this regime, "alienation of community
property must have the written consent of the other spouse or he authority of the court without
which the disposition or encumbrance is void." 44 Both requirements are manifestly absent in the
instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):

Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?

A Yes, sir. 45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an
initial scribbled above it. 46 This, however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its immovable property. Said excerpt be
understood in the context of her whole testimony. During her cross-examination. Respondent
Gruenberg testified:

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

[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not authorized?

A Yes, sir.

Q You stated on direct examination that you did not represent that you were authorized to sell the
property?

A Yes, sir.

Q But you also did not say that you were not authorized to sell the property, you did not tell that to
Mr. Co, is that correct?

A That was not asked of me.

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the president who
[was] also authorized to sign on behalf of the corporation.

Q You did not say that you were not authorized nor did you say that you were authorized?

A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00
earnest money at that time. That was our first meeting. 47

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property.
On the other hand, her testimony demonstrates that the president of Petitioner Corporation, in his
great desire to buy the property, threw caution to the wind by offering and paying the earnest
money without first verifying Gruenberg's authority to sell the lot.

Fourth Issue:
Damages and Attorney's Fees

Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice
and bad faith, respondents attempted and succeeded in impressing on the trial court and [the] Court
of Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite
the receipt issued by the former specifically indicating that she was signing on behalf of Motorich
Sales Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not
authorize Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was]
concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act." 48 Assuming that
Respondent Motorich was not a party to the alleged fraud, petitioner maintains that Respondent
Gruenberg should be held liable because she "acted fraudulently and in bad faith [in] representing
herself as duly authorized by [R]espondent [C]orporation." 49

As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing
allegations lack factual bases. Hence, an award of damages or attorney's fees cannot be justified. The
amount paid as "earnest money" was not proven to have redounded to the benefit of Respondent
Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich,
because "it was deposited with the account of Aren Commercial c/o Motorich Sales
Corporation." 50 Respondent Gruenberg, however, disputes the allegations of petitioner. She testified
as follows:

Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was
encashed.

A Yes. sir, the check was paid in my name and I deposit[ed] it.

Q In your account?

A Yes, sir. 51
In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push
through." 52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been
the president of Petitioner Corporation for more than ten years and has also served as chief
executive of two other corporate entities. 53 Co cannot feign ignorance of the scope of the authority
of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the
scope of Gruenberg's authorization to enter into a contract to sell a parcel of land belonging to
Motorich.

Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court.
Indubitably, petitioner appears to be the victim of its own officer's negligence in entering into a
contract with and paying an unauthorized officer of another corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return
to petitioner the amount she received as earnest money, as "no one shall enrich himself at the
expense of another." 54 a principle embodied in Article 2154 of Civil Code. 55 Although there was no
binding relation between them, petitioner paid Gruenberg on the mistaken belief that she had the
authority to sell the property of Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by
reason of a mistake in the contruction or application of a difficult question of law may come within
the scope of the preceding article."

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.

SO ORDERED.

G.R. No. 182729 September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch
21, and ROMEO M. MORALES, doing business under the name and style "RM Morales Trophies and
Plaques,"Respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008
Decision1and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. SP No.
100152.

The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the Regional Trial
Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing
business under the name and style RM Morales Trophies and Plaques v. Kukan, Inc. In the said orders,
the RTC disregarded the separate corporate identities of Kukan, Inc. and Kukan International
Corporation and declared them to be one and the same entity. Accordingly, the RTC held Kukan
International Corporation, albeit not impleaded in the underlying complaint of Romeo M. Morales,
liable for the judgment award decreed in a Decision dated November 28, 2002 5 in favor of Morales
and against Kukan, Inc.

The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages
in a building being constructed in Makati City. Morales tendered the winning bid and was awarded
the PhP 5 million contract. Some of the items in the project award were later excluded resulting in
the corresponding reduction of the contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP 1,976,371.07, leaving a balance
of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands. Shortchanged, Morales filed
a Complaint6 with the RTC against Kukan, Inc. for a sum of money, the case docketed as Civil Case No.
99-93173 and eventually raffled to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued.
However, starting November 2000, Kukan, Inc. no longer appeared and participated in the
proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default and paving the
way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc.,
disposing as follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan,
Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR
PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full
payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06)
as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ of
execution8 against Kukan, Inc. The sheriff then levied upon various personal properties found at what
was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati
City. Alleging that it owned the properties thus levied and that it was a different corporation from
Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC
was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case
No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In
it, Morales prayed, applying the principle of piercing the veil of corporate fiction, that an order be
issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties under the name or
in the possession of KIC, it being alleged that both corporations are but one and the same entity. KIC
opposed Morales motion. By Order of May 29, 20039as reiterated in a subsequent order, the court
denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship
between the two, Morales filed a Motion for Examination of Judgment Debtors dated May 4, 2005.
In this motion Morales sought that subponae be issued against the primary stockholders of Kukan,
Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an Order
dated May 24, 2005.10

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually
granted the motion. The case was re-raffled to Branch 21, presided by public respondent Judge Amor
Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to
declare KIC as having no existence separate from Kukan, Inc. This time around, the RTC, by Order
dated March 12, 2007, granted the motion, the dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as
follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same
corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount
awarded to plaintiff pursuant to the decision of November [28], 2002 which has long been final and
executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order dated June 7,
2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC
Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated
March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

SO ORDERED.11

The CA later denied KICs motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Courts
consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioners Constitutional Right to
Due Process was not violated by the public respondent in rendering the Orders dated March 12, 2007
and June 7, 2007 and in declaring petitioner to be liable for the judgment obligations of the
corporation "Kukan, Inc." to private respondent as petitioner is a stranger to the case and was
never made a party in the case before the trial court nor was it ever served a summons and a copy of
the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007
and June 7, 2007 rendered by public respondent declaring the petitioner liable to the judgment
obligations of the corporation "Kukan, Inc." to private respondent are valid as said orders of the
public respondent modify and/or amend the trial courts final and executory decision rendered on
November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007
and June 7, 2007 rendered by public respondent declaring the petitioner [KIC] and the corporation
"Kukan, Inc." as one and the same, and, therefore, the Veil of Corporate Fiction between them be
pierced as the procedure undertaken by public respondent which the [CA] upheld is not sanctioned
by the Rules of Court and/or established jurisprudence enunciated by this Honorable Supreme
Court.12

In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after
the judgment against Kukan, Inc. has attained finality, execute it against the property of KIC; second,
whether the trial court acquired jurisdiction over KIC; and third, whether the trial and appellate
courts correctly applied, under the premises, the principle of piercing the veil of corporate fiction.
 The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after adjudging
Kukan, Inc. liable for a sum of money in a final and executory judgment, execute such judgment debt
against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the
execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all proceedings on
the execution are proceedings in the suit. There is no question that the court which rendered the
judgment has a general supervisory control over its process of execution, and this power carries with
it the right to determine every question of fact and law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said branch has a
general supervisory control over its processes in the execution of its judgment with a right to
determine every question of fact and law which may be involved in the execution."

The courts supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions, among which is
the correction of clerical errors. Else, the court violates the principle of finality of judgment and its
immutability, concepts which the Court, in Tan v. Timbal,15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement of
rights of the parties. Once a decision or order becomes final and executory, it is removed from the
power or jurisdiction of the court which rendered it to further alter or amend it. It thereby becomes
immutable and unalterable and any amendment or alteration which substantially affects a final and
executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for
that purpose. An order of execution which varies the tenor of the judgment or exceeds the terms
thereof is a nullity. (Emphasis supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality
becomes immutable and unalterable. As such, it may no longer be modified in any respect even if
the modification is meant to correct erroneous conclusions of fact or law and whether it will be made
by the court that rendered it or by the highest court of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public policy and
sound practice that, at the risk of occasional error, the judgment of courts and the award of quasi-
judicial agencies must become final on some definite date fixed by law. The only exceptions to the
general rule are the correction of clerical errors, the so-called nunc pro tunc entries which cause no
prejudice to any party, void judgments, and whenever circumstances transpire after the finality of
the decision which render its execution unjust and inequitable. None of the exceptions obtains here
to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the
execution of its final decision in a manner as would amount to its prohibited alteration or
modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan,
Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR
PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full
payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06)
as litigation expenses.

x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of execution,
answerable for the above judgment liability is a clear case of altering a decision, an instance of
granting relief not contemplated in the decision sought to be executed. And the change does not fall
under any of the recognized exceptions to the doctrine of finality and immutability of judgment. It is
a settled rule that a writ of execution must conform to the fallo of the judgment; as an inevitable
corollary, a writ beyond the terms of the judgment is a nullity.17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination
of the other issues raised by KIC would be proper.

Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and its
property, given that it was neither made a party nor impleaded in Civil Case No. 99-93173, let alone
served with summons. In other words, did the trial court acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the
jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier, namely: (a)
the Affidavit of Third-Party Claim;18(b) the Comment and Opposition to Plaintiffs Omnibus
Motion;19 (c) the Motion for Reconsideration of the RTC Order dated March 12, 2007;20 and (d) the
Motion for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of the Rules of Court, stated
that "the procedural rule on service of summons can be waived by voluntary submission to the
courts jurisdiction through any form of appearance by the party or its counsel." 22

We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20, Rule 14 of
the Rules in concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire jurisdiction over
the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand,
jurisdiction over the defendants in a civil case is acquired either through the service of summons
upon them or through their voluntary appearance in court and their submission to its authority.
(Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation,
stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of the defendant either
by the service of summons or by the latters voluntary appearance and submission to the authority of
the former."

The courts jurisdiction over a party-defendant resulting from his voluntary submission to its
authority is provided under Sec. 20, Rule 14 of the Rules, which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in the actions shall be
equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside from
lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.

To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed as
voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd. 25 and De Midgely v.
Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether superseded27 by La
Naval Drug Corporation v. Court of Appeals,28 wherein the Court essentially ruled and elucidated on
the current view in our jurisdiction, to wit: "[A] special appearance before the courtchallenging its
jurisdiction over the person through a motion to dismiss even if the movant invokes other grounds
is not tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over his
person; and such is not constitutive of a voluntary submission to the jurisdiction of the court."29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is
conceded that it raised affirmative defenses through its aforementioned pleadings, KIC never
abandoned its challenge, however implicit, to the RTCs jurisdiction over its person. The challenge
was subsumed in KICs primary assertion that it was not the same entity as Kukan, Inc. Pertinently, in
its Comment and Opposition to Plaintiffs Omnibus Motion dated May 20, 2003, KIC entered its
"special but not voluntary appearance" alleging therein that it was a different entity and has a
separate legal personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all
its pleadings, thus effectively resisting all along the RTCs jurisdiction of its person. It cannot be
overemphasized that KIC could not file before the RTC a motion to dismiss and its attachments in
Civil Case No. 99-93173, precisely because KIC was neither impleaded nor served with summons.
Consequently, KIC could only assert and claim through its affidavits, comments, and motions filed by
special appearance before the RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the
courts lack of jurisdiction over its person. It would defy logic to say that KIC unequivocally submitted
itself to the jurisdiction of the RTC when it strongly asserted that it and Kukan, Inc. are different
entities. In the scheme of things obtaining, KIC had no other option but to insist on its separate
identity and plead for relief consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly applied
the principle of piercing the veil of corporate entitycalled also as disregarding the fiction of a
separate juridical personality of a corporationto support a conclusion that Kukan, Inc. and KIC are
but one and the same corporation with respect to the contract award referred to at the outset. This
principle finds its context on the postulate that a corporation is an artificial being invested with a
personality separate and distinct from those of the stockholders and from other corporations to
which it may be connected or related.31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission,32 the

Court revisited the subject principle of piercing the veil of corporate fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group. Another
formulation of this doctrine is that when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct entities and treat them as
identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when
necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is used
as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The
doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due
process when, in the execution of its November 28, 2002 Decision, the court authorized the issuance
of the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC has never been a party to the
underlying suit. As a counterpoint, Morales argues that KICs specific concern on due process and on
the validity of the writ to execute the RTCs November 28, 2002 Decision would be mooted if it were
established that KIC and Kukan, Inc. are indeed one and the same corporation.

Morales contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is basically
applied only to determine established liability;34 it is not available to confer on the court a jurisdiction
it has not acquired, in the first place, over a party not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be subject to the courts process of piercing the veil of its
corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its property would infringe on its right to
due process. Aguedo Agbayani, a recognized authority on Commercial Law, stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the
trial of the case after the court has already acquired jurisdiction over the corporation. Hence, before
this doctrine can be applied, based on the evidence presented, it is imperative that the court must
first have jurisdiction over the corporation.35 x x x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over
the corporation or corporations involved before its or their separate personalities are disregarded;
and (2) the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial
over a cause of action duly commenced involving parties duly brought under the authority of the
court by way of service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the
time and manner of raising the principle in question, it is undisputed that no full-blown trial involving
KIC was had when the RTC disregarded the corporate veil of KIC. The reason for this actuality is
simple and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that the RTC did not
acquire jurisdiction over it. It was dragged to the case after it reacted to the improper execution of its
properties and veritably hauled to court, not thru the usual process of service of summons, but by
mere motion of a party with whom it has no privity of contract and after the decision in the main
case had already become final and executory. As to the propriety of a plea for the application of the
principle by mere motion, the following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not
available to settle important questions of law, or to dispose of the merits of the case. A motion is
usually a proceeding incidental to an action, but it may be a wholly distinct or independent
proceeding. A motion in this sense is not within this discussion even though the relief demanded is
denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct errors which have
crept in along the line of the principal actions progress. Generally, where there is a procedural defect
in a proceeding and no method under statute or rule of court by which it may be called to the
attention of the court, a motion is an appropriate remedy. In many jurisdictions, the motion has
replaced the common-law pleas testing the sufficiency of the pleadings, and various common-law
writs, such as writ of error coram nobis and audita querela. In some cases, a motion may be one of
several remedies available. For example, in some jurisdictions, a motion to vacate an order is a
remedy alternative to an appeal therefrom.

Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan,
Inc.assuming hypothetically that he can, applying the piercing the corporate veil principle
resolves itself into the question of whether a mere motion is the appropriate vehicle for such
purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC
liable on theory that Kukan, Inc. was out to defraud him through the use of the separate and distinct
personality of another corporation, KIC. In net effect, Morales adverted motion to pierce the veil of
corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for the liability of judgment
debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two corporations. This new cause
of action should be properly ventilated in another complaint and subsequent trial where the doctrine
of piercing the corporate veil can, if appropriate, be applied, based on the evidence adduced.
Establishing the claim of Morales and the corresponding liability of KIC for Kukan Inc.s indebtedness
could hardly be the subject, under the premises, of a mere motion interposed after the principal
action against Kukan, Inc. alone had peremptorily been terminated. After all, a complaint is one
where the plaintiff alleges causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the instant
case.

As a general rule, courts should be wary of lifting the corporate veil between corporations, however
related. Philippine National Bank v. Andrada Electric Engineering Company37 explains why:

A corporation is an artificial being created by operation of law. x x x It has a personality separate and
distinct from the persons composing it, as well as from any other legal entity to which it may be
related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when
it becomes a shield for fraud, illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an erroneous
application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or
to cover up an otherwise blatant violation of the prohibition against forum-shopping. Only in these
and similar instances may the veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully employed to
evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings. To be sure,
the Court has, on numerous occasions,38applied the principle where a corporation is dissolved and its
assets are transferred to another to avoid a financial liability of the first corporation with the result
that the second corporation should be considered a continuation and successor of the first entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations, there was
a confluence of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a financial
liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the second
corporation should be considered as a continuation and successor of the first corporation.

In the instant case, however, the second and third factors are conspicuously absent. There is,
therefore, no compelling justification for disregarding the fiction of corporate entity separating
Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA miserably failed to identify
the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the
following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its stockholder,
director and officers, the law expressly provides for an exception. When Michael Chan, the Managing
Director of defendant Kukan, Inc. (majority stockholder of the newly formed corporation [KIC])
confirmed the award to plaintiff to supply and install interior signages in the Enterprise Center he
(Michael Chan, Managing Director of defendant Kukan, Inc.) knew that there was no sufficient
corporate funds to pay its obligation/account, thus implying bad faith on his part and fraud in
contracting the obligation. Michael Chan neither returned the interior signages nor tendered
payment to the plaintiff. This circumstance may warrant the piercing of the veil of corporation
fiction. Having been guilty of bad faith in the management of corporate matters the corporate
trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the
circumstances of the case. x x x [A]nd the circumstances are: the signature of Michael Chan,
Managing Director of Kukan, Inc. appearing in the confirmation of the award sent to the plaintiff;
signature of Chan Kai Kit, a British National appearing in the Articles of Incorporation and signature of
Michael Chan also a British National appearing in the Articles of Incorporation [of] Kukan
International Corp. give the impression that they are one and the same person, that Michael Chan
and Chan Kai Kit are both majority stockholders of Kukan International Corp. and Kukan, Inc. holding
40% of the stocks; that Kukan International Corp. is practically doing the same kind of business as
that of Kukan, Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of
Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common shares of
both corporations, obviously oblivious that overlapping stock ownership is a common business
phenomenon. It must be remembered, however, that KICs properties were the ones seized upon
levy on execution and not that of Kukan, Inc. or of Michael Chan for that matter. Mere ownership by
a single stockholder or by another corporation of a substantial block of shares of a corporation does
not, standing alone, provide sufficient justification for disregarding the separate corporate
personality.40 For this ground to hold sway in this case, there must be proof that Chan had control or
complete dominion of Kukan and KICs finances, policies, and business practices; he used such
control to commit fraud; and the control was the proximate cause of the financial loss complained of
by Morales. The absence of any of the elements prevents the piercing of the corporate veil. 41 And
indeed, the records do not show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x
worth more than three million pesos although it had only Php5,000.00 paid-up capital; [KIC] was
incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate in the trial; *KICs+
purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan
Kai Kit, holds forty percent of the outstanding stocks, while he formerly held the same amount of
stocks in Kukan Inc. These would lead to the inescapable conclusion that Kukan, Inc. committed
fraudulent representation by awarding to the private respondent the contract with full knowledge
that it was not in a position to comply with the obligation it had assumed because of inadequate
paid-up capital. It bears stressing that shareholders should in good faith put at the risk of the
business, unencumbered capital reasonably adequate for its prospective liabilities. The capital should
not be illusory or trifling compared with the business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a. Chan
Kai Kit has the largest block of shares in both business enterprises. The emergence of the former was
cleverly timed with the hasty withdrawal of the latter during the trial to avoid the financial liability
that was eventually suffered by the latter. The two companies have a related business purpose.
Considering these circumstances, the obvious conclusion is that the creation of Kukan International
Corporation served as a device to evade the obligation incurred by Kukan, Inc. and yet profit from the
goodwill attained by the name "Kukan" by continuing to engage in the same line of business with the
same list of clients.42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the
business activities in which both corporations are engaged as a jumping board to its conclusion that
the creation of KIC "served as a device to evade the obligation incurred by Kukan, Inc." The appellate
court, however, left a gaping hole by failing to demonstrate that Kukan, Inc. and its stockholders
defrauded Morales. In fine, there is no showing that the incorporation, and the separate and distinct
personality, of KIC was used to defeat Morales right to recover from Kukan, Inc. Judging from the
records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales could not,
thus, validly argue that Kukan, Inc. tried to avoid liability or had no property against which to
proceed.

Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001 General
Information Sheet (GIS) with the Securities and Exchange Commission. However, such fact does not
necessarily mean that Kukan, Inc. had altogether ceased operations, as Morales would have this
Court believe, for it is stated on the face of the GIS that it is only upon a failure to file the corporate
GIS for five (5) consecutive years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of
PhP 5,000 is not an indication of the intent on the part of its management to defraud creditors. Paid-
up capital is merely seed money to start a corporation or a business entity. As in this case, it merely
represented the capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP
5,000 is not and should not be taken as a reflection of the firms capacity to meet its recurrent and
long-term obligations. It must be borne in mind that the equity portion cannot be equated to the
viability of a business concern, for the best test is the working capital which consists of the liquid
assets of a given business relating to the nature of the business concern.lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge
of fraud, for it is in compliance with Sec. 13 of the Corporation Code, 43 which only requires a
minimum paid-up capital of PhP 5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as
they are by the same stockholders, stands without factual basis. It is true that Michael Chan, a.k.a.
Chan Kai Kit, owns 40% of the outstanding capital stock of both corporations. But such circumstance,
standing alone, is insufficient to establish identity. There must be at least a substantial identity of
stockholders for both corporations in order to consider this factor to be constitutive of corporate
identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development and
Investment Corporation.45 General Credit Corporation is factually not on all fours with the instant
case. There, the common stockholders of the corporations represented 90% of the outstanding
capital stock of the companies, unlike here where Michael Chan merely represents 40% of the
outstanding capital stock of both KIC and Kukan, Inc., not even a majority of it. In that case,
 moreover, evidence was adduced to support the finding that the funds of the second corporation
came from the first. Finally, there was proof in General Credit Corporation of complete control, such
that one corporation was a mere dummy or alter ego of the other, which is absent in the instant
case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of the
principle of piercing the veil of corporate fiction to the instant case. As shown by the records, the
name Michael Chan, the similarity of business activities engaged in, and incidentally the word
"Kukan" appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As
illustrated, these circumstances are insufficient to establish the identity of KIC as the alter ego or
successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who
seek to pierce the veil must clearly establish that the separate and distinct personalities of the
corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete
and on the assumption that the RTC has validly acquired jurisdiction over the party concerned,
Morales ought to have proved by convincing evidence that Kukan, Inc. was collapsed and thereafter
KIC purposely formed and operated to defraud him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and April 16, 2008
Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE. The levy placed upon the
personal properties of Kukan International Corporation is hereby ordered lifted and the personal
properties ordered returned to Kukan International Corporation. The RTC of Manila, Branch 21 is
hereby directed to execute the RTC Decision dated November 28, 2002 against Kukan, Inc. with
reasonable dispatch.

No costs.

SO ORDERED.

