PIONEER INSURANCE & SURETY CORPORATION vs. THE HON. COURT OF 12.
12. A decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's
APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM
G.R. No. 84197 July 28, 1989
Facts:
1. In 1965, Jacob S. Lim was engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.
2. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered
into and executed a sales contract for the sale and purchase of two DC-3A Type
aircrafts and one set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments.
3. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed
and issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for the
balance price of the aircrafts and spare parts.
4. It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
ConstancioMaglana contributed some funds used in the purchase of the aircrafts
and spare parts.
5. The funds were supposed to be their contributions to a new corporation
proposed by Lim to expand his airline business.
6. They executed two separate indemnity agreements in favor of Pioneer, one
signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and
the Cervanteses.
7. The indemnity agreements stipulated that the indemnitors principally agree and
bind themselves jointly and severally to indemnify and hold and save harmless
Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may
incur in consequence of having become surety upon the bond/note and to pay,
reimburse and make good to Pioneer, its successors and assigns, all sums and
amounts of money which it or its representatives should or may pay or cause to
be paid or become liable to pay on them of whatever kind and nature.
8. Lim doing business under the name and style of SAL executed in favor of Pioneer
as deed of chattel mortgage as security for the latter's suretyship in favor of the
former. It was stipulated therein that Lim transfer and convey to the surety the
two aircrafts.
9. Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
10. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage.
11. The Cervanteses and Maglana, however, filed a third party claim alleging that they
are co-owners of the aircrafts.
complaint against all other defendants.
Issues:
What legal rules govern the relationship among co-investors whose
agreement was to do business through the corporate vehicle but who failed to
incorporate the entity in which they had chosen to invest?
How are the losses to be treated in situations where their contributions
to the intended 'corporation' were invested not through the corporate form?
Ruling:
While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed by the
supposed charter and the laws of the state relating thereto and not by the rules
governing partners, it is ordinarily held that persons who attempt, but fail, to form
a corporation and who carry on business under the corporate name occupy the
position of partners inter se. Thus, where persons associate themselves together
under articles to purchase property to carry on a business, and their organization
is so defective as to come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized. So, where
certain persons associated themselves as a corporation for the development of
land for irrigation purposes, and each conveyed land to the corporation, and two
of them contracted to pay a third the difference in the proportionate value of the
land conveyed by him, and no stock was ever issued in the corporation, it was
treated as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of the property
contributed by each. However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist, and it should be
implied only when necessary to do justice between the parties; thus, one who
takes no part except to subscribe for stock in a proposed corporation which is
never legally formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so as to be
liable as such in an action for settlement of the alleged partnership and
contribution. A partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts
illegally contracted by the latter.
 It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This gives
credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement.
No de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not
in behalf of his other would-be incorporators in transacting the sale of the
airplanes and spare parts.
People v. Quasha (1953)
G.R. No. L-6055
June 12, 1953
FACTS:
 William H. Quasha
 a member of the Philippine bar, committed a
crime of falsification of a public and commercial
document for causing it to appear that Arsenio
Baylon, a Filipino citizen, had subscribed to and
was the owner of 60.005 % of the subscribed
capital stock of Pacific Airways Corp.
(Pacific) when in reality the money paid belongs
to an American citizen whose name did not
appear in the article of incorporation,
o to circumvent the constitutional mandate that
no corp. shall be authorize to operate as a
public utility in the Philippines unless 60%
of its capital stock is owned by Filipinos.
 Found guilty after trial and sentenced to a term
of imprisonment and a fine
 Quasha appealed to this Court
 Primary purpose: to carry on the business of a
common carrier by air, land or water
 Baylon did not have the controlling vote because of
the difference in voting power between the preferred
shares and the common shares
ISSUE: For a corporation to be entitled to operate a
public utility is it necessary that it be organized with 60
per cent of its capital owned by Filipinos from the start