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

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

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the
decision[1] of the Court of Appeals dated February 27, 2003 in CA-G.R. CV No. 61868, which
affirmed in toto the June 19, 1998 decision[2] of Branch 20 of the Regional Trial Court of Manila in
Civil Case No. 96-79554.
The facts are as follows:
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year
physical therapy student of the Manila Central University, was riding a motorcycle along Radial 10
Avenue, near the Veteran Shipyard Gate in the City of Manila. At the same time, petitioner,
Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same
road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn
was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing the
southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck, he bumped
the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco,
which resulted in his instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled
the scene of the collision.[3]
Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond
Odani Secosa, Dassad Warehousing and Port Services, Inc. and Dassads president, El Buenasucenso
Sy. The complaint was docketed as Civil Case No. 96-79554 of the RTC of Manila, Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor of herein
respondents, the dispositive portion of which states:

WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the plaintiffs
ordering the defendants to pay plaintiffs jointly and severally:

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

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

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

4. The sum of P500,000.00 as moral damages;

5. The sum of P50,000.00 as exemplary damages;

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

SO ORDERED.

Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed
decision in toto.[4]
Hence the present petition, based on the following arguments:
I.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
THAT PETITIONER DASSAD DID NOT EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN
THE SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN ACCORDANCE WITH ARTICLE
2180 OF THE NEW CIVIL CODE AND RELATED JURISPRUDENCE ON THE MATTER.

II.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
IN HOLDING PETITIONER EL BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND
SECOSA IN VIOLATION OF THE CORPORATION LAW AND RELATED JURISPRUDENCE ON THE MATTER.

III.

THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS AWARDING
P500,000.00 AS MORAL DAMAGES IS MANIFESTLY ABSURD, MISTAKEN AND UNJUST. [5]

The petition is partly impressed with merit.

On the issue of whether petitioner Dassad Warehousing and Port Services, Inc. exercised the
diligence of a good father of a family in the selection and supervision of its employees, we find the
assailed decision to be in full accord with pertinent provisions of law and established jurisprudence.
Article 2176 of the Civil Code provides:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to
pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:

The obligation imposed by article 2176 is demandable not only for ones own acts or omissions, but
also for those of persons for whom one is responsible x x x.

Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not engaged in any business or
industry x x x.

The responsibility treated of in this article shall cease when the persons herein mentioned prove that
they observed all the diligence of a good father of a family to prevent damage.

Based on the foregoing provisions, when an injury is caused by the negligence of an employee,
there instantly arises a presumption that there was negligence on the part of the employer either in
the selection of his employee or in the supervision over him after such selection. The presumption,
however, may be rebutted by a clear showing on the part of the employer that it exercised the care
and diligence of a good father of a family in the selection and supervision of his employee. Hence, to
evade solidary liability for quasi-delict committed by an employee, the employer must adduce
sufficient proof that it exercised such degree of care.[6]
How does an employer prove that he indeed exercised the diligence of a good father of a family
in the selection and supervision of his employee? The case of Metro Manila Transit Corporation v.
Court of Appeals[7] is instructive:

In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the issue has the
burden of presenting at the trial such amount of evidence required by law to obtain a favorable
judgment[8] . . . In making proof in its or his case, it is paramount that the best and most complete
evidence is formally entered.[9]

Coming now to the case at bar, while there is no rule which requires that testimonial evidence, to
hold sway, must be corroborated by documentary evidence, inasmuch as the witnesses testimonies
dwelt on mere generalities, we cannot consider the same as sufficiently persuasive proof that there
was observance of due diligence in the selection and supervision of employees. Petitioners attempt
to prove its deligentissimi patris familias in the selection and supervision of employees through oral
evidence must fail as it was unable to buttress the same with any other evidence, object or
documentary, which might obviate the apparent biased nature of the testimony.[10]

Our view that the evidence for petitioner MMTC falls short of the required evidentiary quantum as
would convincingly and undoubtedly prove its observance of the diligence of a good father of a
family has its precursor in the underlying rationale pronounced in the earlier case of Central Taxicab
Corp. vs. Ex-Meralco Employees Transportation Co., et al.,[11] set amidst an almost identical factual
setting, where we held that:

The failure of the defendant company to produce in court any record or other documentary proof
tending to establish that it had exercised all the diligence of a good father of a family in the selection
and supervision of its drivers and buses, notwithstanding the calls therefor by both the trial court and
the opposing counsel, argues strongly against its pretensions.

We are fully aware that there is no hard-and-fast rule on the quantum of evidence needed to prove
due observance of all the diligence of a good father of a family as would constitute a valid defense to
the legal presumption of negligence on the part of an employer or master whose employee has by
his negligence, caused damage to another. x x x (R)educing the testimony of Albert to its proper
proportion, we do not have enough trustworthy evidence left to go by. We are of the considered
opinion, therefore, that the believable evidence on the degree of care and diligence that has been
exercised in the selection and supervision of Roberto Leon y Salazar, is not legally sufficient to
overcome the presumption of negligence against the defendant company.

The above-quoted ruling was reiterated in a recent case again involving the Metro Manila Transit
Corporation,[12] thus:
In the selection of prospective employees, employers are required to examine them as to their
qualifications, experience, and service records.[13] On the other hand, with respect to the supervision
of employees, employers should formulate standard operating procedures, monitor their
implementation, and impose disciplinary measures for breaches thereof. To establish these factors in
a trial involving the issue of vicarious liability, employers must submit concrete proof, including
documentary evidence.

In this case, MMTC sought to prove that it exercised the diligence of a good father of a family with
respect to the selection of employees by presenting mainly testimonial evidence on its hiring
procedure. According to MMTC, applicants are required to submit professional driving licenses,
certifications of work experience, and clearances from the National Bureau of Investigation; to
undergo tests of their driving skills, concentration, reflexes, and vision; and, to complete training
programs on traffic rules, vehicle maintenance, and standard operating procedures during
emergency cases.

xxxxxxxxx

Although testimonies were offered that in the case of Pedro Musa all these precautions were
followed, the records of his interview, of the results of his examinations, and of his service were not
presented. . . [T]here is no record that Musa attended such training programs and passed the said
examinations before he was employed. No proof was presented that Musa did not have any record
of traffic violations. Nor were records of daily inspections, allegedly conducted by supervisors, ever
presented. . . The failure of MMTC to present such documentary proof puts in doubt the credibility of
its witnesses.

Jurisprudentially, therefore, the employer must not merely present testimonial evidence to
prove that he observed the diligence of a good father of a family in the selection and supervision of
his employee, but he must also support such testimonial evidence with concrete or documentary
evidence. The reason for this is to obviate the biased nature of the employers testimony or that of his
witnesses.[14]
Applying the foregoing doctrines to the present case, we hold that petitioner Dassad
Warehousing and Port Services, Inc. failed to conclusively prove that it had exercised the requisite
diligence of a good father of a family in the selection and supervision of its employees.
Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port Services, Inc. to
support its position that it had exercised the diligence of a good father of a family in the selection
and supervision of its employees, testified that he was the one who recommended petitioner
Raymundo Secosa as a driver to Dassad Warehousing and Port Services, Inc.; that it was his duty to
scrutinize the capabilities of drivers; and that he believed petitioner to be physically and mentally fit
for he had undergone rigid training and attended the PPA safety seminar.[15]
Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony of its lone
witness with documentary evidence which would have strengthened its claim of due diligence in the
selection and supervision of its employees. Such an omission is fatal to its position, on account of
which, Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo Secosa for the
damages suffered by the heirs of Erwin Francisco.
However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with his co-
petitioners. While it may be true that Sy is the president of petitioner Dassad Warehousing and Port
Services, Inc., such fact is not by itself sufficient to hold him solidarily liable for the liabilities adjudged
against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested by law with a personality
separate from that of its stockholders or members.[16] It has a personality separate and distinct from
those of the persons composing it as well as from that of any other entity to which it may be related.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not in itself sufficient ground for disregarding the separate corporate
personality.[17] A corporations authority to act and its liability for its actions are separate and apart
from the individuals who own it.[18]
The so-called veil of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as
 a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.[19] Also, the corporate entity may be disregarded
in the interest of justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both instances, there must
have been fraud and proof of it. For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established.[20] It cannot be
presumed.[21]
The records of this case are bereft of any evidence tending to show the presence of any grounds
enumerated above that will justify the piercing of the veil of corporate fiction such as to hold the
president of Dassad Warehousing and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad
Warehousing and Port Services, Inc., and not in the name of El Buenasenso Sy.Raymundo Secosa is
an employee of Dassad Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these
things, when taken collectively, point toward El Buenasenso Sys exclusion from liability for damages
arising from the death of Erwin Francisco.
Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc. liable for
negligence for the death of Erwin Francisco on June 27, 1996, we now consider the question of moral
damages which his parents, herein respondents, are entitled to recover. Petitioners assail the award
of moral damages of P500,000.00 for being manifestly absurd, mistaken and unjust. We are not
persuaded.
Under Article 2206, the spouse, legitimate and illegitimate descendants and ascendants of the
deceased may demand moral damages for mental anguish for the death of the deceased. The reason
for the grant of moral damages has been explained in this wise:

. . . the award of moral damages is aimed at a restoration, within the limits possible, of the spiritual
status quo ante; and therefore, it must be proportionate to the suffering inflicted. The intensity of
the pain experienced by the relatives of the victim is proportionate to the intensity of affection for
him and bears no relation whatsoever with the wealth or means of the offender.[22]

In the instant case, the spouses Francisco presented evidence of the searing pain that they felt
when the premature loss of their son was relayed to them. That pain was highly evident in the
testimony of the father who was forever deprived of a son, a son whose untimely death came at that
point when the latter was nearing the culmination of every parents wish to educate their
children. The death of Francis has indeed left a void in the lives of the respondents. Antonio Francisco
testified on the effect of the death of his son, Francis, in this manner:
Q: (Atty. Balanag): What did you do when you learned that your son was killed on June 27, 1996?
A: (ANTONIO FRANCISCO): I boxed the door and pushed the image of St. Nio telling why this
happened to us.
Q: Mr. Witness, how did you feel when you learned of the untimely death of your son, Erwin Suares
(sic)?
A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that my son is dead.
xxxxxxxxx
Q: How did your family react to the death of Erwin Suarez Francisco?
A: All of my family and relatives were felt (sic) sorrow because they knew that my son is (sic) good.
Q: We know that it is impossible to put money terms(s) [on] the life of [a] human, but since you are
now in court and if you were to ask this court how much would you and your family
compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish of my son (sic).[23]
Moral damages are emphatically not intended to enrich a plaintiff at the expense of the
defendant. They are awarded to allow the former to obtain means, diversion or amusements that
will serve to alleviate the moral suffering he has undergone due to the defendants culpable action
and must, perforce, be proportional to the suffering inflicted.[24] We have previously held as proper
an award of P500,000.00 as moral damages to the heirs of a deceased family member who died in a
vehicular accident. In our 2002 decision in Metro Manila Transit Corporation v. Court of Appeals, et
al.,[25] we affirmed the award of moral damages of P500,000.00 to the heirs of the victim, a mother,
who died from injuries she sustained when a bus driven by an employee of the petitioner hit her. In
the case at bar, we likewise affirm the portion of the assailed decision awarding the moral damages.
Since the petitioners did not question the other damages adjudged against them by the court a
quo, we affirm the award of these damages to the respondents.
WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED with the MODIFICATION
that petitioner El Buenasenso Sy is ABSOLVED from any liability adjudged against his co-petitioners in
this case.
Costs against petitioners.
SO ORDERED.

G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,

vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.

KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to
annul and set aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27,
2000, affirming the Order issuing a writ of preliminary injunction of the Regional Trial Court of
Makati, Branch 147 dated June 30, 1999, and its Order dated October 4, 1999, which denied
petitioner's motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine
law. Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General
Merchandise are domestic corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized
and doing business in Hong Kong, extended a letter of credit in favor of the respondents in the
amount of US$300,000.00 secured by real estate mortgages constituted over four (4) parcels of land
in Makati City. This credit facility was later increased successively to US$1,140,000.00 in September
1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997; and decreased
to US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by remitting
those amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to
the terms of the real estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the
respondents of the foreclosure of all the real estate mortgages and that the properties subject
thereof were to be sold at a public auction on May 27, 1999 at the Makati City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ
of preliminary injunction and/or temporary restraining order before the Regional Trial Court of
Makati. The Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary
restraining order. On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial Court of
Makati. The trial judge then set a hearing on June 8, 1999. At the hearing of the application for
preliminary injunction, petitioner was given a period of seven days to file its written opposition to the
application. On June 15, 1999, petitioner filed an opposition to the application for a writ of
preliminary injunction to which the respondents filed a reply. On June 25, 1999, petitioner filed a
motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity
between the petitioner and respondents. On June 30, 1999, the trial court judge issued an Order for
the issuance of a writ of preliminary injunction, which writ was correspondingly issued on July 14,
1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of
preliminary injunction before the Court of Appeals. In the impugned decision, 1 the appellate court
dismissed the petition. Petitioner thus seeks recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO,
CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS
AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS OR
LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS
PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101
SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial
court's Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the
complaint in the instant case.3

In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are
two separate entities, petitioner is still the party-in-interest in the application for preliminary
injunction because it is tasked to commit acts of foreclosing respondents' properties. 4 Respondents
maintain that the entire credit facility is void as it contains stipulations in violation of the principle of
mutuality of contracts.5 In addition, respondents justified the act of the court a quo in applying the
doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter
ego or a business conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of
the contract:

GROUNDS

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE
DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED UPON
MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF
INTEREST SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS
REDUCED BY LAW OR BY THE MONETARY BOARD.7

Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the
foreclosure and eventual sale of the property in order to protect their rights to said property by
reason of void credit facilities as bases for the real estate mortgage over the said property. 8

The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their
complaint, respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full
power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, herein petitioner is an agent with limited authority and
specific duties under a special power of attorney incorporated in the real estate mortgage. It is not
privy to the loan contracts entered into by respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal
and the party to the loan contracts, and the respondents. Yet, despite the recognition that petitioner
is a mere agent, the respondents in their complaint prayed that the petitioner PNB be ordered to re-
compute the rescheduling of the interest to be paid by them in accordance with the terms and
conditions in the documents evidencing the credit facilities, and crediting the amount previously paid
to PNB by herein respondents.9

Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set
forth in the contract. Respondents, therefore, do not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly
owned subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit
against PNB-IFL.10 In justifying its ruling, the trial court, citing the case of Koppel Phil. Inc. vs.
Yatco,11 reasoned that the corporate entity may be disregarded where a corporation is the mere
alter ego, or business conduit of a person or where the corporation is so organized and controlled
and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality distinct and separate from its
individual stockholders or members, and is not affected by the personal rights, obligations and
transactions of the latter.13 The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of
the parent corporation as well as the subsidiary will be confined to those arising in their respective
business. The courts may in the exercise of judicial discretion step in to prevent the abuses of
separate entity privilege and pierce the veil of corporate entity.

We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this
Court disregarded the separate existence of the parent and the subsidiary on the ground that the
latter was formed merely for the purpose of evading the payment of higher taxes. In the case at bar,
respondents fail to show any cogent reason why the separate entities of the PNB and PNB-IFL should
be disregarded.

While there exists no definite test of general application in determining when a subsidiary may be
treated as a mere instrumentality of the parent corporation, some factors have been identified that
will justify the application of the treatment of the doctrine of the piercing of the corporate veil. The
case of Garrett vs. Southern Railway Co.14 is enlightening. The case involved a suit against the
Southern Railway Company. Plaintiff was employed by Lenoir Car Works and alleged that he
sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway
Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works,
hence, the latter corporation was but a mere instrumentality of the former. The Tennessee Supreme
Court stated that as a general rule the stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable for the torts of the subsidiary
unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court
then outlined the circumstances which may be useful in the determination of whether the subsidiary
is but a mere instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue

the infinite variations of fact that can arise but there are certain common circumstances which are
important and which, if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the
capital stock of Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The
complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an
equitable doctrine developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. The doctrine applies when the corporate fiction
is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made
as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.15

In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the
doctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only of finances but
of policy and business practice in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and, unjust act in contravention of
plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to the operation. 17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing
of the indicative factors that the former corporation is a mere instrumentality of the latter are
present. Neither is there a demonstration that any of the evils sought to be prevented by the
doctrine of piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the
corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at
bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal
relationship involved in this case since the petitioner was not sued because it is the parent company
of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in
initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be
considered a suit against the principal. Under the Rules of Court, every action must be prosecuted or
defended in the name of the real party-in-interest, unless otherwise authorized by law or these
Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no final
determination can be had, an action shall be joined either as plaintiffs or defendants." 19 In the case
at bar, the injunction suit is directed only against the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional
remedy but adjunct to the main suit.20 A writ of preliminary injunction is an ancillary or preventive
remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and for
no other purpose during the pendency of the principal action. The dismissal of the principal action
thus results in the denial of the prayer for the issuance of the writ. Further, there is no showing that
respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of Civil
Procedure provides:

SECTION 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be

granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists
in restraining the commission or continuance of the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts complained of during
the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring
or suffering to be done, some act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard compensation. 21 Respondents
do not deny their indebtedness. Their properties are by their own choice encumbered by real estate
mortgages. Upon the non-payment of the loans, which were secured by the mortgages sought to be
foreclosed, the mortgaged properties are properly subject to a foreclosure sale. Moreover,
respondents questioned the alleged void stipulations in the contract only when petitioner initiated
the foreclosure proceedings. Clearly, respondents have failed to prove that they have a right
protected and that the acts against which the writ is to be directed are violative of said right.22 The
Court is not unmindful of the findings of both the trial court and the appellate court that there may
be serious grounds to nullify the provisions of the loan agreement. However, as earlier discussed,
respondents committed the mistake of filing the case against the wrong party, thus, they must suffer
the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the latter is not privy to
the contract the provisions of which respondents seek to declare void. Accordingly, the case before
the Regional Trial Court must be dismissed and the preliminary injunction issued in connection
therewith, must be lifted.

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of
Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of the Regional
Trial Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and
the complaint in said case DISMISSED.

SO ORDERED.

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe; Rodolfo
Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador,
Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut,
Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno
Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just
but the alter ego of a person or of another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the
notion of legal entity should come to naught. The law in these instances will regard the corporation
as a mere association of persons and, in case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct
from the other corporation. The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a "break-open order" to the sheriff
to be enforced against personal property found in the premises of petitioner's sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were
employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices
that their contracts of employment had expired and the project in which they were hired had been
completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private
respondent's employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-
payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate
private respondents and to pay them back wages equivalent to one year or three hundred working
days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and
executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents' back wages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums
from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff
to collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment
award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution
on petitioner through the security guard on duty but the service was refused on the ground that
petitioner no longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias
writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report,
dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila,
claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had
levied upon.4

The said special sheriff recommended that a "break-open order" be issued to enable him to enter
petitioner's premises so that he could proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order,"
alleging that HPPI and petitioner corporation were owned by the same incorporator/stockholders.
They also alleged that petitioner temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer because of the issuance of the break-
open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities Exchange
Commission (SEC) and the General Information Sheet, dated May 25, 1987, submitted by HPPI to the
Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a break-
open order, contending that HPPI is a corporation which is separate and distinct from petitioner.
HPPI also alleged that the two corporations are engaged in two different kinds of businesses, i.e.,
HPPI is a manufacturing firm while petitioner was then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for
break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of
the Labor Arbiter, issued a break-open order and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied
upon. It dismissed the third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated
December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution
of its decision despite a third-party claim on the levied property. Petitioner further contends, that the
doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of
any showing that it created HPPI in order to evade its liability to private respondents. It also contends
that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a business which
is distinct and separate from petitioner's construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the same set of officers and
subscribers.7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. 8 But, this separate
and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice.9 So, when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
laws,10 this separate personality of the corporation may be disregarded or the veil of corporate
fiction pierced.11 This is true likewise when the corporation is merely an adjunct, a business conduit
or an alter ego of another corporation.12

The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify the application of the doctrine
of piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding
the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in
fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a
conduit for its principal. It must be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of
plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to that operation. 14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a
sham or a subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on
April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15,
1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other
hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating
that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casio as the corporate secretary of both
corporations. It would also not be amiss to note that both corporations had the same president,
the same board of directors, the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the
third-party claimant shared the same address and/or premises. Under this circumstances, (sic) it
cannot be said that the property levied upon by the sheriff were not of respondents. 16

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is obviously
a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid
the financial liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the
occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of
June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1,
1957, up to December 7, 1962, when the latter finally ceased to operate, were not disputed by
petitioner. It is very clear that the latter corporation was a continuation and successor of the first
entity . . . . Both predecessors and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of the same business. This
"avoiding-the-liability" scheme is very patent, considering that 90% of the subscribed shares of stock
of the Claparols Steel Corporation (the second corporation) was owned by respondent . . . Claparols
himself, and all the assets of the dissolved Claparols Steel and Nail plant were turned over to the
emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose
veil in the present case could, and should, be pierced as it was deliberately and maliciously designed
to evade its financial obligation to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of
the execution, private respondents had no other recourse but to apply for a break-open order after
the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with
Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing
were complied with. Petitioner and the third-party claimant were given the opportunity to submit
evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion.18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992
and December 3, 1992, are AFFIRMED.

SO ORDERED.

G.R. No. L-47673 October 10, 1946

KOPPEL (PHILIPPINES), INC., plaintiff-appellant,

vs.
ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.

Padilla, Carlos and Fernando for appellant.

Office of the Solicitor General Ozaeta, First Assistant Solicitor General Reyes and.
Office of the Solicitor General Reyes and Solicitor Caizanes for appellee.
HILADO, J.:

This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance of
Manila in civil case No. 51218 of said court dismissing said corporation's complaint for the recovery
of the sum of P64,122.51 which it had paid under protest to the Collector of Internal Revenue on
October 30, 1936, as merchant sales tax. The main facts of the case were stipulated in the court
below as follows:

AGREED STATEMENT OF FACTS

Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the Solicitor General and
undersigned Assistant Attorney of the Bureau of Justice and, with leave of this Honorable Court,
hereby respectfully stipulated and agree to the following facts, to wit:

I. That plaintiff is a corporation duly organized and existing under and by virtue of the laws of the
Philippines, with principal office therein at the City of Manila, the capital stock of which is divided
into thousand (1,000) shares of P100 each. The Koppel Industrial Car and Equipment company, a
corporation organized and existing under the laws of the State of Pennsylvania, United States of
America, and not licensed to do business in the Philippines, owned nine hundred and ninety-five
(995) shares out of the total capital stock of the plaintiff from the year 1928 up to and including the
year 1936, and the remaining five (5) shares only were and are owned one each by officers of the
plaintiff corporation.

II. That plaintiff, at all times material to this case, was and now is duly licensed to engage in business
as a merchant and commercial broker in the Philippines; and was and is the holder of the
corresponding merchant's and commercial broker's privilege tax receipts.

III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in lieu of Mr. Alfredo
L. Yatco.

IV. That during the period from January 1, 1929, up to and including December 31, 1932, plaintiff
transacted business in the Philippines in the following manner, with the exception of the transactions
which are described in paragraphs V and VI of this stipulation:

When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it
asked for price quotations from plaintiff. Atypical form of such request is attached hereto and made
a part hereof as Exhibit A. (Exhibit A represents typical transactions arising from written requests for
quotations, while Exhibits B to G, inclusive, are typical transactions arising from verbal requests for
quotation.) Plaintiff then cabled for the quotation desired for Koppel Industrial Car and Equipment
Company. A sample of the pertinent cable is hereto attached and made a part hereof as Exhibit B.
Koppel Industrial Car and Equipment Company answered by cable quoting its cost price, usually A. C.
I. F. Manila cost price, which was later followed by a letter of confirmation. A sample of the said cable
quotation and of the letter of confirmation are hereto attached and made a part hereof as Exhibits C
and C-1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment Company. Copy of the
plaintiff's letter to purchaser is hereto attached and made a part hereof as Exhibit D. On the basis of
these quotations, orders were placed by the local purchasers, copies of which orders are hereto
attached as Exhibits E and E-1.

A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's order. Sample of said cable is hereto attached as
Exhibit F. The bills of lading were usually made to "order" and indorsed in blank with notation to the
effect that the buyer be notified of the shipment of the goods covered in the bills of lading;
commercial invoices were issued by Koppel Industrial Car and Equipment Company in the names of
the purchasers and certificates of insurance were likewise issued in their names, or in the name of
Koppel Industrial Car and Equipment Company but indorsed in blank and attached to drafts drawn by
Koppel Industrial Car and Equipment Company on the purchasers, which were forwarded through
foreign banks to local banks. Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2
and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed, but said Exhibits I-
1, I-2 and I-3 have no connection with the transaction covered by Exhibits B to G, inclusive. The
purchasers secured the shipping papers by arrangement with the banks, and thereupon received and
cleared the shipments. If the merchandise were of European origin, and if there was not sufficient
time to forward the documents necessary for clearance, through foreign banks to local banks, to the
purchasers, the Koppel Industrial Car and Equipment company did, in many cases, send the
documents directly from Europe to plaintiff with instructions to turn these documents over to the
purchasers. In many cases, where sales was effected on the basis of C. I. F. Manila, duty paid, plaintiff
advanced the sums required for the payment of the duty, and these sums, so advanced, were in
every case reimbursed to plaintiff by Koppel Industrial Car and Equipment Company. The price were
payable by drafts agreed upon in each case and drawn by Koppel Industrial Car and Equipment
Company on respective purchasers through local banks, and payments were made to the banks by
the purchasers on presentation and delivery to them of the above-mentioned shipping documents or
copies thereof. A sample of said drafts is hereto attached as Exhibit G. Plaintiff received by way of
compensation a percentage of the profits realized on the above transactions as fixed in paragraph 6
of the plaintiff's contract with Koppel Industrial Car and Equipment Company, which contract is
hereto attached as Exhibit H, and suffered its corresponding share in the losses resulting from some
of the transactions.

That the total gross sales from January 1, 1929, up to and including December 31, 1932, effected in
the foregoing manner and under the above specified conditions, amount to P3, 596,438.84.

V. That when a local sugar central was interested in the purchase of railway materials, machinery and
supplies, it secured quotations from, and placed the corresponding orders with, the plaintiff in
substantially the same manner as outlined in paragraph IV of this stipulation, with the only difference
that the purchase orders which were agreed to by the central and the plaintiff are similar to the
sample hereto attached and made a part hereof as Exhibit I. Typical samples of the bills of lading
covering the herein transaction are hereto attached and made a part hereto as Exhibits I-1, I-2 and I-
3. The value of the sales carried out in the manner mentioned in this paragraph is P133,964.98.

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, placed an option with
Koppel Industrial Car and Equipment Company, through plaintiff, to purchase within three months a
pair of Atlas-Diesel Marine Engines. Koppel Industrial Car and Equipment Company purchased said
Diesel Engines in Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of
$16,508.32 on the Koppel Industrial Car and Equipment Company, which paid the amount covered by
the draft. Later, Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial Car and
Equipment Company could not ship to or draw on said Mr. Miguel J. Ossorio, it in turn drew another
draft on plaintiff for the same amount at six months sight, with the understanding that Koppel
Industrial Car and Equipment Company would reimburse plaintiff when said engines were disposed
of. Plaintiff honored the draft and debited the said sum of $16,508.32 to merchandise account. The
engines were left stored at Stockholm, Sweden. On April 1, 1930, a new local buyer, Mr. Cesar
Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for $21,000 (P42,000)
C. I. F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000 was drawn by
Koppel Industrial Car and Equipment Company on Mr. Cesar Barrios. After the draft was fully paid by
Mr. Barrios, Koppel Industrial Car and Equipment Company reimbursed plaintiff with cost price of
$16,508.32 and credited it with $1,152.95 as its share of the profit on the transaction. Exhibits J and
J-1 are herewith attached and made integral parts of this stipulation with particular reference to
paragraph VI hereof.

VII. That plaintiff's share in the profits realized out of these transactions described in paragraphs IV, V
and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and that plaintiff within the time
provided by law returned the aforesaid amount P132,201.30 for the purpose of the commercial
broker's 4 per cent tax and paid thereon the sum P5,288.05 as such tax.

VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants' sales tax of
1% per cent on the amount of P3,772,403.82, representing the total gross value of the sales
mentioned in paragraphs IV, V and VI hereof, including the 25 per cent surcharge for the late
payment of the said tax, which tax and surcharge were determined after the amount of P5,288.05
mentioned in paragraph VI hereof was deducted.

IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in order to avoid
further penalties, levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled plaintiff's protest, and defendant has failed and
refused and still fails and refuses, notwithstanding demands by plaintiff, to return to the plaintiff said
sum of P64,122.51 or any part thereof.

xxx xxx xxx

That the parties hereby reserve the right to present additional evidence in support of their respective
contentions.

Manila, Philippines, December 26, 1939

(Sgd.) ROMAN OZAETA

Solicitor General

(Sgd.) ANTONIO CAIZARES

Assistant Attorney

(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification of or addition to their agreed statement of
facts. A preponderance of evidence has established, besides the facts thus stipulated, the following:

(a) The shares of stock of plaintiff corporation were and are all owned by Koppel Industries Car and
Equipment Company of Pennsylvania, U. S. A., exceptive which were necessary to qualify the Board
of Directors of said plaintiff corporation;

(b) In the transactions involved herein the plaintiff corporation acted as the representative of Koppel
Industrial Car and Equipment Company only, and not as the agent of both the latter company and
the respective local purchasers plaintiff's principal witness, A.H. Bishop, its resident Vice-
President, in his testimony invariably referred to Koppel Industrial Car and Equipment Co. as "our
principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of page 10 to the top of page 11,
the witness stated that they had "several principal" abroad but that "our principal abroad was, for
the years in question, Koppel Industrial Car and Equipment Company," and on page 68, he testified
that what he actually said was ". . . but our principal abroad" and not "our principal abroad" as to
which it is very significant that neither this witness nor any other gave the name of even a single
other principal abroad of the plaintiff corporation;

(c) The plaintiff corporation bore alone incidental expenses as, for instance, cable expenses-not
only those of its own cables but also those of its "principal" (t.s.n., pp. 52, 53);

(d) the plaintiff's "share in the profits" realized from the transactions in which it intervened was left
virtually in the hands of Koppel Industrial Car and Equipment Company (t.s.n., p. 51);

(e) Where drafts were not paid by the purchasers, the local banks were instructed not to protest
them but to refer them to plaintiff which was fully empowered by Koppel Industrial Car and
Equipment company to instruct the banks with regards to disposition of the drafts and documents
(t.s.n., p. 50; Exhibit G);lawphil.net

(f) Where the goods were European origin, consular invoices, bill of lading, and, in general, the
documents necessary for clearance were sent directly to plaintiff (t.s.n., p. 14);

(g) If the plaintiff had in stock the merchandise desired by local buyers, it immediately filled the
orders of such local buyers and made delivery in the Philippines without the necessity of cabling its
principal in America either for price quotations or confirmation or rejection of that agreed upon
between it and the buyer (t.s.n., pp. 39-43);

(h) Whenever the deliveries made by Koppel Industrial Car and Equipment Company were
incomplete or insufficient to fill the local buyer's orders, plaintiff used to make good the deficiencies
by deliveries from its own local stock, but in such cases it charged its principal only the actual cost of
the merchandise thus delivered by it from its stock and in such transactions plaintiff did not realize
any profit (t.s.n., pp. 53-54);

(i) The contract of sale involved herein were all perfected in the Philippines.

Those described in paragraph IV of the agreed statement of facts went through the following
process: (1) "When a local buyer was interested in the purchase of railway materials, machinery, and
supplies, it asked for price quotations from plaintiff"; (2) "Plaintiff then cabled for the quotation
desired from Koppel Industrial Car and Equipment Company"; (3) "Plaintiff, however, quoted to the
purchaser a selling price above the figures quoted by Koppel Industrial Car and Equipment
Company"; (4) "On the basis of these quotations, orders were placed by the local purchasers . . ."

Those described in paragraph V of said agreed statement of facts were transacted "in substantially
the same manner as outlined in paragraph IV."

As to the single transaction described in paragraph VI of the same agreed statement of facts,
discarding the Ossorio option which anyway was called off, "On April 1, 1930, a new local buyer, Mr.
Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for
$21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).

(j) Exhibit H contains the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform only the
functions of a broker as set forth above, and shall not take possession of any of the materials or
equipment applying to said orders or perform any acts or duties outside the scope of a broker; and in
no sense shall this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.

The Court of First Instance held for the defendant and dismissed plaintiff's complaint with costs to it.

Upon this appeal, seven errors are assigned to said judgment as follows:.

1. That the court a quo erred in not holding that appellant is a domestic corporation distinct and
separate from, and not a mere branch of Koppel Industrial Car and Equipment Co.;

2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated January 31, 1931,
Exhibit M;

3. the court a quo erred in not holding that a character of a broker is determined by the nature of the
transaction and not by the basis or measure of his compensation;

4. The court a quo erred in not holding that appellant acted as a commercial broker in the
transactions covered under paragraph VI of the agreed statement of facts;

5. The court a quo erred in not holding that appellant acted as a commercial broker in the
transactions covered under paragraph v of the agreed statement of facts;

6. The court a quo erred in not holding that appellant acted as a commercial broker in the sole
transaction covered under paragraph VI of the agreed statement of facts;

7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach ("hechura")
of Koppel industrial Car and Equipment Company. The lower court did not deny legal personality to
Koppel (Philippines), Inc. for any and all purposes, but in effect its conclusion was that, in the
transactions involved herein, the public interest and convenience would be defeated and what would
amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the
corporate fiction."

I. In its first assignment of error appellant submits that the trial court erred in not holding that it is a
domestic corporation distinct and separate from and not a mere branch of Koppel Industrial Car and
Equipment Company. It contends that its corporate existence as Philippine corporation can not be
collaterally attacked and that the Government is estopped from so doing. As stated above, the lower
court did not deny legal personality to appellant for any and all purposes, but held in effect that in
the transaction involved in this case the public interest and convenience would be defeated and what
would amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the
corporate fiction." In other words, in looking through the corporate form to the ultimate person or
corporation behind that form, in the particular transactions which were involved in the case
submitted to its determination and judgment, the court did so in order to prevent the contravention
of the local internal revenue laws, and the perpetration of what would amount to a tax evasion,
inasmuch as it considered and in our opinion, correctly that appellant Koppel (Philippines), Inc.
was a mere branch or agency or dummy ("hechura") of Koppel Industrial Car and Equipment Co. The
court did not hold that the corporate personality of Koppel (Philippines), Inc., would also be
disregarded in other cases or for other purposes. It would have had no power to so hold. The courts'
action in this regard must be confined to the transactions involved in the case at bar "for the purpose
of adjudging the rights and liabilities of the parties in the case. They have no jurisdiction to do more."
(1 Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section 41.)

A leading and much cited case puts it as follows:

If any general rule can be laid down, in the present state of authority, it is that a corporation will be
looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears;
but, when the notion of legal entity is used to defeat public convinience, justify wrong, protect fraud,
or defend crime, the law will regard the corporation as an association of persons. (1 Fletcher
Cyclopedia of Corporation [Permanent Edition], pp. 135, 136; United States vs. Milwaukee
Refrigeration Transit Co., 142 Fed., 247, 255, per Sanborn, J.)

In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or
subsidiary of Koppel Industrial Car and Equipment Co., a Pennsylvania corporation not licensed to do
business in the Philippines but actually doing business here through the plaintiff; that the said foreign
corporation holds 995 of the 1,000 shares of the plaintiff's capital stock, the remaining five shares
being held by the officers of the plaintiff herein in order to permit the incorporation thereof and to
enable its aforesaid officers to act as directors of the plaintiff corporation; and that plaintiff was
organized as a Philippine corporation for the purpose of evading the payment by its parent foreign
corporation of merchants' sales tax on the transactions involved in this case and others of similar
nature."

By most courts the entity is normally regarded but is disregarded to prevent injustice, or the
distortion or hiding of the truth, or to let in a just defense. (1 Fletcher, Cyclopedia of Corporation,
Permanent Edition, pp. 139,140; emphasis supplied.)

Another rule is that, when the corporation is the mere alter ego, or business conduit of a person, it
may de disregarded." (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, p. 136.)

Manifestly, the principle is the same whether the "person" be natural or artificial.

A very numerous and growing class of cases wherein the corporate entity is disregarded is that (it is
so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation)." (1 Fletcher, Cyclopedia of Corporation,
Permanent ed., pp. 154, 155.)

While we recognize the legal principle that a corporation does not lose its entity by the ownership of
the bulk or even the whole of its stock, by another corporation (Monongahela Co. vs. Pittsburg Co.,
196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is equally well settled and ignore corporate
forms." (Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)

Where it appears that two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons, disregard the
legal fiction that two corporations are distinct entities, and treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc., 279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will be disregarded in a case where a corporation
is so organized and controlled and its affairs are so conducted, as to make it merely an
instrumentality or adjunct of another corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed.,
665.)

In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme Court of
the United States disregarded the artificial personality of the subsidiary coal company in order to
avoid that the parent corporation, the Lehigh Valley R. Co., should be able, through the fiction of that
personality, to evade the prohibition of the Hepburn Act against the transportation by railroad
companies of the articles and commodities described therein.

Chief Justice White, speaking for the court, said:

. . . Coming to discharge this duty it follows, in view of the express prohibitions of the commodities
clause, it must be held that while the right of a railroad company as a stockholder to use its stock
ownership for the purpose of a bona fide separate administration of the affairs of a corporation in
which it has a stock interest may not be denied, the use of such stock ownership in substance for the
purpose of destroying the entity of a producing, etc., corporation, and commingling its affairs in
administration with the affairs of the railroad company, so as to make the two corporations virtually
one, brings the railroad company so voluntarily acting as to such producing, etc., corporation within
the prohibitions of the commodities clause. In other words, that by operation and effect of the
commodities clause there is duty cast upon a railroad company proposing to carry in interstate
commerce the product of a producing, etc., corporation in which it has a stock interest, not to abuse
such power so as virtually to do by indirection that which the commodities clause prohibits, a duty
which plainly would be violated by the unnecessary commingling of the affairs of the producing
company with its own, so as to cause them to be one and inseparable.

Corrobarative authorities can be cited in support of the same proposition, which we deem
unnecessary to mention here.

From the facts hereinabove stated, as established by a preponderance of the evidence , particularly
those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed statement of facts,
we find that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and
Koppel Industrial Car and Equipment company are to all intents and purposes one and the same; or,
to use another mode of expression, that, as regards those transactions, the former corporation is a
mere branch, subsidiary or agency of the latter. To our mind, this is conclusively borne out by the
fact, among others, that the amount of he so-called "share in the profits" of Koppel (Philippines), Inc.,
was ultimately left to the sole, unbridled control of Koppel Industrial Car and Equipment Company. If,
in their relations with each other, Koppel (Philippines), Inc., was considered and intended to function
as a bona fide separate corporation, we can not conceive how this arrangement could have been
adopted, for if there was any factor in its business as to which it would in that case naturally have
been opposed to being thus controlled, it must have been precisely the amount of profit which it
could endeavor and hope to earn. No group of businessmen could be expected to organize a
mercantile corporation the ultimate end of which could only be profit if the amount of that
profit were to be subjected to such a unilateral control of another corporation, unless indeed the
former has previously been designed by the incorporators to serve as a mere subsidiary, branch or
agency of the latter. Evidently, Koppel Industrial Car and Equipment Company made us of its
ownership of the overwhelming majority 99.5% of the capital stock of the local corporation to
control the operations of the latter to such an extent that it had the final say even as to how much
should be allotted to said local entity in the so-called sharing in the profits. We can not overlook the
fact that in the practical working of corporate organizations of the class to which these two entities
belong, the holder or holders of the controlling part of the capital stock of the corporation,
particularly where the control is determined by the virtual ownership of the totality of the shares,
dominate not only the selection of the Board of Directors but, more often than not, also the action of
that Board. Applying this to the instant case, we can not conceive how the Philippine corporation
could effectively go against the policies, decisions, and desires of the American corporation with
regards to the scheme which was devised through the instrumentality of the contract Exhibit H, as
well as all the other details of the system which was adopted in order to avoid paying the 1 per cent
merchants sales tax. Neither can we conceive how the Philippine corporation could avoid following
the directions of the American corporation held 99.5 per cent of the capital stock of the Philippine
corporation. In the present instance, we note that Koppel (Philippines), Inc., was represented in the
Philippines by its "resident Vice-President." This fact necessarily leads to the inference that the
corporation had at least a Vice-President, and presumably also a President, who were not resident in
the Philippines but in America, where the parent corporation is domiciled. If Koppel (Philippines),
Inc., had been intended to operate as a regular domestic corporation in the Philippines, where it was
formed, the record and the evidence do not disclose any reason why all its officers should not reside
and perform their functions in the Philippines.

Other facts appearing from the evidence, and presently to be stated, strengthen our conclusion,
because they can only be explained if the local entity is considered as a mere subsidiary, branch or
agency of the parent organization. Plaintiff charged the parent corporation no more than actual cost
without profit whatsoever for merchandise allegedly of its own to complete deficiencies of
shipments made by said parent corporation (t.s.n., pp. 53, 54) a fact which could not conceivably
have been the case if plaintiff had acted in such transactions as an entirely independent entity doing
business for profit, of course with the American concern. There has been no attempt even to
explain, if the latter situation really obtained, why these two corporations should have thus departed
from the ordinary course of business. Plaintiff was charged by the American corporation with the
cost even of the latter's cable quotations from ought that appears from the evidence, this can only
be comprehended by considering plaintiff as such a subsidiary, branch or agency of the parent entity,
in which case it would be perfectly understandable that for convenient accounting purposes and the
easy determination of the profits or losses of the parent corporation's Philippines should be charged
against the Philippine office and set off against its receipts, thus separating the accounts of said
branch from those which the central organization might have in other countries. The reference to
plaintiff by local banks, under a standing instruction of the parent corporation, of unpaid drafts
drawn on Philippine customers by said parent corporation, whenever said customers dishonored the
drafts, and the fact that the American corporation had previously advised said banks that plaintiff in
those cases was "fully empowered to instruct (the banks) with regard to the disposition of the drafts
and documents" (t.s.n., p. 50), in the absence of any other satisfactory explanation naturally give rise
to the inference that plaintiff was a subsidiary, branch or agency of the American concern, rather
than an independent corporation acting as a broker. For, without such positive explanation, this
delegation of power is indicative of the relations between central and branch offices of the same
business enterprise, with the latter acting under instructions already given by the former. Far from
disclosing a real separation between the two entities, particularly in regard to the transactions in
question, the evidence reveals such commongling and interlacing of their activities as to render even
incomprehensible certain accounting operations between them, except upon the basis that the
Philippine corporation was to all intents and purposes a mere subsidiary, branch, or agency of the
American parent entity. Only upon this basis can it be comprehended why it seems not to matter at
all how much profit would be allocated to plaintiff, or even that no profit at all be so allocated to it,
at any given time or after any given period.

As already stated above, under the evidence the sales in the Philippines of the railway materials,
machinery and supplies imported here by Koppel Industrial Car and Equipment Company could have
been as conviniently and efficiently transacted and handled if not more so had said corporation
merely established a branch or agency in the Philippines and obtained license to do business locally;
and if it had done so and said sales had been effected by such branch or agency, there seems to be
no dispute that the 1 per cent merchants' sales tax then in force would have been collectible. So far
as we can discover, there would be only one, but very important, difference between the two
schemes a difference in tax liability on the ground that the sales were made through another and
distinct corporation, as alleged broker, when we have seen that this latter corporation is virtually
owned by the former, or that they practically one and the same, is to sanction a circumvention of our
tax laws, and permit a tax evasion of no mean proportions and the consequent commission of a
grave injustice to the Government. Not only this; it would allow the taxpayer to do by
indirection what the tax laws prohibited to be done directly (non-payment of legitimate taxes),
paraphrasing the United States Supreme Court in United States vs. Lehigh Valley R. Co., supra.

The act of one corporation crediting or debiting the other for certain items, expenses or even
merchandise sold or disposed of, is perfectly compatible with the idea of the domestic entity being or
acting as a mere branch, agency or subsidiary of the parent organization. Such operations were called
for any way by the exigencies or convenience of the entire business. Indeed, accounting operation
such as these are invitable, and have to be effected in the ordinary course of business enterprise
extends its trade to another land through a branch office, or through another scheme amounting to
the same thing.

If plaintiff were to act as broker in the Philippines for any other corporation, entity or person, distinct
from Koppel Industrial Car and Equipment company, an entirely different question will arise, which,
however, we are not called upon, nor in a position, to decide.

As stated above, Exhibit H contains to the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform only the
functions of a broker as set forth above, and shall not take possession of any of the materials or
equipment applying to said orders or perform any acts or duties outside the scope of a broker; and in
no sense shall this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.

The foregoing paragraph, construed in the light of other facts noted elsewhere in this decision,
betrays, we think a deliberate intent, through the medium of a scheme devised with great care, to
avoid the payment of precisely the 1 per cent merchants' sales tax in force in the Philippines
before, at the time of, and after, the making of the said contract Exhibit H. If this were to be allowed,
the payment of a tax, which directly could not have been avoided, could be evaded by indirection,
consideration being had of the aforementioned peculiar relations between the said American and
local corporations. Such evasion, involving as it would, a violation of the former Internal Revenue
Law, would even fall within the penal sanction of section 2741 of the Revised Administrative Code.
Which only goes to show the illegality of the whole scheme. We are not here concerned with the
impossibility of collecting the merchants' sales tax, as a mere incidental consequence of transactions
legal in themselves and innocent in their purpose. We are dealing with a scheme the primary, not to
say the sole, object of which the evasion of the payment of such tax. It is this aim of the scheme that
makes it illegal.

We have said above that the contracts of sale involved herein were all perfected in the Philippines.
From the facts stipulated in paragraph IV of the agreed statement of facts, it clearly appears that the
Philippine purchasers had to wait for Koppel Industrial Car and Equipment Company to communicate
its cost prices to Koppel (Philippines), Inc., were perfected in the Philippines. In those cases where no
such price quotations from the American corporation were needed, of course, the sales effected in
those cases described in paragraph V of the agreed statement of facts were, as expressed therein,
transacted "in substantially the same manner as outlined in paragraph VI." Even the single
transaction described in paragraph VI of the agreed statement of facts was also perfected in the
Philippines, because the contracting parties were here and the consent of each was given here. While
it is true that when the contract was thus perfected in the Philippines the pair of Atlas-Diesel Marine
Engines were in Sweden and the agreement was to deliver them C.I.F. Hongkong, the contract of sale
being consensual perfected by mere consent (Civil Code, article 1445; 10 Manresa, 4th ed., p.
11), the location of the property and the place of delivery did not matter in the question of where
the agreement was perfected.

In said paragraph VI, we read the following, as indicating where the contract was perfected,
considering beforehand that one party, Koppel (Philippines),Inc., which in contemplation of law, as to
that transaction, was the same Koppel Industrial Car Equipment Co., was in the Philippines:

. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was found and the
same engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)

Under the revenue law in force when the sales in question took place, the merchants' sales tax
attached upon the happening of the respective sales of the "commodities, goods, wares, and
merchandise" involved, and we are clearly of opinion that such "sales" took place upon the
perfection of the corresponding contracts. If such perfection took place in the Philippines, the
merchants' sales tax then in force here attached to the transactions.

Even if we should consider that the Philippine buyers in the cases covered by paragraph IV and V of
the agreed statement of facts, contracted with Koppel Industrial Car and Equipment company, we
will arrive at the same final result. It can not be denied in that case that said American corporation
 contracted through Koppel (Philippines), Inc., which was in the Philippines. The real transaction in
each case of sale, in final effect, began with an offer of sale from the seller, said American
corporation, through its agent, the local corporation, of the railway materials, machinery, and
supplies at the prices quoted, and perfected or completed by the acceptance of that offer by the
local buyers when the latter, accepting those prices, placed their orders. The offer could not correctly
be said to have been made by the local buyers when they asked for price quotations, for they could
not rationally be taken to have bound themselves to buy before knowing the prices. And even if we
should take into consideration the fact that the american corporation contracted, at least partly,
through correspondence, according to article 54 of the Code of Commerce, the respective contracts
were completed from the time of the acceptance by the local buyers, which happened in the
Philippines.

Contracts executed through correspondence shall be completed from the time an answer is
made accepting the proposition or the conditions by which the latter may be modified." (Code of
Commerce, article 54; emphasis supplied.)

A contract is as a rule considered as entered into at the place where the place it is performed. So
where delivery is regarded as made at the place of delivery." (13 C. J., 580-81, section 581.)

(In the consensual contract of sale delivery is not needed for its perfection.)

II. Appellant's second assignment of error can be summarily disposed of. It is clear that the ruling of
the Secretary of Finance, Exhibit M, was not binding upon the trial court, much less upon this
tribunal, since the duty and power of interpreting the laws is primarily a function of the judiciary.
(Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by this
legal principle, nor can it properly be heard to say that it relied on the Secretary's ruling and that,
therefore, the courts should not now apply an interpretation at variance therewith. The rule of stare
decisis is undoubtedly entitled to more respect in the construction of statutes than the
interpretations given by officers of the administrative branches of the government, even those
entrusted with the administration of particular laws. But this court, in Philippine Trust Company and
Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:

. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in the business field,
is desirable. But idolatrous reverence for precedent, simply as precedent, no longer rules. More
important than anything else is that court should be right. . . .

III. In the view we take of the case, and after the disposition made above of the first assignment of
error, it becomes unnecessary to make any specific ruling on the third, fourth, fifth, sixth, and
seventh assignments of error, all of which are necessarily disposed of adversely to appellant's
contention.

Wherefore, he judgment appealed from is affirmed, with costs of both instances against appellant.
So ordered.

[G.R. No. 127181. September 4, 2001]

LAND BANK OF THE PHILIPPINES, petitioner, vs. THE COURT OF APPEALS, ECO MANAGEMENT
CORPORATION and EMMANUEL C. OATE, respondents.

DECISION
QUISUMBING, J.:
 This petition for review on certiorari seeks to reverse and set aside the decision[1] promulgated
on June 17, 1996 in CA-GR No. CV-43239 of public respondent and its resolution[2] dated November
29, 1996 denying petitioners motion for reconsideration.[3]
The facts of this case as found by the Court of Appeals and which we find supported by the
records are as follows:

On various dates in September, October, and November, 1980, appellant Land Bank of the
Philippines (LBP) extended a series of credit accommodations to appellee ECO, using the trust funds
of the Philippine Virginia Tobacco Administration (PVTA) in the aggregate amount of
P26,109,000.00. The proceeds of the credit accommodations were received on behalf of ECO by
appellee Oate.

On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written demands
were made, but ECO was unable to pay. ECO claims that the company was in financial difficulty for it
was unable to collect its investments with companies which were affected by the financial crisis
brought about by the Dewey Dee scandal.

xxx

On October 20, 1981, ECO proposed and submitted to LBP a Plan of Payment whereby the former
would set up a financing company which would absorb the loan obligations. It was proposed that LBP
would participate in the scheme through the conversion of P9,000,000.00 which was part of the total
loan, into equity.

On March 4, 1982, LBP informed ECO of the action taken by the formers Trust Committee concerning
the Plan of Payment which reads in part, as follows:

xxx

Please be informed that the Banks Trust Committee has deliberated on the plan of payment during
its meetings on November 6, 1981 and February 23, 1982. The Committee arrived at a decision that
you may proceed with your Plan of Payment provided Land Bank shall not participate in the
undertaking in any manner whatsoever.

In view thereof, may we advise you to make necessary revision in the proposed Plan of Payment and
submit the same to us as soon as possible. (Records, p. 428)

On May 5, 1982, ECO submitted to LBP a Revised Plan of Payment deleting the latters participation in
the proposed financing company. The Trust Committee deliberated on the Revised Plan of Payment
and resolved to reject it. LBP then sent a letter to the PVTA for the latters comments. The letter
stated that if LBP did not hear from PVTA within five (5) days from the latters receipt of the letter,
such silence would be construed to be an approval of LBPs intention to file suit against ECO and its
corporate officers. PVTA did not respond to the letter.

On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and
Emmanuel C. Oate before the Regional Trial Court of Manila, Branch 50.

After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oate was
absolved from personal liability for insufficiency of evidence.

Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that there
was an error in computation in the amounts to be paid. LBP also questioned the dismissal of the case
with regard to Oate.

On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order of
the court, both parties submitted Supplemental Motions for Reconsideration and their respective
Oppositions to each others Motions.

On February 3, 1993, the trial court rendered an Amended Decision, the dispositive portion of which
reads as follows:
ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified to read as follows:

WHEREFORE, judgment is rendered ordering defendant Eco Management Corporation to pay

plaintiff Land Bank of the Philippines:

A. The sum of P26,109,000.00 representing the total amount of the ten (10) loan accommodations
plus 16% interest per annum computed from the dates of their respective maturities until fully paid,
broken down as follows:

1. the principal amount of P4,000,000.00 with interest at 16% computed from September 18, 1981;

2. the principal amount of P5,000,000.00 with interest at 16% computed from September 21, 1981;

3. the principal amount of P1,000,000.00 with interest rate at 16% computed from September 28,
1981;

4. the principal amount of P1,000,000.00 with interest at 15% computed from October 5, 1981;

5. the principal amount of P2,000,000.00 with interest rate at of 16% computed from October 8,
1981;

6. the principal amount of P2,000,000.00 with interest rate at of 16% from October 23, 1981;

7. the principal amount of P814,000.00 with interest rate at of 16% computed from November 1,
1981;

8. the principal amount of P2,295,000.00 with interest rate at of 16% computed from November 6,
1981;

9. the principal amount of P3,000,000.00 with interest rate at of 16% computed from November 7,
1981;

10. the principal amount of P5,000,000.00 with interest rate at 16% computed from November 9,
1981;

B. The sum of P260,000.00 as attorneys fees; and

C. The costs of the suit.

The case as against defendant Emmanuel Oate is dismissed for insufficiency of evidence.

SO ORDERED. (Records, p. 608)[4]

The Court of Appeals affirmed in toto the amended decision of the trial court.[5]
On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a resolution
dated November 29, 1996. Hence, this present petition, assigning the following errors allegedly
committed by the Court of Appeals:
A

THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON THE FACTS AS
ESTABLISHED BY EVIDENCE, THERE EXISTS A SUBSTANTIAL AND JUSTIFIABLE GROUND UPON WHICH
THE LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT ECO MANAGEMENT
CORPORATION MAY BE PIERCED.

THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY TO RESPONDENT

EMMANUEL C. OATE JOINTLY AND SEVERALLY WITH RESPONDENT ECO MANAGEMENT
CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST THEREON.
 C

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF THE LOWER COURT THE
SAME NOT BEING SUPPORTED BY THE EVIDENCE AND APPLICABLE LAWS AND JURISPRUDENCE.[6]

The primary issues for resolution here are (1) whether or not the corporate veil of ECO
Management Corporation should be pierced; and (2) whether or not Emmanuel C. Oate should be
held jointly and severally liable with ECO Management Corporation for the loans incurred from Land
Bank.
Petitioner contends that the personalities of Emmanuel Oate and of ECO Management
Corporation should be treated as one, for the particular purpose of holding respondent Oate liable
for the loans incurred by corporate respondent ECO from Land Bank. According to petitioner, the
said corporation was formed ostensibly to allow Oate to acquire loans from Land Bank which he used
for his personal advantage.
Petitioner submits the following arguments to support its stand: (1) Respondent Oate owns the
majority of the interest holdings in respondent corporation, specifically during the crucial time when
appellees applied for and obtained the loan from LANDBANK, sometime in September to November,
1980. (2) The acronym ECO stands for the initials of Emmanuel C. Oate, which is the logical, sensible
and concrete explanation for the name ECO, in the absence of evidence to the contrary. (3)
Respondent Oate has always referred to himself as the debtor, not merely as an officer or a
representative of respondent corporation. (4) Respondent Oate personally paid P1 Million taken
from trust accounts in his name. (5) Respondent Oate made a personal offering to pay his personal
obligation. (6) Respondent Oate controlled respondent corporation by simultaneously holding two
(2) corporate positions, viz., as Chairman and as treasurer, beginning from the time of respondent
corporations incorporation and continuously thereafter without benefit of election. (7) Respondent
corporation had not held any meeting of the stockholders or of the Board of Directors, as shown by
the fact that no proceeding of such corporate activities was filed with or borne by the record of the
Securities and Exchange Commission (SEC). The only corporate records respondent corporation filed
with the SEC were the following:Articles of Incorporation, Treasurers Affidavit, Undertaking to
Change Corporate Name, Statement of Assets and Liabilities.[7]
Private respondents, in turn, contend that Oates only participation in the transaction between
petitioner and respondent ECO was his execution of the loan agreements and promissory notes as
Chairman of the corporations Board of Directors. There was nothing in the loan agreement nor in the
promissory notes which would indicate that Oate was binding himself jointly and severally with
ECO. Respondents likewise deny that ECO stands for Emmanuel C. Oate. Respondents also note that
Oate is no longer a majority stockholder of ECO and that the payment by a third person of the debt
of another is allowed under the Civil Code. They also alleged that there was no fraud and/or bad faith
in the transactions between them and Land Bank. Hence, private respondents conclude, there is no
legal ground to pierce the veil of respondent corporations personality.[8]
At the outset, we find the matters raised by petitioner in his argumentation are mainly questions
of fact which are not proper in a petition of this nature. [9] Petitioner is basically questioning the
evaluation made by the Court of Appeals of the evidence submitted at the trial. The Court of Appeals
had found that petitioners evidence was not sufficient to justify the piercing of ECOs corporate
personality.[10]Petitioner contended otherwise. It is basic that where what is being questioned is the
sufficiency of evidence, it is a question of fact.[11] Nevertheless, even if we regard these matters as
tendering an issue of law, we still find no reason to reverse the findings of the Court of Appeals.
A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal entity to which it may be
related.[12]By this attribute, a stockholder may not, generally, be made to answer for acts or liabilities
of the said corporation, and vice versa.[13] This separate and distinct personality is, however, merely a
fiction created by law for convenience and to promote the ends of justice.[14] For this reason, it may
not be used or invoked for ends subversive to the policy and purpose behind its creation [15] or which
could not have been intended by law to which it owes its being. [16] This is particularly true when the
fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, [17] confuse
legitimate legal or judicial issues,[18] perpetrate deception or otherwise circumvent the law.[19] This is
likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit
for the sole benefit of the stockholders or of another corporate entity. [20] In all these cases, the
notion of corporate entity will be pierced or disregarded with reference to the particular transaction
involved.[21]
The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using
the personality of the corporation as a means to perpetrate fraud and/or escape a liability and
responsibility demanded by law. In order to disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established. [22] In the absence of any
malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for
corporate liabilities.[23]
The mere fact that Oate owned the majority of the shares of ECO is not a ground to conclude
that Oate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of
the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of
separate corporate personalities.[24] Neither is the fact that the name ECO represents the first three
letters of Oates name sufficient reason to pierce the veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oate. A corporation may assume any name provided it is
lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of
one of its shareholders.
That respondent corporation in this case was being used as a mere alter ego of Oate to obtain
the loans had not been shown. Bad faith or fraud on the part of ECO and Oate was not also
shown. As the Court of Appeals observed, if shareholders of ECO meant to defraud petitioner, then
they could have just easily absconded instead of going out of their way to propose Plans of
Payment.[25] Likewise, Oate volunteered to pay a portion of the corporations debt. [26] This offer
demonstrated good faith on his part to ease the debt of the corporation of which he was a part. It is
understandable that a shareholder would want to help his corporation and in the process, assure
that his stakes in the said corporation are secured. In this case, it was established that the P1 Million
did not come solely from Oate. It was taken from a trust account which was owned by Oate and
other investors.[27] It was likewise proved that the P1 Million was a loan granted by Oate and his co-
depositors to alleviate the plight of ECO.[28] This circumstance should not be construed as an
admission that he was really the debtor and not ECO.
In sum, we agree with the Court of Appeals conclusion that the evidence presented by the
petitioner does not suffice to hold respondent Oate personally liable for the debt of co-respondent
ECO. No reversible error could be attributed to respondent courts decision and resolution which
petitioner assails.
WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the Court of
Appeals in CA-G.R. CV No. 43239 are AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. L-20214 March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.

Fisher, DeWitt, Perkins and Brady for appellant.

Ross and Lawrence for appellee.

STATEMENT

For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of
the International Banking Corporation of Manila, and it is conceded that he is a competent and
experienced business man. July 31, 1916, C. D. Willits and I. L. Patterson were partners doing
business in San Francisco, California, under the name of Willits & Patterson. The plaintiff was then in
San Francisco, and as a result of negotiations the plaintiff and the firm entered into a written
contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of the
firm in the Philippine Islands for certain purposes for the period of five years at a minimum salary of
$200 per month and travelling expenses. The plaintiff returned to Manila and entered on the
discharge of his duties under the contract. As a result of plaintiff's employment and the world war
conditions, the business of the firm in the Philippines very rapidly increased and grew beyond the
fondest hopes of either party. A dispute arose between the plaintiff and the firm as to the
construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile
Patterson retired from the firm and Willits became the sole owner of its assets. For convenience of
operation and to serve his own purpose, Willits organized a corporation under the laws of California
with its principal office at San Francisco, in and by which he subscribed for, and became the exclusive
owner of all the capital stock except a few shares for organization purposes only, and the name of
the firm was used as the name of the corporation. A short time after that Willits came to Manila and
organized a corporation here known as Willits & Patterson, Ltd., in and to which he again subscribed
for all of the capital stock except the nominal shares necessary to qualify the directors. In legal effect,
the San Francisco corporation took over and acquired all of the assets and liabilities of the Manila
corporation. At the time that Willits was in Manila and while to all intents and purposes he was the
sole owner of the stock of corporations, there was a conference between him and the plaintiff over
the disputed construction of Exhibit A. As a result of which another instrument, known in the record
as Exhibit B, was prepared in the form of a letter which the plaintiff addressed to Willits at Manila on
November 10, 1919, the purpose of which was to more clearly define and specify the compensation
which the plaintiff was to receive for his services. Willits received and confirmed this letter by signing
the name of Willits & Patterson, By C.d. Willits. At the time both corporations were legally organized,
and there is nothing in the corporate minutes to show that Exhibit B was ever formally ratified or
approved by either corporation. After its organization, the Manila corporation employed a regular
accountant whose duty it was to audit the accounts of the company and render financial statements
both for the use of the local banks and the local and parent corporations at San Francisco. From time
to time and in the ordinary course of business such statements of account were prepared by the
accountant and duly forwarded to the home office, and among other things was a statement of July
31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum of
P106,277.50. A short time previous to that date, the San Francisco corporation became involved in
financial trouble, and all of its assets were turned over to a "creditors' committee." When this
statement was received, the "creditors' committee" immediately protested its allowance. An attempt
was made without success to adjust the matter on a friendly basis and without litigation. January 10,
1922, the plaintiff brought this action to recover from the defendant the sum of P106,277.50 with
legal interest and costs, and written instruments known in the record as Exhibits A and B were
attached to, and made a part of, the complaint.

For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and
denies each and every other allegation, except as specifically admitted, and alleges that what is
known as Exhibit B was signed by Willits without the authority of the defendant corporation or the
firm of Willits & Patterson, and that it is not an agreement which was ever entered into with the
plaintiff by the defendant or the firm, and, as a separate defense and counterclaim, it alleges that on
the 30th of June, 1920, there was a balance due and owing the plaintiff from the defendant under
the contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That about July 6, 1921, the plaintiff
wrongfully took P30,000 from the assets of the firm, and that he is now indebted to the firm in the
sum of P10,858.95, with interest and costs, from which it prays judgement.

The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and
authority of the defendant, and denies all other new matter in the answer.

Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as
prayed for in its counterclaim, from which the plaintiff appeals, contending that the trial court erred
in not holding that the contract between the parties is that which is embodied in Exhibits A and B,
and that the defendant assumed all partnership obligations, and in failing to render judgment for the
plaintiff, as prayed for, and in dismissing his complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions involved are "what
was the contract under which the plaintiff rendered services for five years ending July 31, 1921," and
"what is due the plaintiff under that contract." Plaintiff contends that his services were performed
under Exhibits A and B, and that the defendant assumed all of the obligations of the original
partnership under Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B.
The defendant admits that Exhibit A was the original contract between Arnold and the firm of Willits
& Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was to
be employed for a period of five years as the agent of Willits & Patterson in the Philippine Islands to
operate a certain oil mill, and to do such other business as might be deemed advisable for which he
was to receive, first, the travelling expenses of his wife and self from San Francisco to Manila, second,
the minimum salary of $200 per month, third, a brokerage of 1 per cent upon all purchases and sales
of merchandise, except for the account of the coconut oil mill, fourth, one-half of the profits on any
transaction in the name of the firm or himself not provided for in the agreement. That the agreement
also provided that if it be found that the business was operated at a loss, Arnold should receive a
monthly salary of $400 during such period. That the business was operated at a loss from June 30,
1920, to July 31, 1921, and that for such reason, he was entitled to nothing more than a salary of
$400 per month, or for that period P10,400. Adding this amount to the P8,741.05, which the
defendant admits he owed Arnold on June 30, 1920, makes a total of P19,141.05, leaving a balance
due the defendant as set out in the counterclaim. In other words, that the plaintiff's compensation
was measured by, and limited to, the above specified provisions in the contract Exhibit A, and that
the defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:

WILLITS & PATTERSON, LTD.

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

CHAS. D. WILLITS, Esq.,

Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits & Patterson is as
under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on all
purchases made for them in the Philippines or sales made to them by Manila and one per cent on all
sales made for them in the Philippines, or purchases made from them by Manila. If such purchases or
sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the commission
is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits & Patterson, San Francisco,
and Willits & Patterson, Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits &
Patterson, San Francisco, half the profits are to be credited to my account and half to the Profit &
Loss account of Willits & Patterson, Ltd., Manila.

On all other business, such as the Cooperative Coconut Products Co. account, or any other business
we may undertake as agents or managers, half the profits are to be credited to my account and half
to the Profit & Loss account of Willits & Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their own funds
invested in the capital stock or a corporation, I of course do not participate in the earnings of such
stock, any more than Willits & Patterson would participate in the earnings of stock held by me on my
account.

If the foregoing conforms to your understanding of our agreement, please confirm below.

Yours faithfully,
(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L.
Patterson constituted the firm of Willits & Patterson doing business in the City of San Francisco; that
later Patterson retired from the firm, and Willits acquired all of his interests and thereafter continued
the business under the name and style of Willits & Patterson; that the original contract Exhibit A was
made between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a period of
five years from that date; that plaintiff entered upon the discharged of his duties and continued his
services in the Philippine Islands to someone for the period of five years; that on November 10, 1919,
and as a result of conferences between Willits and the plaintiff, Exhibit B was addressed and signed
in the manner and form above stated in the City of Manila. A short time prior to that date Willits
organized a corporation in San Francisco, in the State of California, which took over and acquired all
of the assets of the firm's business in California then being conducted under the name and style of
Willits & Patterson; that he subscribed for all of the capital stock of the corporation, and that in truth
and in fact he was the owner of all of its capital stock. After this was done he caused a new
corporation to be organized under the laws of the Philippine Islands with principal office at Manila,
which took over and acquired all the business and assets of the firm of Willits & Patterson in the
Philippine Islands, in and to which, in legal effect, he subscribed for all of its capital stock, and was
the owner of all of its stock. After both corporations were organized the above letter was drafted and
signed. The plaintiff contends that the signing of Exhibit B in the manner and under the conditions in
which it was signed, and through the subsequent acts and conduct of the parties, was ratified and, in
legal effect, became and is now binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he
was to all intents and purposes the legal owner of all the stock in both corporations. It also appears
from the evidence that the parent corporation at San Francisco took over and acquired all of the
assets and liabilities of the local corporation at Manila. That after it was organized the Manila
corporation kept separate records and account books of its own, and that from time to time financial
statements were made and forwarded to the home office, from which it conclusively appears that
plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no
time after Exhibit B was signed was there ever any dispute between plaintiff and Willits as to the
compensation for plaintiff's services. That is to say, as between the plaintiff and Willits, Exhibit B was
approved, followed and at all times in force and effect, after it was signed November 10, 1919. It
appears from an analysis of Exhibit B that it was for the mutual interest of both parties. From a small
beginning, the business was then in a very flourishing conditions and growing fast, and the profits
were very large and were running into big money.

Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall
be divided in equal shares between the said parties hereto; (b) that Arnold should receive a
brokerage of 1 per cent from all purchases and sales of merchandise, except for the account of the
coconut mills; (c) that the net profits from all other business should be divided in equal half shares
between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all
the profits and a brokerage of 1 per cent from all purchases and sales, except those for the account
of the coconut oil mills, which under the volume of business then existing would run into a very large
sum of money. It was for such reason and after personal conferences between them, and to settle all
disputed questions, that Exhibit B was prepared and signed.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff
faithfully performed all the duties incumbent upon him under his contract of employment, it being
understood, however, that this admission does not include an admission that the plaintiff placed a
proper interpretation upon his right to remuneration under said contract of employment."
It being admitted that the plaintiff worked "under his contract of employment" for the period of five
years, the question naturally arises, for whom was he working? His contract was made with the
original firm of Willits & Patterson, and that firm was dissolved and it ceased to exist, and all of its
assets were merged in, and taken over by, the parent corporation at San Francisco. In the very nature
of things, after the corporation was formed, the plaintiff could not and did not continue to work for
the firm, and, yet, he continued his employment for the full period of five years. For whom did he
work after the partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the
mutual interests of both parties, and that if the contract Exhibit A was to be enforced according to its
terms, that Arnold might well contend for a much larger sum of money for his services. In truth and
in fact Willits and both corporations recognized his employment and accepted the benefits of his
services. He continued his employment and rendered his services after the corporation were
organized and Exhibit B was signed just the same as he did before, and both corporations recognized
and accepted his services. Although the plaintiff was president of the local corporation, the
testimony is conclusive that both of them were what is known as a one man corporation, and Willits,
as the owner of all of the stock, was the force and dominant power which controlled them. After
Exhibit B was signed it was recognized by Willits that the plaintiff's services were to be performed
and measured by its term and provisions, and there never was any dispute between plaintiff and
Willits upon that question.

The controversy first arose after the corporation was in financial trouble and the appointment of
what is known in the record as a "creditors' committee." There is no claim or pretense that there was
any fraud or collusion between plaintiff and Willits, and it is very apparent that Exhibit B was to the
mutual interest of both parties. It is elementary law that if Exhibit B is a binding contract between the
plaintiff and Willits and the corporations, it is equally binding upon the creditors' committee. It would
not have any higher or better legal right than the corporation itself, and could not make any defense
which it could not make. It is very significant that the claim or defense which is now interposed by
the creditors' committee was never made or asserted at any previous time by the defendant, and
that it never was made by Willits, and it is very apparent that if he had remained in control of the
corporation, it would never have made the defense which is now made by the creditors' committee.
The record is conclusive that at the time he signed Exhibit B, Willits was, in legal effect, the owner
and holder of all the stock in both corporations, and that he approved it in their interest, and to
protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter
of fact, it appears from the statement of Mr. Larkin, the accountant, in the record that if plaintiff's
cause of action was now founded upon Exhibit A, he would have a claim for more than P160,000.

Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from its membership has
its limitations. It must be noted that this separate existence is for particular purposes. It must also be
remembered that there can be no corporate existence without persons to compose it; there can be
no association without associates. This separate existence is to a certain extent a legal fiction.
Whenever necessary for the interests of the public or for the protection or enforcement of the rights
of the membership, courts will disregard this legal fiction and operate upon both the corporation and
the persons composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L. R. A., 145, in
which the Supreme Court of Ohio says:

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

Where the stock of a corporation is owned by one person whereby the corporation functions only for
the benefit of such individual owner, the corporation and the individual should be deemed to be the
same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in the
first instance could not have made, it may by ratification render binding on it a contract, entered into
on its behalf by its officers or agents without authority. As a general rule such ratification need not be
manifested by any voted or formal resolution of the corporation or be authenticated by the
corporate seal; no higher degree of evidence is requisite in establishing ratification on the part of a
corporation, than is requisite in showing an antecedent authorization.

xxx xxx xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in the
same manner that the absent of a natural person may be, and it is well settled that where a
corporation with full knowledge of the unauthorized act of its officer or agents acquiesces in and
consents to such acts, it thereby ratifies them, especially where the acquiescence results in prejudice
to a third person.

xxx xxx xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed in
his official capacity to manage its affair, his authority to represent the corporation may be inferred
from the manner in which he has been permitted by the directors to transact its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers or
agents within the scope or apparent scope of their authority is attributed to the corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act received
and enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one capable of
ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more easily inferred where
the corporation receives and retains property under it, and as a general rule where a corporation,
through its proper officers or board, takes and retains the benefits of the unauthorized act or
contract of an officer or agent, with full knowledge of all the material facts, it thereby ratifies and
becomes bound by such act of contract, together with all the liabilities and burdens resulting
therefrom, and in some jurisdiction this rule is, in effect, declared by statute. Thus the corporation is
liable on the ground of ratification where, with knowledge of the facts, it accepts the benefit of
services rendered under an unauthorized contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to
time and in the ordinary course of business made and prepared financial statements showing its
assets and liabilities, true copies of which were sent to the home office in San Francisco. It appears
upon their face that plaintiff's compensation was made and founded on Exhibit B, and that such
statements were made and prepared by the accountant on the assumption that Exhibit B was in full
force and effect as between the plaintiff and the defendant. In the course of business in the early
part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at P740
per ton. Due to break in the market, plaintiff was able to purchase the oil at P380 per ton or a profit
of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson,
San Francisco, half the profit are to be credited to may account and half to the Profit & Loss account
Willits & Patterson, Ltd., Manila.

The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed
that all of the oil purchased should be held as security for the full payment of the purchase price. As a
result, the defendant itself received the P105,000 in cash, P75,000 in notes, and still holds the 500
tons of oil as security for the balance of the purchase price. This transaction was shown in the semi-
annual financial statement for the period ending December 31, 1920. That is to say, the business was
transacted by and through the plaintiff, and the defendant received and accepted all of the profits on
the deal, and the statement which was rendered gave him a credit for P90,737.88, or half the profit
as provided in the contract Exhibit B, with interest.

Although the previous financial statements show upon their face that the account of plaintiff was
credit with several small items on the same basis, it was not until the 23d of March, 1921, that any
objection was ever made by anyone, and objection was made for the first time by the creditors'
committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon
the defendant corporation, and the plaintiff is entitled to recover for his services on that writing as it
modified the original contract Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the
plaintiff is entitled to recover P106,277.50. It is very apparent that his statement was based upon the
assumption that there was a net profit of P180,000 on the 500 tons of oil, of which the plaintiff was
entitled to one-half.

In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the
amount which the defendant paid for them at the time of the purchase or P380 per ton, and the
record shows that the defendant took and now has the possession of all of the oil secure the
payment of the price at which it was sold. Hence, the profit on the deal to the defendant at the time
of the sale would amount to the difference between what the defendant paid for the oil and the
amount which it received for the oil at the time it sold the oil. It appears that at the time of the sale
the defendant only received P105,000 in cash, and that it took and accepted the promissory notes of
Cruz & Tan Chong Say, the purchasers, for P75,000 more which have been collected and may never
be. Hence, it must follow that the amount evidence by the notes cannot now be deemed or treated
as profits on the deal and cannot be until such times as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be entered here in favor of
the plaintiff and against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per
cent per annum from the 10th day of January, 1922. In addition thereto, judgment will be rendered
against the defendant in substance and to the effect that the plaintiff is the owner of an undivided
one-half interest in the promissory notes for P75,000 which were executed by Cruz & Tan Chong Say,
as a part of the purchase price of the oil, and that he is entitled to have and receive one-half of all the
proceeds from the notes or either of them, and that also he have judgment against the defendant for
costs. So ordered.

G.R. No. L-9687 June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

Ozaeta, Lichauco and Picazo for petitioner-appellant.

Office of the Solicitor General for respondent-appellee.

BENGZON, C.J.:
Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency
liability of P1,317,629.61 on Liddell & Co., Inc.

Said Company lists down several issues which may be boiled to the following:

(a) Whether or not Judge Umali of the Tax Court below could validly participate in the making of the
decision;

(b) Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical
corporations, the latter being merely .the alter ego of the former;

(c) Whether or not, granting the identical nature of the corporations, the assessment of tax liability,
including the surcharge thereon by the Court of Tax Appeals, is correct.

Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right to
present additional evidence.

Said undisputed facts are substantially as follows:

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation establish in the
Philippines on February 1, 1946, with an authorized capital of P100,000 divided into 1000 share at
P100 each. Of this authorized capital, 196 shares valued at P19,600 were subscribed and paid by
Frank Liddell while the other four shares were in the name of Charles Kurz, E.J. Darras, Angel
Manzano and Julian Serrano at one shares each. Its purpose was to engage in the business of
importing and retailing Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks..

On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to declare a
90% stock dividend after which declaration on, Frank Liddells holding in the Company increased to
1,960 shares and the employees, Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano at 10
share each. The declaration of stock dividend was followed by a resolution increasing the authorized
capital of the company to P1,000.000 which the Securities & Exchange Commission approved on
March 3, 1947. Upon such approval, Frank Liddell subscribed to 3,000 additional shares, for which he
paid into the corporation P300,000 so that he had in his own name 4,960 shares.

On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano on the
other, executed an agreement (Exhibit A) which was further supplemented by two other agreements
(Exhibits B and C) dated May 24, 1947 and June 3, 1948, wherein Frank Liddell transferred (On June
7, 1948) to various employees of Liddell & Co. shares of stock.

At the annual meeting of stockholders of Liddell & Co. held on March 9, 1948, a 100% stock dividend
was declared, thereby increasing the issued capital stock of aid corporation from P1,000.000 to P
3,000,000 which increase was duly approved by the Securities and Exchange Commission on June 7,
1948. Frank Liddell subscribed to and paid 20% of the increase of P400,000. He paid 25% thereof in
the amount of P100,000 and the balance of P3,000,000 was merely debited to Frank Liddell-Drawing
Account and credited to Subscribed Capital Stock on December 11, 1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance with the
agreements, Exhibits A, B, and C, the stocks of said company stood as follows:

Name No. of Shares Amount Per Cent

Frank Liddell 13,688P1,368,800 72.00%
Irene Liddell 1 100 .01%
Mercedes Vecin 1 100 .01%
Charles Kurz 1,225 122,500 6.45%
E.J. Darras 1,225 122,500 6.45%
Angel Manzano 1,150 115,000 6.06%
Julian Serrano 710 71,000 3.74%
E. Hasim 500 50,000 2.64%
 G. W. Kernot 500 50,000 2.64%
19,000P1,900,000 100.00%

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of
Directors of Liddell & Co., stock dividends were again declared. As a result of said declaration and in
accordance with the agreements, Exhibits, A, B, and C, the stockholdings in the company appeared to
be:

Name No. of Shares Amount Per Cent

Frank Liddell 19,738P1,973,800 65.791%
Irene Liddell 1 100 .003%
Mercedes Vecin 1 100 .003%
Charles Kurz 2,215 221,500 7.381%
E.J. Darras 2,215 221,500 7.381%
Angel Manzano 1,810 181,000 6.031%
Julian Serrano 1,700 170,000 5.670%
E. Hasim 830 83,000 2.770%
G. W. Kernot 1,490 149,000 4.970%
30,000P3,000,000 100.000%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings available for dividends
accrued to Frank Liddell although at the time of the execution of aid instrument, Frank Liddell owned
all of the shares in said corporation. 45% accrued to the employees, parties thereto; Kurz 12-1/2%;
Darras 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%. The agreement Exhibit A was also
made retroactive to 1946. Frank Liddell reserved the right to reapportion the 45% dividends
pertaining to the employees in the future for the purpose of including such other faithful and
efficient employees as he may subsequently designate. (As a matter of fact, Frank Liddell did so
designate two additional employees namely: E. Hasim and G. W. Kernot). It was for such inclusion of
future faithful employees that Exhibits B-1 and C were executed. As per Exhibit C, dated May 13,
1948, the 45% given by Frank Liddell to his employees was reapportioned as follows: C. Kurz 12,%;
E. J. Darras 12%; A. Manzano l2%; J. Serrano 3-1/2%; G. W. Kernot 2%.

Exhibit B contains the employees' definition in detail of the manner by which they sought to prevent
their share-holdings from being transferred to others who may be complete strangers to the business
on Liddell & Co.

From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation of
Liddell & Co. Inc., was amended so as to limit its business activities to importations of automobiles
and trucks, Liddell & Co. was engaged in business as an importer and at the same time retailer of
Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the Securities and
Exchange Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed
and paid for as follows: Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P.
Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.

At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their respective
positions in the Retail Dept. of Liddell & Co. and they were taken in and employed by Liddell Motors,
Inc.: Kurz as Manager-Treasurer, Manzano as General Sales Manager for cars and Kernot as General
Sales Manager for trucks.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to
Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then,
Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as
its original sales.
Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc. the Collector of
Internal Revenue determined that the latter was but an alter ego of Liddell & Co. Wherefore, he
concluded, that for sales tax purposes, those sales made by Liddell Motors, Inc. to the public were
considered as the original sales of Liddell & Co. Accordingly, the Collector of Internal Revenue
assessed against Liddell & Co. a sales tax deficiency, including surcharges, in the amount of
P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc. to the general public
from January 1, 1949 to September 15, 1950, was made the basis without deducting from the selling
price, the taxes already paid by Liddell & Co. in its sales to the Liddell Motors Inc.

The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue.

A. Judge Umali: Appellant urges the disqualification on of Judge Roman M. Umali to participate in the
decision of the instant case because he was Chief of the Law Division, then Acting Deputy Collector
and later Chief Counsel of the Bureau of Internal Revenue during the time when the assessment in
question was made.1 In refusing to disqualify himself despite admission that had held the
aforementioned offices, Judge Umali stated that he had not in any way participated, nor expressed
any definite opinion, on any question raised by the parties when this case was presented for
resolution before the said bureau. Furthermore, after careful inspection of the records of the Bureau,
he (Judge Umali as well as the other members of the court below), had not found any indication that
he had expressed any opinion or made any decision that would tend to disqualify him from
participating in the consideration of the case in the Tax Court.

At this juncture, it is well to consider that petitioner did not question the truth of Judge Umali's
statements. In view thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in
furtherance of the presumption of the judge's moral sense of responsibility this Court has adopted,
and now here repeats, the ruling that the mere participation of a judge in prior proceedings relating
to the subject in the capacity of an administrative official does not necessarily disqualify him from
acting as judge.2

Appellant also contends that Judge Umali signed the said decision contrary to the provision of
Section 13, Republic Act No. 1125;3 that whereas the case was submitted for decision of the Court of
Tax Appeals on July 12, 1955, and the decision of Associate Judge Luciano and Judge Nable were both
signed on August 11, 1955 (that is, on the last day of the 30-day period provided for in Section 13,
Republic Act No. 1125), Judge Umali signed the decision August 31, 1955 or 20 days after the lapse of
the 30-day period allotted by law.

By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the Court of Tax
Appeals) like the law governing the procedure in the court of Industrial Relations, there is no
provision invalidating decisions rendered after the lapse of 30 days, the requirement of Section 13,
Republic Act No. 1125 should be construed as directory.4

Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125
(quoted in the margin)5 confirms this view; because in providing for two thirty-day periods, the law
means that decision may still be rendered within the second period of thirty days (Judge Umali
signed his decision within that period).

B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is the alter
ego of Liddell & Co. Inc., we are fully convinced that Liddell & Co. is wholly owned by Frank Liddell. As
of the time of its organization, 98% of the capital stock belonged to Frank Liddell. The 20% paid-up
subscription with which the company began its business was paid by him. The subsequent
subscriptions to the capital stock were made by him and paid with his own money.

These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority to
designate in the future the employee who could receive earnings of the corporation; to apportion
among the stock holders the share in the profits; (2) that all certificates of stock in the names of the
employees should be deposited with Frank Liddell duly indorsed in blank by the employees
concerned; (3) that each employee was required to sign an agreement with the corporation to the
effect that, upon his death or upon his retirement or separation for any cause whatsoever from the
corporation, the said corporation should, within a period of sixty days therefor, have the absolute
and exclusive option to purchase and acquire the whole of the stock interest of the employees so
dying, resigning, retiring or separating.

These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied the
original his complete control over the corporation.

As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He supplied the
original capital funds.6 It is not proven that his wife Irene, ostensibly the sole incorporator of Liddell
Motors, Inc. had money of her own to pay for her P20,000 initial subscription. 7 Her income in the
United States in the years 1943 and 1944 and the savings therefrom could not be enough to cover
the amount of subscription, much less to operate an expensive trade like the retail of motor vehicles.
The alleged sale of her property in Oregon might have been true, but the money received therefrom
was never shown to have been saved or deposited so as to be still available at the time of the
organization of the Liddell Motors, Inc.

The evidence at hand also shows that Irene Liddell had scant participation in the affairs of Liddell
Motors, Inc. She could hardly be said to possess business experience. The income tax forms record
no independent income of her own. As a matter of fact, the checks that represented her salary and
bonus from Liddell Motors, Inc. found their way into the personal account of Frank Liddell. Her
frequent absences from the country negate any active participation in the affairs of the Motors
company.

There are quite a series of conspicuous circumstances that militate against the separate and distinct
personality of Liddell Motors, Inc. from Liddell & Co.8 We notice that the bulk of the business of
Liddell & Co. was channeled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc.
pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co. Inc. and then
sell them to the general public. These sales of vehicles by Liddell & Co. to Liddell Motors, Inc. for the
most part were shown to have taken place on the same day that Liddell Motors, Inc. sold such
vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell
Motors, Inc. as a matter of formality.

During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell
which were deposited by Frank Liddell in his personal account with the Philippine National Bank.
During this time also, he issued in favor of Liddell Motors, Inc. six (6) checks drawn against his
personal account with the same bank. The checks issued by Frank Liddell to the Liddell Motors, Inc.
were significantly for the most part issued on the same day when Liddell & Co. Inc. issued the checks
for Frank Liddell9 and for the same amounts.

It is of course accepted that the mere fact that one or more corporations are owned and controlled
by a single stockholder is not of itself sufficient ground for disregarding separate corporate entities.
Authorities10 support the rule that it is lawful to obtain a corporation charter, even with a single
substantial stockholder, to engage in a specific activity, and such activity may co-exist with other
private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and
without fraud on another, its separate identity is to be respected.

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and
controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the
separate corporate identity of one from the other. There is, however, in this instant case, a peculiar
consequence of the organization and activities of Liddell Motors, Inc.

Under the law in force at the time of its incorporation the sales tax on original sales of cars (sections
184, 185 and 186 of the National Internal Revenue Code), was progressive, i.e. 10% of the selling
price of the car if it did not exceed P5000, and 15% of the price if more than P5000 but not more
than P7000, etc. This progressive rate of the sales tax naturally would tempt the taxpayer to employ
a way of reducing the price of the first sale. And Liddell Motors, Inc. was the medium created by
Liddell & Co. to reduce the price and the tax liability.

Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. to Liddell Motors,
Inc. on January 17, 1948 for P4,546,000.00 including tax; the price of the car was P4,133,000.23, the
tax paid being P413.22, at 10%. And when this car was later sold (on the same day) by Liddell Motors,
Inc. to P.V. Luistro for P5500, no more sales tax was paid.11 In this price of P5500 was included the
P413.32 representing taxes paid by Liddell & Co. Inc. in the sale to Liddell Motors, Inc. Deducting
P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of P5,087.68
would have been the net selling price of Liddell & Co., Inc. to the general public (had Liddell Motors,
Inc. not participated and intervened in the sale), and 15% sales tax would have been due. In this
transaction, P349.68 in the form of taxes was evaded. All the other transactions (numerous)
examined in this light will inevitably reveal that the Government coffers had been deprived of a
sizeable amount of taxes.

As opined in the case of Gregory v. Helvering,12 "the legal right of a taxpayer to decrease the amount
of what otherwise would be his taxes, or altogether avoid them by means which the law permits,
cannot be doubted." But, as held in another case,13 "where a corporation is a dummy, is unreal or a
sham and serves no business purpose and is intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald and a mischievous fiction."

Consistently with this view, the United States Supreme Court 14 held that "a taxpayer may gain
advantage of doing business thru a corporation if he pleases, but the revenue officers in proper
cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and
treat the person who actually may take the benefits of the transactions as the person accordingly
taxable."

Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made
through an other and distinct corporation when it is proved that the latter is virtually owned by the
former or that they are practically one and the same is to sanction a circumvention of our tax laws. 15

C. Tax liability computation: In the Yutivo case16 the same question involving the computation of the
alleged deficiency sales tax has been raised. In accordance with our ruling in said case we hold as
correctly stated by Judge Nable in his concurring and dissenting opinion on this case, that the
deficiency sales tax should be based on the selling price obtained by Liddell Motors, Inc. to the public
AFTER DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO., INC. in its sales to Liddell Motors, Inc.

On the imposition of the 50% surcharge by reason of fraud, we see that the transactions between
Liddell Motors Inc. and Liddell & Co., Inc. have always been embodied in proper documents,
constantly subject to inspection by the tax authorities. Liddell & Co., Inc. have always made a full
report of its income and receipts in its income tax returns.

Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the basis of its
sales to Liddell Motors, Inc. and not on those by the latter to the public, it cannot be held that the
Liddell & Co., Inc. deliberately made a false return for the purpose of defrauding the government of
its revenue, and should suffer a 50% surcharge. But penalty for late payment (25%) should be
imposed.

In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. is declared
liable only for the amount of P426,811.67 with 25% surcharge for late payment and 6% interest
thereon from the time the judgment becomes final.

As it appears that, during the pendency of this litigation appellant paid under protest to the
Government the total amount assessed by the Collector, the latter is hereby required to return the
excess to the petitioner. No costs.

G.R. No. 167530 March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

x-----------------------x

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner,

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

x-----------------------x

G.R. No. 167603

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 dated November 30, 2004 and the
Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said Decision
affirmed the Decision4 dated November 6, 1995 of the Regional Trial Court (RTC) of Makati City,
Branch 62, granting a judgment award of 8,370,934.74, plus legal interest, in favor of respondent
Hydro Resources Contractors Corporation (HRCC) with the modification that the Privatization and
Management Office (PMO), successor of petitioner Asset Privatization Trust (APT), 5 has been held
solidarily liable with Nonoc Mining and Industrial Corporation (NMIC)6 and petitioners Philippine
National Bank (PNB) and Development Bank of the Philippines (DBP), while the Resolution denied
reconsideration separately prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties
of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and
PNB acquired substantially all the assets of MMIC and resumed the business operations of the
defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC,
respectively, except for five qualifying shares.8As of September 1984, the members of the Board of
Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and
Faustino Agbada, were either from DBP or PNB.9

Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and Road
Construction Program in 1985 for a total contract price of 35,770,120. After computing the
payments already made by NMIC under the program and crediting the NMICs receivables from

Hercon, Inc., the latter found that NMIC still has an unpaid balance of 8,370,934.74. 10 Hercon, Inc.
made several demands on NMIC, including a letter of final demand dated August 12, 1986, and when
these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136
seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon,
Inc.11 The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. 12

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition and privatization of certain government corporations
and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB
executed their respective deeds of transfer in favor of the National Government assigning,
transferring and conveying certain assets and liabilities, including their respective stakes in NMIC. 13 In
turn and on even date, the National Government transferred the said assets and liabilities to the APT
as trustee under a Trust Agreement.14 Thus, the complaint was amended for the second time to
implead and include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with
HRCC was entered into by its then President without any authority. Moreover, the said contract
allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC
further claimed that the contract amount was manifestly excessive and grossly disadvantageous to
the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and
attorneys fees, as well as payment for equipment rental for four trucks, replacement of parts and
other services, and damage to some of NMICs properties.16

For its part, DBPs answer17 raised the defense that HRCC had no cause of action against it because
DBP was not privy to HRCCs contract with NMIC. Moreover, NMICs juridical personality is separate
from that of DBP. DBP further interposed a counterclaim for attorneys fees. 18

PNBs answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCCs part
and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a
demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality of
NMIC and made counterclaims for moral damages and attorneys fees.20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity
between Hercon, Inc. and APT, and the National Governments preferred lien over the assets of
NMIC.22

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC:

On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this
Court likewise finds for the plaintiff.

From the documentary evidence adduced by the plaintiff, some of which were even adopted by
defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A",
"I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established that except for five (5)
qualifying shares, NMIC is owned by defendants DBP and PNB, with the former owning 57% thereof,
and the latter 43%. As of September 24, 1984, all the members of NMICs Board of Directors, namely,
Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada are
either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").

The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it
was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third
persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned,
conducted and controlled by the same parties, both law and equity will, when necessary to protect
the rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and
treat them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both
DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latters unpaid
obligations to plaintiff.23

Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the
trial court reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO
RESOURCES CONTRACTORS CORPORATION and against the defendants NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE
NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and severally, the
sum of 8,370,934.74 plus legal interest thereon from date of demand, and attorneys fees
equivalent to 25% of the judgment award.
The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND
INDUSTRIAL CORPORATION is directed to ensure compliance with this Decision.24

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong
for the RTC to pierce the veil of NMICs corporate personality and hold DBP and PNB solidarily liable
with NMIC.25

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the
veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In
particular, the Court of Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the
extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders, with the
qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to
comply with the requirement of the law as to number of incorporators; and that the directorates of
DBP, PNB and [NMIC] are interlocked.

xxxx

We find it therefore correct for the lower court to have ruled that:

"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both
DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latters unpaid
obligation to plaintiff."26(Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the
corporate veil of NMIC should be pierced, ratiocinating:

For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial
contracts, and then using such separate entity to evade the payment of a just debt, would be the
height of injustice and iniquity. Surely that could not have been the intendment of the law with
respect to corporations. x x x.27

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in
favor of appellee Hydro Resources Contractors Corporation in the amount of 8,370,934.74 with
legal interest from date of demand is hereby AFFIRMED, but the dismissal of the case as against
Assets Privatization Trust is REVERSED, and its successor the Privatization and Management Office is
INCLUDED as one of those jointly and severally liable for such indebtedness. The award of attorneys
fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied. 29

Hence, these consolidated petitions.30

All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and
distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is
not a sufficient ground for disregarding the separate corporate personality of NMIC because NMIC
was not a mere adjunct, business conduit or alter ego of DBP and PNB. According to them, the
application of the doctrine of piercing the corporate veil is unwarranted as nothing in the records
would show that the ownership and control of the shareholdings of NMIC by DBP and PNB were used
to commit fraud, illegality or injustice. In the absence of evidence that the stock control by DBP and
PNB over NMIC was used to commit some fraud or a wrong and that said control was the proximate
cause of the injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity"
is misplaced.31
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMICs
exclusive and separate corporate indebtedness to HRCC, such liability of the two banks was
transferred to and assumed by the National Government through the APT, now the PMO, under the
respective deeds of transfer both dated February 27, 1997 executed by DBP and PNB pursuant to
Proclamation No. 50 dated December 8, 1986 and Administrative Order No. 14 dated February 3,
1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the National
Government of all liabilities incurred by NMIC, the National Government through the APT could not
be held liable for NMICs contractual liability. The APT asserts that HRCC had not sufficiently shown
that the APT is the successor-in-interest of all the liabilities of NMIC, or of DBP and PNB as
transferors, and that the adjudged liability is included among the liabilities assigned and transferred
by DBP and PNB in favor of the National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of
corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which owned, conducted
and controlled the business of NMIC as shown by the following circumstances: NMIC was owned by
DBP and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB financed
the operations of NMIC. HRCC further argues that a parent corporation may be held liable for the
contracts or obligations of its subsidiary corporation where the latter is a mere agency,
instrumentality or adjunct of the parent corporation.34

Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC
because the APT assumed the obligations of DBP and PNB as the successor-in-interest of the said
banks with respect to the assets and liabilities of NMIC.35 As trustee of the Republic of the
Philippines, the APT also assumed the responsibility of the Republic pursuant to the following
provision of Section 2.02 of the respective deeds of transfer executed by DBP and PNB in favor of the
Republic:

SECTION 2. TRANSFER OF BANKS LIABILITIES

xxxx

2.02 With respect to the Banks liabilities which are contingent and those liabilities where the Banks
creditors consent to the transfer thereof is not obtained, said liabilities shall remain in the books of
the BANK with the GOVERNMENT funding the payment thereof.36

After a careful review of the case, this Court finds the petitions impressed with merit.

A corporation is an artificial entity created by operation of law. It possesses the right of succession
and such powers, attributes, and properties expressly authorized by law or incident to its
existence.37 It has a personality separate and distinct from that of its stockholders and from that of
other corporations to which it may be connected.38 As a consequence of its status as a distinct legal
entity and as a result of a conscious policy decision to promote capital formation, 39 a corporation
incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other words, by
virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder.41 This protection from liability for shareholders is the principle of
limited liability.42

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when
it becomes a shield for fraud, illegality or inequity committed against third persons. 43

However, the rule is that a court should be careful in assessing the milieu where the doctrine of the
corporate veil may be applied. Otherwise an injustice, although unintended, may result from its
erroneous application.44 Thus, cutting through the corporate cover requires an approach
characterized by due care and caution:
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. x x x.45 (Emphases supplied; citations omitted.)

Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine
of piercing the corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of
DBP and PNB) should be held solidarily liable for using NMIC as alter ego.47 The RTC sustained the
allegation of HRCC and pierced the corporate veil of NMIC pursuant to the alter ego theory when it
concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB." 48 The
Court of Appeals upheld such conclusion of the trial court.49 In other words, both the trial and
appellate courts relied on the alter ego theory when they disregarded the separate corporate
personality of NMIC.

In this connection, case law lays down a three-pronged test to determine the application of the alter
ego theory, which is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.50 (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent.51 It examines the parent corporations
relationship with the subsidiary.52 It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct corporate entity will be ignored. 53 It
seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation,
though acting through the subsidiary in form and appearance, "is operating the business directly for
itself."54

The second prong is the "fraud" test. This test requires that the parent corporations conduct in using
the subsidiary corporation be unjust, fraudulent or wrongful.55 It examines the relationship of the
plaintiff to the corporation.56 It recognizes that piercing is appropriate only if the parent corporation
uses the subsidiary in a way that harms the plaintiff creditor.57 As such, it requires a showing of "an
element of injustice or fundamental unfairness."58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendants
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered.59 A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have
been treated unjustly by the defendants exercise of control and improper use of the corporate form
and, thereby, suffer damages.60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing
the corporate veil.61

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation. 62 With respect to
the control element, it refers not to paper or formal control by majority or even complete stock
control but actual control which amounts to "such domination of finances, policies and practices that
the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but
a conduit for its principal."63 In addition, the control must be shown to have been exercised at the
time the acts complained of took place.64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate
cover of NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of
NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.65 Unfortunately, the
conclusion of the trial and appellate courts that the DBP and PNB fit the alter ego theory with respect
to NMICs transaction with HRCC on the premise of complete stock ownership and interlocking
directorates involved a quantum leap in logic and law exposing a gap in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another corporation and
their interlocking directorates may serve as indicia of control, by themselves and without more,
however, these circumstances are insufficient to establish an alter ego relationship or connection
between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing
of the latters corporate cover. This Court has declared that "mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality."66 This Court has likewise ruled
that the "existence of interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations."67

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to
this Court, provided they are borne out of the record or are based on substantial evidence. 68 It is
equally true that the question of whether one corporation is merely an alter ego of another is purely
one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or
whether the requisite quantum of evidence has been adduced warranting the piercing of the veil of
corporate personality.69 Nevertheless, it has been held in Sarona v. National Labor Relations
Commission70 that this Court has the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for
fraudulent or malevolent ends, if the findings in the assailed decision are either not supported by the
evidence on record or based on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC
were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate
mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence
establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with
NMICs stockholders. The letter proposal of Hercon, Inc., HRCCs predecessor-in-interest, regarding
the contract for NMICs mine stripping and road construction program was addressed to and
accepted by NMIC.71 The various billing reports, progress reports, statements of accounts and
communications of Hercon, Inc./HRCC regarding NMICs mine stripping and road construction
program in 1985 concerned NMIC and NMICs officers, without any indication of or reference to the
control exercised by DBP and/or PNB over NMICs affairs, policies and practices. 72
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the
alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services
rendered by HRCC in connection with NMICs mine stripping and road construction program in 1985.
On the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC was
dealing with NMIC as a distinct juridical person acting through its own corporate officers. 73

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCCs Exhibit "I-5,"74 the initial General Information Sheet submitted by
NMIC to the Securities and Exchange Commission, relied upon by the trial court and the Court of
Appeals may have proven that DBP and PNB owned the stocks of NMIC to the extent of 57% and
43%, respectively. However, nothing in it supports a finding that NMIC, DBP, and PNB had
interlocking directors as it only indicates that, of the five members of NMICs board of directors, four
were nominees of either DBP or PNB and only one was a nominee of both DBP and PNB. 75 Only two
members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to
be members of the board of governors of DBP and none was proved to be a member of the board of
directors of PNB.76 No director of NMIC was shown to be also sitting simultaneously in the board of
governors/directors of both DBP and PNB.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and
NMIC on the other hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia, 77 which
it described as "a case under a similar factual milieu."78 However, in Sibagat Timber Corporation, this
Court took care to enumerate the circumstances which led to the piercing of the corporate veil of
Sibagat Timber Corporation for being the alter ego of Del Rosario & Sons Logging Enterprises, Inc.
Those circumstances were as follows: holding office in the same building, practical identity of the
officers and directors of the two corporations and assumption of management and control of Sibagat
Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.

Here, DBP and PNB maintain an address different from that of NMIC.79 As already discussed, there
was insufficient proof of interlocking directorates. There was not even an allegation of similarity of
corporate officers. Instead of evidence that DBP and PNB assumed and controlled the management
of NMIC, HRCCs evidence shows that NMIC operated as a distinct entity endowed with its own legal
personality. Thus, what obtains in this case is a factual backdrop different from, not similar to,
Sibagat Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiffs legal rights must be clearly and convincingly
established; it cannot be presumed. Without a demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not apply.80

In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that
NMIC was used to conceal fraud. x x x.81

Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC
which DBP and PNB used "to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights." It is a
recognition that, even assuming that DBP and PNB exercised control over NMIC, there is no evidence
that the juridical personality of NMIC was used by DBP and PNB to commit a fraud or to do a wrong
against HRCC.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed
against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a
mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals82:

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud
that may work inequities among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud, and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or
fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm
could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC could hold
DBP and PNB solidarily liable with NMIC.1wphi1

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as
transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB
are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC
recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the
shoes of DBP and PNB with respect to the latter's rights and obligations" in NMIC. 83 As such assignee,
therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities may be
imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC
invokes, the APT cannot be held liable. The contingent liability for which the National Government,
through the APT, may be held liable under the said provision refers to contingent liabilities of DBP
and PNB. Since DBP and PNB may not be held solidarily liable with NMIC, no contingent liability may
be imputed to the APT as well. Only NMIC as a distinct and separate legal entity is liable to pay its
corporate obligation to HRCC in the amount of 8,370,934.74, with legal interest thereon from date
of demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the
judgment against it. The APT itself acknowledges this.84

WHEREFORE, the petitions are hereby GRANTED.

The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the
Asset Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack of
merit. The Asset Privatization Trust, now the Privatization and Management Office, as trustee of
Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to
ensure compliance by the Nonoc Mining and Industrial Corporation, now the Philnico Processing
Corporation, with this Decision.

SO ORDERED.

PRISMA CONSTRUCTION & DEVELOPMENT G.R. No. 160545

CORPORATION and ROGELIO S. PANTALEON,
Petitioners,
Present:
*
NACHURA, J.,
- versus - BRION, Acting Chairperson,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,
Respondent.
Promulgated:

March 9, 2010
x------------------------------------------------------------------------------------------x
DECISION

BRION, J.:

We resolve in this Decision the petition for review on certiorari[1] filed by petitioners Prisma
Construction & Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon)
(collectively, petitioners) who seek to reverse and set aside the Decision[2] dated May 5, 2003 and the
Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in CA-
G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC),
Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment
of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the interest rate
from 4% per month to 12% per annum, computed from the filing of the complaint to full
payment. The assailed CA Resolution denied the petitioners Motion for Reconsideration.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA,
obtained a P1,000,000.00[4] loan from the respondent, with a monthly interest of P40,000.00
payable for six months, or a total obligation of P1,240,000.00 to be paid within six (6)
months,[5] under the following schedule of payments:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00[6]
Total P1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note[7] that states:

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO

HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F.
Menchavez, representing a six-month loan payable according to the following schedule:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged. [8]

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the
promissory note in his personal capacity,[9] and as duly authorized by the Board of Directors of
PRISMA.[10] The petitioners failed to completely pay the loan within the stipulated six (6)-month
period.
 From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the
respondent:

September 8, 1994 P320,000.00

October 8, 1995.P600,000.00
November 8, 1995.....P158,772.00
January 4, 1997 P30,000.00[11]

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of January
4, 1997, to which it applied a 4% monthly interest.[12] Thus, on August 28, 1997, the respondent filed
a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly
interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit.[13]

In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but
denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in the
promissory note. Pantaleon also denied that he made himself personally liable and that he made
representations that the loan would be repaid within six (6) months. [14]

THE RTC RULING

The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check
for P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4%
or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. It noted that the
petitioners made several payments amounting to P1,228,772.00, but they were still indebted to the
respondent for P3,526,117.00 as of February 11,[15] 1999 after considering the 4% monthly interest.
The RTC observed that PRISMA was a one-man corporation of Pantaleon and used this circumstance
to justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners to jointly
and severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from
February 11, 1999 until fully paid.[16]

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of
Court, insisting that there was no express stipulation on the 4% monthly interest.

THE CA RULING

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly
interest principally based on the board resolution that authorized Pantaleon to transact a loan with
an approved interest of not more than 4% per month. The appellate court, however, noted that the
interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per
annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of Pantaleon that
justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC Decision by
imposing a 12% per annum interest, computed from the filing of the complaint until finality of
judgment, and thereafter, 12% from finality until fully paid.[17]

After the CA's denial[18] of their motion for reconsideration,[19] the petitioners filed the present
petition for review on certiorari under Rule 45 of the Rules of Court.

THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the
parties agreed to a 4% monthly interest because the board resolution was not an evidence of a loan
or forbearance of money, but merely an authorization for Pantaleon to perform certain acts,
including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the
Civil Code is that interest due should be stipulated in writing, and no such stipulation exists. Even
assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)-month period
only and cannot be interpreted to apply beyond it. The petitioners also point out the glaring
inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per annum
to 12% per annum, but failed to consider that the amount of P3,526,117.00 that the RTC ordered
them to pay includes the compounded 4% monthly interest.

THE CASE FOR THE RESPONDENT

The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest
because the board resolution is attached to, and an integral part of, the promissory note based on
which the petitioners obtained the loan. The respondent further contends that the petitioners are
estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest
on the principal amount under the promissory note and the board resolution.

THE ISSUE

The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so,
does the rate of interest apply to the 6-month payment period only or until full payment of the loan?

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in writing;

otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith.[20] When the terms of a contract are clear and leave no doubt as to
the intention of the contracting parties, the literal meaning of its stipulations governs. [21] In such
cases, courts have no authority to alter the contract by construction or to make a new contract for
the parties; a court's duty is confined to the interpretation of the contract the parties made for
themselves without regard to its wisdom or folly, as the court cannot supply material stipulations or
read into the contract words the contract does not contain.[22] It is only when the contract is vague
and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the
parties intent.

In the present case, the respondent issued a check for P1,000,000.00.[23] In turn, Pantaleon, in his
personal capacity and as authorized by the Board, executed the promissory note quoted above. Thus,
the P1,000,000.00 loan shall be payable within six (6) months, or from January 8, 1994 up to June 8,
1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total
obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be
computed at 4% interest per month, but no such rate of interest was stipulated in the promissory
note; rather a fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. Under this provision, the payment of interest in loans or forbearance
of money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2)
the agreement for the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of interest at a stipulated rate. Thus, we held in Tan v.
Valdehueza[24] and Ching v. Nicdao[25] that collection of interest without any stipulation in writing is
prohibited by law.

Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six
(6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties
in the promissory note. Thereafter, the interest on the loan should be at the legal interest rate of
12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:[26]

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code. (Emphasis supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,[27] Sulit v. Court of
Appeals,[28] Crismina Garments, Inc. v. Court of Appeals,[29] Eastern Assurance and Surety Corporation
v. Court of Appeals,[30] Sps. Catungal v. Hao,[31] Yong v. Tiu,[32] and Sps. Barrera v. Sps.
Lorenzo.[33] Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that
the parties agreed to a 4% interest, compounded by the application of this interest beyond the
promissory notes six (6)-month period. The facts show that the parties agreed to the payment of
a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of interest payable
within a six (6)-month period.

Medel v. Court of Appeals not applicable

 The CA misapplied Medel v. Court of Appeals[34] in finding that a 4% interest per month was
unconscionable.

In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per
month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus attorneys fee
equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with the
stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous,
unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and
void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.
Salazar[35] of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v. Court of
Appeals,[36] of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in Imperial v.
Jaucian,[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v.
Quio,[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v.
Yasuma,[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
Timan,[40] of 7% and 5% per month for loans totalling P964,000.00. We note that in all these cases,
the terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite
period.

Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per month on the principal of a
loan payable within six months. Additionally, no issue on the excessiveness of the stipulated amount
of P40,000.00 per month was ever put in issue by the petitioners;[41] they only assailed the
application of a 4% interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the
only limitation being that these stipulations, clauses, terms and conditions are not contrary to law,
morals, public order or public policy.[42] The payment of the specific sum of money of P40,000.00 per
month was voluntarily agreed upon by the petitioners and the respondent. There is nothing from the
records and, in fact, there is no allegation showing that petitioners were victims of fraud when they
entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per
month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total principal
and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply.
The amounts already paid by the petitioners during the pendency of the suit, amounting
to P1,228,772.00 as of February 12, 1999,[43] should be deducted from the total amount due,
computed as indicated above. We remand the case to the trial court for the actual computation of
the total amount due.
Doctrine of Estoppel not applicable

The respondent submits that the petitioners are estopped from disputing the 4% monthly interest
beyond the six-month stipulated period, since they agreed to pay this interest on the principal
amount under the promissory note and the board resolution.

We disagree with the respondents contention.

We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as
established by the record, negate its application. Under the promissory note,[44]what the petitioners
agreed to was the payment of a specific sum of P40,000.00 per month for six months not a 4% rate
of interest per month for six (6) months on a loan whose principal is P1,000,000.00, for the total
amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them
from raising their present defenses against a 4% per month interest after the six-month period of the
agreement. The board resolution,[45] on the other hand, simply authorizes Pantaleon to contract for a
loan with a monthly interest of not more than 4%. This resolution merely embodies the extent of
Pantaleons authority to contract and does not create any right or obligation except as between
Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel.

Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when
the separate and distinct corporate personality defeats public convenience, as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the
corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter
ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.[46] In the absence of malice, bad faith, or a specific provision of law making a corporate
officer liable, such corporate officer cannot be made personally liable for corporate liabilities. [47]

In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or
unlawful act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon denied
personal liability in his Answer, he made himself accountable in the promissory note in his personal
capacity and as authorized by the Board Resolution of PRISMA.[48] With this statement of personal
liability and in the absence of any representation on the part of PRISMA that the obligation is all its
own because of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May
5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The petitioners loan of P1,000,000.00 shall
bear interest of P40,000.00 per month for six (6) months from December 8, 1993 as indicated in the
promissory note. Any portion of this loan, unpaid as of the end of the six-month payment period,
shall thereafter bear interest at 12% per annum. The total amount due and unpaid, including accrued
interests, shall bear interest at 12% per annum from the finality of this Decision. Let this case
be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the proper computation of
the amount due as herein directed, with due regard to the payments the petitioners have already
remitted. Costs against the respondent.
SO ORDERED.

G.R. No. 177493

ERIC GODFREY STANLEY LIVESEY, Petitioner,

vs.
BINSWANGER PHILIPPINES, INC. and KEITH ELLIOT, Respondent.

DECISION

BRION, J.:

We resolve this petition for review on certiorari1 assailing the decision2 dated August 18, 2006 and
the resolution3dated March 29, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 94461.

The Antecedents

In December 2001, petitioner Eric Godfrey Stanley Livesey filed a complaint for illegal dismissal with
money claims4against CBB Philippines Strategic Property Services, Inc. (CBB) and Paul Dwyer. CBB
was a domestic corporation engaged in real estate brokerage and Dwyer was its President.

Designated as Acting Member in lieu of Associate Justice Estela M. Perlas-Bernabe, per Special Order
No. 1650 dated March 13, 2014.

Livesey alleged that on April 12, 2001, CBB hired him as Director and Head of Business Space
Development, with a monthly salary of US$5,000.00; shareholdings in CBBs offshore parent
company; and other benefits. In August 2001, he was appointed as Managing Director and his salary
was increased to US$16,000.00 a month. Allegedly, despite the several deals for CBB he drew up,
CBB failed to pay him a significant portion of his salary. For this reason, he was compelled to resign
on December 18, 2001. He claimed CBB owed him US$23,000.00 in unpaid salaries.

CBB denied liability. It alleged that it engaged Livesey as a corporate officer in April 2001: he was
elected Vice-President (with a salary of P75,000.00/month), and thereafter, he became President (at
P1,200,000.00/year). It claimed that Livesey was later designated as Managing Director when it
became an extension office of its principal in Hongkong.5

On December 17, 2001, Livesey demanded that CBB pay him US$25,000.00 in unpaid salaries and, at
the same time, tendered his resignation. CBB posited that the labor arbiter (LA) had no jurisdiction as
the complaint involved an intra-corporate dispute.

In his decision dated September 20, 2002,6 LA Jaime M. Reyno found that Livesey had been illegally
dismissed. LA Reyno ordered CBB to reinstate Livesey to his former position as Managing Director
and to pay him US$23,000.00 in accrued salaries (from July to December 2001), and US$5,000.00 a
month in back salaries from January 2002 until reinstatement; and 10% of the total award as
attorneys fees.
Thereafter, the parties entered into a compromise agreement 7 which LA Reyno approved in an order
dated November 6, 2002.8 Under the agreement, Livesey was to receive US$31,000.00 in full
satisfaction of LA Reynos decision, broken down into US$13,000.00 to be paid by CBB to Livesey or
his authorized representative upon the signing of the agreement; US$9,000.00 on or before June 30,
2003; and US$9,000.00 on or before September 30, 2003. Further, the agreement provided that
unless and until the agreement is fully satisfied, CBB shall not: (1) sell, alienate, or otherwise dispose
of all or substantially all of its assets or business; (2) suspend, discontinue, or cease its entire, or a
substantial portion of its business operations; (3) substantially change the nature of its business; and
(4) declare bankruptcy or insolvency.

CBB paid Livesey the initial amount of US$13,000.00, but not the next two installments as the
company ceased operations. In reaction, Livesey moved for the issuance of a writ of execution. LA
Eduardo G. Magno granted the writ,9 but it was not enforced. Livesey then filed a motion for the
issuance of an alias writ of execution,10 alleging that in the process of serving respondents the writ,
he learned "that respondents, in a clear and willful attempt to avoid their liabilities to complainant x
x x have organized another corporation, [Binswanger] Philippines, Inc."11 He claimed that there was
evidence showing that CBB and Binswanger Philippines, Inc. (Binswanger) are one and the same
corporation, pointing out that CBB stands for Chesterton Blumenauer Binswanger. 12 Invoking the
doctrine of piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution be
issued against respondents Binswanger and Keith Elliot, CBBs former President, and now
Binswangers President and Chief Executive Officer (CEO).

The Compulsory Arbitration Rulings

In an order13 dated March 22, 2004, LA Catalino R. Laderas denied Liveseys motion for an alias writ
of execution, holding that the doctrine of piercing the corporate veil was inapplicable in the case. He
explained that the stockholders of the two corporations were not the same. Further, LA Laderas
stressed that LA Reynos decision had already become final and could no longer be altered or
modified to include additional respondents.

Livesey filed an appeal which the National Labor Relations Commission (NLRC) granted in its
decision14 dated September 7, 2005. It reversed LA Laderas March 22, 2004 order and declared the
respondents jointly and severally liable with CBB for LA Reynos decision 15 of September 20, 2002 in
favor of Livesey. The respondents moved for reconsideration, filed by an Atty. Genaro S.
Jacosalem,16 not by their counsel of record at the time, Corporate Counsels Philippines, Law Offices.
The NLRC denied the motion in its resolution of January 6, 2006.17The respondents then sought relief
from the CA through a petition for certiorari under Rule 65 of the Rules of Court.

The respondents charged the NLRC with grave abuse of discretion for holding them liable to Livesey
and in exercising jurisdiction over an intra-corporate dispute. They maintained that Binswanger is a
separate and distinct corporation from CBB and that Elliot signed the compromise agreement in
CBBs behalf, not in his personal capacity. It was error for the NLRC, they argued, when it applied the
doctrine of piercing the veil of corporate fiction to the case, despite the absence of clear evidence in
that respect.

For his part, Livesey contended that the petition should be dismissed outright for being filed out of
time. He claimed that the respondents counsel of record received a copy of the NLRC resolution
denying their motion for reconsideration as early as January 19, 2006, yet the petition was filed only
on May 15, 2006. He insisted that in any event, there was ample evidence supporting the application
of the doctrine of piercing the veil of corporate fiction to the case.

The CA Decision

The CA granted the petition,18 reversed the NLRC decision19 of September 7, 2005 and reinstated LA
Laderas order20 of March 22, 2004. The CA found untenable Liveseys contention that the petition
for certiorari was filed out of time, stressing that while there was no valid substitution or withdrawal
of the respondents former counsel, the NLRC impliedly recognized Atty. Jacosalem as their new
counsel when it resolved the motion for reconsideration which he filed.
On the merits of the case, the CA disagreed with the NLRC finding that the respondents are jointly
and severally liable with CBB in the case. It emphasized that the mere fact that Binswanger and CBB
have the same President is not in itself sufficient to pierce the veil of corporate fiction of the two
entities, and that although Elliot was formerly CBBs President, this circumstance alone does not
make him answerable for CBBs liabilities, there being no proof that he was motivated by malice or
bad faith when he signed the compromise agreement in CBBs behalf; neither was there proof that
Binswanger was formed, or that it was operated, for the purpose of shielding fraudulent or illegal
activities of its officers or stockholders or that the corporate veil was used to conceal fraud, illegality
or inequity at the expense of third persons like Livesey.

Livesey moved for reconsideration, but the CA denied the motion in its resolution dated March 29,
2007.21 Hence, the present petition.

The Petition

Livesey prays for a reversal of the CA rulings on the basis of the following arguments:

1. The CA erred in not denying the respondents petition for certiorari dated May 12, 2006 for being
filed out of time.

Livesey assails the CAs reliance on the Courts pronouncement in Rinconada Telephone Co., Inc. v.
Hon. Buenviaje22 to justify its ruling that the receipt on March 17, 2006 by Atty. Jacosalem of the
NLRCs denial of the respondents motion for reconsideration was the reckoning date for the filing of
the petition for certiorari, not the receipt of a copy of the same resolution on January 19, 2006 by the
respondents counsel of record, the Corporate Counsels Philippines, Law Offices. The cited Courts
pronouncement reads:

In view of respondent judges recognition of Atty. Santos as new counsel for petitioner without even
a valid substitution or withdrawal of petitioners former counsel, said new counsel logically awaited
for service to him of any action taken on his motion for reconsideration. Respondent judges sudden
change of posture in insisting that Atty. Maggay is the counsel of record is, therefore, a whimsical
and capricious exercise of discretion that prevented petitioner and Atty. Santos from taking a timely
appeal[.]23

With the above citation, Livesey points out, the CA opined that a copy of the NLRC resolution denying
the respondents motion for reconsideration should have been served on Atty. Jacosalem and no
longer on the counsel of record, so that the sixty (60)-day period for the filing of the petition should
be reckoned from March 17, 2006 when Atty. Jacosalem secured a copy of the resolution from the
NLRC (the petition was filed by a Jeffrey Jacosalem on May 15, 2006).24 Livesey submits that the CAs
reliance on Rinconada was misplaced. He argues that notwithstanding the signing by Atty. Jacosalem
of the motion for reconsideration, it was only proper that the NLRC served a copy of the resolution
on the Corporate Counsels Philippines, Law Offices as it was still the respondents counsel at the
time.25 He adds that Atty. Jacosalem never participated in the NLRC proceedings because he did not
enter his appearance as the respondents counsel before the labor agency; further, he did not even
indicate his office address on the motion for reconsideration he signed.

2. The CA erred in not applying the doctrine of piercing the veil of corporate fiction to the case.

Livesey bewails the CAs refusal to pierce Binswangers corporate veil in his bid to make the company
and Elliot liable, together with CBB, for the judgment award to him. He insists that CBB and
Binswanger are one and the same corporation as shown by the "overwhelming evidence" he
presented to the LA, the NLRC and the CA, as follows:

a.CBB stands for "Chesterton Blumenauer Binswanger."26

b.After executing the compromise agreement with him, through Elliot, CBB ceased operations
following a transaction where a substantial amount of CBB shares changed hands. Almost
simultaneously with CBBs closing (in July 2003), Binswanger was established with its headquarters
set up beside CBBs office at Unit 501, 5/F Peninsula Court Building in Makati City.27
c.Key CBB officers and employees moved to Binswanger led by Elliot, former CBB President who
became Binswangers President and CEO; Ferdie Catral, former CBB Director and Head of Operations;
Evangeline Agcaoili and Janet Pei.

d.Summons served on Binswanger in an earlier labor case was received by Binswanger using CBBs
receiving stamp.28

e.A Leslie Young received on August 23, 2003 an online query on whether CBB was the same as
Blumaneuver Binswanger (BB). Signing as Web Editor, Binswanger/CBB, Young replied via e-mail:29

We are known as either CBB (Chesterton Blumenauer Binswanger) or as Chesterton Petty Ltd. in the
Philippines. Contact info for our office in Manila is as follows:

Manila Philippines
CBB Philippines Unit 509, 5th Floor
Peninsula Court, Paseo de Roxas corner Makati Avenue
1226 Makati City Philippines Contact: Keith Elliot

f. In a letter dated August 21, 2003,30 Elliot noted a Binswanger bid solicitation for a project with the
Philippine National Bank (PNB) which

was actually a CBB project as shown by a CBB draft proposal to PNB dated January 24, 2003. 31

g.The affidavit32 dated October 1, 2003 of Hazel de Guzman, another former CBB employee who also
filed an illegal dismissal case against the company, attested to the existence of Liveseys
documentary evidence in his own case and who deposed that at one time, Elliot told her of CBBs
plan to close the corporation and to organize another for the purpose of evading CBBs liabilities.

h.The findings33 of facts of LA Veneranda C. Guerrero who ruled in De Guzmans favor that bolstered
his own evidence in the present case.

3. The CA erred in not holding Elliot liable for the judgment award.

Livesey questions the CAs reliance on Laperal Development Corporation v. Court of Appeals, 34 Sunio,
et al. v. NLRC, et al.,35 and Palay, Inc., et al. v. Clave, etc., et al.,36 in support of its ruling that Elliot is
not liable to him for the LAs award. He argues that in these cases, the Court upheld the separate
personalities of the corporations and their officers/employees because there was no evidence that
the individuals sought to be held liable were in bad faith or that there were badges of fraud in their
actions against the aggrieved party or parties in said cases. He reiterates his submission to the CA
that the circumstances of the present case are different from those of the cited cases. He posits that
the closure of CBB and its immediate replacement by Binswanger could not have been possible
without Elliots guiding hand, such that when CBB ceased operations, Elliot (CBBs President and CEO)
moved to Binswanger in the same position. More importantly, Livesey points out, as signatory for
CBB in the compromise agreement between him (Livesey) and CBB, Elliot knew that it had not been
and would never be fully satisfied.

Livesey thus laments Elliots devious scheme of leaving him an unsatisfied award, stressing that Elliot
was the chief orchestrator of CBB and Binswangers fraudulent act of evading the full satisfaction of
the compromise agreement. In this light, he submits that the Courts ruling in

A.C. Ransom Labor Union-CCLU v. NLRC,37 which deals with the issue of who is liable for the workers
backwages when a corporation ceases operations, should apply to his situation.

The RespondentsPosition

Through their comment38 and memorandum,39 the respondents pray that the petition be denied for
the following reasons:

1. The NLRC had no jurisdiction over the dispute between Livesey and CBB/Dwyer as it involved an
intra-corporate controversy; under Republic Act No. 8799, the Regional Trial Court exercises
jurisdiction over the case.
As shown by the records, Livesey was appointed as CBBs Managing Director during the relevant
period and was also a shareholder, making him a corporate officer.

2.There was no employer-employee relationship between Livesey and Binswanger. Under Article 217
of the Labor Code, the labor arbiters and the NLRC have jurisdiction only over disputes where there is
an employer- employee relationship between the parties.

3.The NLRC erred in applying the doctrine of piercing the veil of corporate fiction to the case based
only on mere assumptions. Point by point, they take exception to Liveseys submissions as follows:

a.The e-mail statement in reply to an online query of Young (CBBs Web Editor) that CBB is known as
Chesterton Blumenauer Binswanger or Chesterton Petty. Ltd. to establish a connection between CBB
and Binswanger is inconclusive as there was no mention in the statement of Binswanger Philippines,
Inc.

b.The affidavit of De Guzman, former CBB Associate Director, who also resigned from the company
like Livesey, has no probative value as it was self-serving and contained only misrepresentation of
facts, conjectures and surmises.

c.When Binswanger was organized and incorporated, CBB had already been abandoned by its Board
of Directors and no longer subsidized by CBB-Hongkong; it had no business operations to work with.

d.The mere transfer of Elliot and Catral from CBB to Binswanger is not a ground to pierce the
corporate veil in the present case absent a clear evidence supporting the application of the doctrine.
The NLRC applied the doctrine on the basis only of LA Guerreros decision in the De Guzman case.

e.The respondents petition for certiorari was filed on time. Atty. Jacosalem, who was presumed to
have been engaged as the respondents counsel, was deemed to have received a copy of the NLRC
resolution (denying the motion for reconsideration) on March 17, 2006 when he requested and
secured a copy from the NLRC. The petition was filed on May 15, 2006 or fifty-nine (59)days from
March 17, 2006. Atty. Jacosalem may have failed to indicate his address on the motion for
reconsideration he filed but that is not a reason for him to be deprived of the notices and processes
of the case.

The Courts Ruling

The procedural question

The respondents petition for certiorari before the CA was filed out of time. The sixty (60)-day filing
period under Rule 65 of the Rules of Court should have been counted from January 19, 2006, the
date of receipt of a copy of the NLRC resolution denying the respondents motion for reconsideration
by the Corporate Counsels Philippines, Law Offices which was the respondents counsel of record at
the time. The respondents cannot insist that Atty. Jacosalems receipt of a copy of the resolution on
March 17, 2006 as the reckoning date for the filing of the petition as we shall discuss below.

The CA chided the NLRC for serving a copy of the resolution on the Corporate Counsels Philippines,
Law Offices, instead of on Atty. Jacosalem as it believed that the labor tribunal impliedly recognized
Atty. Jacosalem as the respondents counsel when it acted on the motion for reconsideration that he
signed. As we see it, the fault was not on the NLRC but on Atty. Jacosalem himself as he left no
forwarding address with the NLRC, a serious lapse that even he admitted. 40 This is a matter that
cannot just be taken for granted as it betrays a careless legal representation that can cause adverse
consequences to the other party.

To our mind, Atty. Jacosalems non-observance of a simple, but basic requirement in the practice of
law lends credence to Liveseys claim that the lawyer did not formally enter his appearance before
the NLRC as the respondents new counsel; if it had been otherwise, he would have supplied his
office address to the NLRC. Also, had he exercised due diligence in the performance of his duty as
counsel, he could have inquired earlier with the NLRC and should not have waited as late as March
17, 2006 about the outcome of the respondents motion for reconsideration which was filed as early
as October 28, 2005.
To reiterate, the filing of the respondents petition for certiorari should have been reckoned from
January 19, 2006 when a copy of the subject NLRC resolution was received by the Corporate Counsels
Philippines, Law Offices, which, as of that date, had not been discharged or had withdrawn and
therefore remained to be the respondents counsel of record. Clearly, the petition for certiorari was
filed out of time. Section 6(a), Rule III of the NLRC Revised Rules of Procedure provides that "[f]or
purposes of appeal, the period shall be counted from receipt of such decisions, resolutions, or orders
by the counsel or representative of record."

We now come to the issue of whether the NLRC had jurisdiction over the controversy between
Livesey and CBB/Dwyer on the ground that it involved an intra-corporate dispute.

Based on the facts of the case, we find this issue to have been rendered academic by the
compromise agreement between Livesey and CBB and approved by LA Reyno.41 That CBB reneged in
the fulfillment of its obligation under the agreement is no reason to revive the issue and further
frustrate the full settlement of the obligation as agreed upon.

The substantive aspect of the case

Even if we rule that the respondents appeal before the CA had been filed on time, we believe and so
hold that the appellate court committed a reversible error of judgment in its challenged decision.

The NLRC committed no grave abuse of discretion in reversing LA Laderas ruling as there is
substantial evidence in the records that Livesey was prevented from fully receiving his monetary
entitlements under the compromise agreement between him and CBB, with Elliot signing for CBB as
its President and CEO. Substantial evidence is more than a scintilla; it means such relevant evidence
as a reasonable mind might accept as adequate to support a conclusion.42

Shortly after Elliot forged the compromise agreement with Livesey, CBB ceased operations, a
corporate event that was not disputed by the respondents. Then Binswanger suddenly appeared. It
was established almost simultaneously with CBBs closure, with no less than Elliot as its President
and CEO. Through the confluence of events surrounding CBBs closure and Binswangers sudden
emergence, a reasonable mind would arrive at the conclusion that Binswanger is CBBs alter ego or
that CBB and Binswanger are one and the same corporation. There are also indications of badges of
fraud in Binswangers incorporation. It was a business strategy to evade CBBs financial liabilities,
including its outstanding obligation to Livesey.

The respondents impugned the probative value of Liveseys documentary evidence and insist that
the NLRC erred in applying the doctrine of piercing the veil of corporate fiction in the case to avoid
liability. They consider the NLRC conclusions as mere assumptions.

We disagree.

It has long been settled that the law vests a corporation with a personality distinct and separate from
its stockholders or members. In the same vein, a corporation, by legal fiction and convenience, is an
entity shielded by a protective mantle and imbued by law with a character alien to the persons
comprising it.43 Nonetheless, the shield is not at all times impenetrable and cannot be extended to a
point beyond its reason and policy. Circumstances might deny a claim for corporate personality,
under the "doctrine of piercing the veil of corporate fiction."

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes.44 Under
the doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions,45 in which case, the fiction will be disregarded and the individuals composing it and the
two corporations will be treated as identical.46

In the present case, we see an indubitable link between CBBs closure and Binswangers
incorporation. CBB ceased to exist only in name; it re-emerged in the person of Binswanger for an
urgent purpose
 to avoid payment by CBB of the last two installments of its monetary obligation to Livesey, as well
as its other financial liabilities. Freed of CBBs liabilities, especially that owing to Livesey, Binswanger
can continue, as it did continue, CBBs real estate brokerage business.

Liveseys evidence, whose existence the respondents never denied, converged to show this
continuity of business operations from CBB to Binswanger.1wphi1 It was not just coincidence that
Binswanger is engaged in the same line of business CBB embarked on: (1) it even holds office in the
very same building and on the very same floor where CBB once stood; (2) CBBs key officers, Elliot, no
less, and Catral moved over to Binswanger, performing the tasks they were doing at CBB; (3)
notwithstanding CBBs closure, Binswangers Web Editor (Young), in an e-mail correspondence,
supplied the information that Binswanger is "now known" as either CBB (Chesterton Blumenauer
Binswanger or as Chesterton Petty, Ltd., in the Philippines; (4) the use of Binswanger of CBBs
paraphernalia (receiving stamp) in connection with a labor case where Binswanger was summoned
by the authorities, although Elliot claimed that he bought the item with his own money; and (5)
Binswangers takeover of CBBs project with the PNB.

While the ostensible reason for Binswangers establishment is to continue CBBs business operations
in the Philippines, which by itself is not illegal, the close proximity between CBBs disestablishment
and Binswangers coming into existence points to an unstated but urgent consideration which, as we
earlier noted, was to evade CBBs unfulfilled financial obligation to Livesey under the compromise
agreement.47

This underhanded objective, it must be stressed, can only be attributed to Elliot as it was apparent
that Binswangers stockholders had nothing to do with Binswangers operations as noted by the
NLRC and which the respondents did not deny.48 Elliot was well aware of the compromise agreement
between Livesey and CBB, as he "agreed and accepted" the terms of the agreement 49 for CBB. He
was also well aware that the last two installments of CBBs obligation to Livesey were due on June 30,
2003 and September 30, 2003. These installments were not met and the reason is that after the
alleged sale of the majority of CBBs shares of stock, it closed down.

With CBBs closure, Livesey asked why people would buy into a corporation and simply close it down
immediately thereafter?50 The answer

to pave the way for CBBs reappearance as Binswanger. Elliots "guiding hand," as Livesey puts it,
is very much evident in CBBs demise and Binswangers creation. Elliot knew that CBB had not fully
complied with its financial obligation under the compromise agreement. He made sure that it would
not be fulfilled when he allowed CBB's closure, despite the condition in the agreement that "unless
and until the Compromise Amount has been fully settled and paid by the Company in favor of Mr.
Livesey, the Company shall not x x x suspend, discontinue, or cease its entire or a substantial portion
of its business operations[.]"51

What happened to CBB, we believe, supports Livesey's assertion that De Guzman, CBB's former
Associate Director, informed him that at one time Elliot told her of CBB 's plan to close the
corporation and organize another for the purpose of evading CBB 's liabilities to Livesey and its other
financial liabilities.52 This wrongful intent we cannot and must not condone, for it will give a premium
to an iniquitous business strategy where a corporation is formed or used for a non-legitimate
purpose, such as to evade a just and due obligation.53 We, therefore, find Elliot as liable as
Binswanger for CBB 's unfulfilled obligation to Livesey.

WHEREFORE, premises considered, we hereby GRANT the petition. The decision dated August 18,
2006 and the Resolution dated March 29, 2007 of the Court of Appeals are SET ASIDE. Binswanger
Philippines, Inc. and Keith Elliot (its President and CEO) are declared jointly and severally liable for
the second and third installments of CBB 's liability to Eric Godfrey Stanley Livesey under the
compromise agreement dated October 14, 2002. Let the case record be remanded to the National
Labor Relations Commission for execution of this Decision.

Costs against the respondents.

SO ORDERED.
G.R. No. 140667 August 12, 2004

WOODCHILD HOLDINGS, INC., petitioner,

vs.
ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision 1 of the Court of Appeals in CA-G.R. CV No.
56125 reversing the Decision2 of the Regional Trial Court of Makati, Branch 57, which ruled in favor of
the petitioner.

The Antecedents

The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric
and Construction Company, was the

owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title
(TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1
which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo,
Rizal.

At a special meeting on May 17, 1991, the respondent's Board of Directors approved a resolution
authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2
covered by TCT No. 78086, with an area of 7,213 square meters, at a price and under such terms and
conditions which he deemed most reasonable and advantageous to the corporation; and to execute,
sign and deliver the pertinent sales documents and receive the proceeds of the sale for and on behalf
of the company.3

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT No.
78086 on which it planned to construct its warehouse building, and a portion of the adjoining lot, Lot
No. 491-A-3-B-1, so that its 45-foot container van would be able to readily enter or leave the
property. In a Letter to Roxas dated June 21, 1991, WHI President Jonathan Y. Dy offered to buy Lot
No. 491-A-3-B-2 under stated terms and conditions for P1,000 per square meter or at the price of
P7,213,000.4 One of the terms incorporated in Dy's offer was the following provision:

5. This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER, that he
holds a good and registrable title to the property, which shall be conveyed CLEAR and FREE of all liens
and encumbrances, and that the area of 7,213 square meters of the subject property already
includes the area on which the right of way traverses from the main lot (area) towards the exit to the
Sumulong Highway as shown in the location plan furnished by the Owner/Seller to the buyer.
Furthermore, in the event that the right of way is insufficient for the buyer's purposes (example:
entry of a 45-foot container), the seller agrees to sell additional square meter from his current
adjacent property to allow the buyer to full access and full use of the property.5

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later or on July
1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI, as vendee, executed a
contract to sell in which RECCI bound and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by
TCT No. 78086 for P7,213,000.6On September 5, 1991, a Deed of Absolute Sale7 in favor of WHI was
issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for P5,000,000, receipt
of which was acknowledged by Roxas under the following terms and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use of and a
right of way from Sumulong Highway to the property herein conveyed consists of 25 square meters
wide to be used as the latter's egress from and ingress to and an additional 25 square meters in the
corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering area for Vendee's vehicles.

The Vendor agrees that in the event that the right of way is insufficient for the Vendee's use (ex entry
of a 45-foot container) the Vendor agrees to sell additional square meters from its current adjacent
property to allow the Vendee full access and full use of the property.

The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to the
parcel of land and improvements herein conveyed, against all claims of any and all persons or
entities, and that the Vendor hereby warrants the right of the Vendee to possess and own the said
parcel of land and improvements thereon and will defend the Vendee against all present and future
claims and/or action in relation thereto, judicial and/or administrative. In particular, the Vendor shall
eject all existing squatters and occupants of the premises within two (2) weeks from the signing
hereof. In case of failure on the part of the Vendor to eject all occupants and squatters within the
two-week period or breach of any of the stipulations, covenants and terms and conditions herein
provided and that of contract to sell dated 1 July 1991, the Vendee shall have the right to cancel the
sale and demand reimbursement for all payments made to the Vendor with interest thereon at 36%
per annum.8

On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for P8,649,000 to
WHI for the construction of the warehouse building on a portion of the property with an area of
5,088 square meters.9 WBI proposed to start the project on October 1, 1991 and to turn over the
building to WHI on February 29, 1992.10

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed its lease
agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be constructed at the
rental rate of P65 per square meter. Ponderosa emphasized the need for the warehouse to be ready
for occupancy before April 1, 1992.11 WHI accepted the offer. However, WBI failed to commence the
construction of the warehouse in October 1, 1991 as planned because of the presence of squatters in
the property and suggested a renegotiation of the contract after the squatters shall have been
evicted.12 Subsequently, the squatters were evicted from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the warehouse
building for P11,804,160.13 The contractor started construction in April 1992 even before the building
officials of Antipolo City issued a building permit on May 28, 1992. After the warehouse was finished,
WHI issued on March 21, 1993 a certificate of occupancy by the building official. Earlier, or on March
18, 1993, WHI, as lessor, and Ponderosa, as lessee, executed a contract of lease over a portion of the
property for a monthly rental of P300,000 for a period of three years from March 1, 1993 up to
February 28, 1996.14

In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a
portion of the property over which WHI had been granted a right of way. Roxas promised to look into
the matter. Dy and Roxas discussed the need of the WHI to buy a 500-square-meter portion of Lot
No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in the deed of absolute sale. However,
Roxas died soon thereafter. On April 15, 1992, the WHI wrote the RECCI, reiterating its verbal
requests to purchase a portion of the said lot as provided for in the deed of absolute sale, and
complained about the latter's failure to eject the squatters within the three-month period agreed
upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085
for its beneficial use within 72 hours from notice thereof, otherwise the appropriate action would be
filed against it. RECCI rejected the demand of WHI. WHI reiterated its demand in a Letter dated May
29, 1992. There was no response from RECCI.
On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court of
Makati, for specific performance and damages, and alleged, inter alia, the following in its complaint:

5. The "current adjacent property" referred to in the aforequoted paragraph of the Deed of Absolute
Sale pertains to the property covered by Transfer Certificate of Title No. N-78085 of the Registry of
Deeds of Antipolo, Rizal, registered in the name of herein defendant Roxas Electric.

6. Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of Absolute
Sale unjustifiably refused to deliver to Woodchild Holdings the stipulated beneficial use and right of
way consisting of 25 square meters and 55 square meters to the prejudice of the plaintiff.

7. Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild Holdings
for its beneficial use is inadequate as turning and/or maneuvering area of its 45-foot container van,
Woodchild Holdings manifested its intention pursuant to para. 5 of the Deed of Sale to purchase
additional square meters from Roxas Electric to allow it full access and use of the purchased
property, however, Roxas Electric refused and failed to merit Woodchild Holdings' request contrary
to defendant Roxas Electric's obligation under the Deed of Absolute Sale (Annex "A").

8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the premises
within the stipulated time frame and as a consequence thereof, plaintiff's planned construction has
been considerably delayed for seven (7) months due to the squatters who continue to trespass and
obstruct the subject property, thereby Woodchild Holdings incurred substantial losses amounting to
P3,560,000.00 occasioned by the increased cost of construction materials and labor.

9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation under Annex "A,"
Woodchild Holdings suffered unrealized income of P300,000.00 a month or P2,100,000.00 supposed
income from rentals of the subject property for seven (7) months.

10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply with its
obligations and warranties under the Deed of Absolute Sale but notwithstanding such demand,
defendant Roxas Electric refused and failed and continue to refuse and fail to heed plaintiff's demand
for compliance.

Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and made an integral
part hereof.

11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas Electric to
particularly annotate on Transfer Certificate of Title No. N-78085 the agreement under Annex "A"
with respect to the beneficial use and right of way, however, Roxas Electric unjustifiably ignored and
disregarded the same.

Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and made an integral
part hereof.

12. By reason of Roxas Electric's continuous refusal and failure to comply with Woodchild Holdings'
valid demand for compliance under Annex "A," the latter was constrained to litigate, thereby
incurring damages as and by way of attorney's fees in the amount of P100,000.00 plus costs of suit
and expenses of litigation.15

The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild Holdings and
ordering Roxas Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and 55
square meters;

b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access and use of
the purchased property pursuant to para. 5 of the Deed of Absolute Sale;
c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right of way
granted to Woodchild Holdings under the Deed of Absolute Sale;

d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages and
unrealized income;

e) to pay attorney's fees in the amount of P100,000.00; and

f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.16

In its answer to the complaint, the RECCI alleged that it never authorized its former president,
Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to sell
any portion thereof or create a lien or burden thereon. It alleged that, under the Resolution
approved on May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No.
78086. As such, the grant of a right of way and the agreement to sell a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085 in the said deed are ultra vires. The RECCI further alleged that the
provision therein that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential
elements of a binding contract.17

In its amended answer to the complaint, the RECCI alleged that the delay in the construction of its
warehouse building was due to the failure of the WHI's contractor to secure a building permit
thereon.18

During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot No.
491-A-3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal portion
of which reads:

WHEREFORE, judgment is hereby rendered directing defendant:

(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m. and
55 sq. m.;

(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said
plaintiff full access and use of the purchased property pursuant to Par. 5 of their Deed of Absolute
Sale;

(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by their
Deed of Absolute Sale;

(4) To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff's unrealized
income;

(5) To pay plaintiff P100,000 representing attorney's fees; and

To pay the costs of suit.

SO ORDERED.19

The trial court ruled that the RECCI was estopped from disowning the apparent authority of Roxas
under the May 17, 1991 Resolution of its Board of Directors. The court reasoned that to do so would
prejudice the WHI which transacted with Roxas in good faith, believing that he had the authority to
bind the WHI relating to the easement of right of way, as well as the right to purchase a portion of
Lot No. 491-A-3-B-1 covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a decision on November 9, 1999
reversing that of the trial court, and ordering the dismissal of the complaint. The CA ruled that, under
the resolution of the Board of Directors of the RECCI, Roxas was merely authorized to sell Lot No.
491-A-3-B-2 covered by TCT No. 78086, but not to grant right of way in favor of the WHI over a
portion of Lot No. 491-A-3-B-1, or to grant an option to the petitioner to buy a portion thereof. The
appellate court also ruled that the grant of a right of way and an option to the respondent were so
lopsided in favor of the respondent because the latter was authorized to fix the location as well as
the price of the portion of its property to be sold to the respondent. Hence, such provisions
contained in the deed of absolute sale were not binding on the RECCI. The appellate court ruled that
the delay in the construction of WHI's warehouse was due to its fault.

The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE (EXH. "C") IS ULTRA
VIRES.

II.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO
ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS THE
STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID STIPULATIONS
AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. "C").

III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE THAT THE
STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. "C") WERE DISADVANTAGEOUS TO THE
APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE PROCESS BY THE
ASSAILED DECISION.

V.

THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT TO EVICT THE
SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. "C").

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO
DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00 REPRESENTING
ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED INCOME AS WELL AS ATTORNEY'S FEES.20

The threshold issues for resolution are the following: (a) whether the respondent is bound by the
provisions in the deed of absolute sale granting to the petitioner beneficial use and a right of way
over a portion of Lot

No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner to buy
a portion thereof, and, if so, whether such agreement is enforceable against the respondent; (b)
whether the respondent failed to eject the squatters on its property within two weeks from the
execution of the deed of absolute sale; and, (c) whether the respondent is liable to the petitioner for
damages.

On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the respondent
authorized Roxas, then its president, to grant a right of way over a portion of Lot No. 491-A-3-B-1 in
favor of the petitioner, and an option for the respondent to buy a portion of the said property. The
petitioner contends that when the respondent sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it
(respondent) was well aware of its obligation to provide the petitioner with a means of ingress to or
egress from the property to the Sumulong Highway, since the latter had no adequate outlet to the
public highway. The petitioner asserts that it agreed to buy the property covered by TCT No. 78085
because of the grant by the respondent of a right of way and an option in its favor to buy a portion of
the property covered by TCT No. 78085. It contends that the respondent never objected to Roxas'
acceptance of its offer to purchase the property and the terms and conditions therein; the
respondent even allowed Roxas to execute the deed of absolute sale in its behalf. The petitioner
asserts that the respondent even received the purchase price of the property without any objection
to the terms and conditions of the said deed of sale. The petitioner claims that it acted in good faith,
and contends that after having been benefited by the said sale, the respondent is estopped from
assailing its terms and conditions. The petitioner notes that the respondent's Board of Directors
never approved any resolution rejecting the deed of absolute sale executed by Roxas for and in its
behalf. As such, the respondent is obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No.
78085 with an area of 500 square meters at the price of P1,000 per square meter, based on its
evidence and Articles 649 and 651 of the New Civil Code.

For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991
Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of the
petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the
respondent was not bound by such provisions contained in the deed of absolute sale. Besides, the
respondent contends, the petitioner cannot enforce its right to buy a portion of the said property
since there was no agreement in the deed of absolute sale on the price thereof as well as the specific
portion and area to be purchased by the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:

A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express authorization from the
corporation's board of directors. Section 23 of BP 68, otherwise known as the Corporation Code of
the Philippines, provides:

"SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and
qualified."

Indubitably, a corporation may act only through its board of directors or, when authorized either by
its by-laws or by its board resolution, through its officers or agents in the normal course of business.
The general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. 22

Generally, the acts of the corporate officers within the scope of their authority are binding on the
corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond
the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or
tacitly, or is estopped from denying them:

Art. 1910. The principal must comply with all the obligations which the agent may have contracted
within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except
when he ratifies it expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable
against the corporation unless ratified by the corporation.23
In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an assumed
agency, whether the assumed agency be a general or special one, are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent
of authority, and in case either is controverted, the burden of proof is upon them to establish it.

In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a portion
of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden thereon. The
petitioner was thus burdened to prove that the respondent so authorized Roxas to sell the same and
to create a lien thereon.

Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the
respondent, which is worded as follows:

RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested
buyer, its 7,213-sq.-meter property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer
Certificate of Title No. N-78086, at a price and on terms and conditions which he deems most
reasonable and advantageous to the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as he is hereby
authorized to execute, sign and deliver the pertinent sales documents and receive the proceeds of
sale for and on behalf of the company.25

Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in
favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a
portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by
TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1,
or to create or convey real rights thereon. Neither may such authority be implied from the authority
granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner "on such terms and conditions which he
deems most reasonable and advantageous." Under paragraph 12, Article 1878 of the New Civil Code,
a special power of attorney is required to convey real rights over immovable property.26 Article 1358
of the New Civil Code requires that contracts which have for their object the creation of real rights
over immovable property must appear in a public document.27 The petitioner cannot feign ignorance
of the need for Roxas to have been specifically authorized in writing by the Board of Directors to be
able to validly grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that
if the act of the agent is one which requires authority in writing, those dealing with him are charged
with notice of that fact.28

Powers of attorney are generally construed strictly and courts will not infer or presume broad
powers from deeds which do not sufficiently include property or subject under which the agent is to
deal.29 The general rule is that the power of attorney must be pursued within legal strictures, and the
agent can neither go beyond it; nor beside it. The act done must be legally identical with that
authorized to be done.30 In sum, then, the consent of the respondent to the assailed provisions in the
deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it.

We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell and the
deed of absolute sale and failing to reject or disapprove the same, the respondent thereby gave him
apparent authority to grant a right of way over Lot No. 491-A-3-B-1 and to grant an option for the
respondent to sell a portion thereof to the petitioner. Absent estoppel or ratification, apparent
authority cannot remedy the lack of the written power required under the statement of frauds. 31 In
addition, the petitioner's fallacy is its wrong assumption of the unproved premise that the
respondent had full knowledge of all the terms and conditions contained in the deed of absolute sale
when Roxas executed it.

It bears stressing that apparent authority is based on estoppel and can arise from two instances: first,
the principal may knowingly permit the agent to so hold himself out as having such authority, and in
this way, the principal becomes estopped to claim that the agent does not have such authority;
second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably
prudent person to believe that he actually has such authority.32 There can be no apparent authority
of an agent without acts or conduct on the part of the principal and such acts or conduct of the
principal must have been known and relied upon in good faith and as a result of the exercise of
reasonable prudence by a third person as claimant and such must have produced a change of
position to its detriment. The apparent power of an agent is to be determined by the acts of the
principal and not by the acts of the agent.33

For the principle of apparent authority to apply, the petitioner was burdened to prove the following:
(a) the acts of the respondent justifying belief in the agency by the petitioner; (b) knowledge thereof
by the respondent which is sought to be held; and, (c) reliance thereon by the petitioner consistent
with ordinary care and prudence.34 In this case, there is no evidence on record of specific acts made
by the respondent35 showing or indicating that it had full knowledge of any representations made by
Roxas to the petitioner that the respondent had authorized him to grant to the respondent an option
to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien
thereon, or that the respondent allowed him to do so.

The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of Lot No.
491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of way on the
adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell a portion thereof, is
barren of merit. It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and
the latter had taken possession of the property. As such, the respondent had the right to retain the
P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of the
principal to be considered as an implied ratification of an unauthorized act of an agent, such act must
be inconsistent with any other hypothesis than that he approved and intended to adopt what had
been done in his name.36 Ratification is based on waiver the intentional relinquishment of a known
right. Ratification cannot be inferred from acts that a principal has a right to do independently of the
unauthorized act of the agent. Moreover, if a writing is required to grant an authority to do a
particular act, ratification of that act must also be in writing.37 Since the respondent had not ratified
the unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent's retention
of the amount, it cannot thereby be implied that it had ratified the unauthorized acts of its agent,
Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its complaint for damages
against the respondent on its finding that the delay in the construction of its warehouse was due to
its (petitioner's) fault. The petitioner asserts that the CA should have affirmed the ruling of the trial
court that the respondent failed to cause the eviction of the squatters from the property on or
before September 29, 1991; hence, was liable for P5,660,000. The respondent, for its part, asserts
that the delay in the construction of the petitioner's warehouse was due to its late filing of an
application for a building permit, only on May 28, 1992.

The petitioner's contention is meritorious. The respondent does not deny that it failed to cause the
eviction of the squatters on or before September 29, 1991. Indeed, the respondent does not deny
the fact that when the petitioner wrote the respondent demanding that the latter cause the eviction
of the squatters on April 15, 1992, the latter were still in the premises. It was only after receiving the
said letter in April 1992 that the respondent caused the eviction of the squatters, which thus cleared
the way for the petitioner's contractor to commence the construction of its warehouse and secure
the appropriate building permit therefor.

The petitioner could not be expected to file its application for a building permit before April 1992
because the squatters were still occupying the property. Because of the respondent's failure to cause
their eviction as agreed upon, the petitioner's contractor failed to commence the construction of the
warehouse in October 1991 for the agreed price of P8,649,000. In the meantime, costs of
construction materials spiraled. Under the construction contract entered into between the petitioner
and the contractor, the petitioner was obliged to pay P11,804,160,39including the additional work
costing P1,441,500, or a net increase of P1,712,980.40 The respondent is liable for the difference
between the original cost of construction and the increase thereon, conformably to Article 1170 of
the New Civil Code, which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay
and those who in any manner contravene the tenor thereof, are liable for damages.
The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the lease of
the property to the Ponderosa Leather Goods Company. The respondent is, thus, liable to the
petitioner for the said amount, under Articles 2200 and 2201 of the New Civil Code:

Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but
also that of the profits which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good
faith is liable shall be those that are the natural and probable consequences of the breach of the
obligation, and which the parties have foreseen or could have reasonably foreseen at the time the
obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation.

In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the assailed Decision of
the Court of Appeals WITH MODIFICATION. The respondent is ordered to pay to the petitioner the
amount of P5,612,980 by way of actual damages and P100,000 by way of attorney's fees. No costs.

SO ORDERED.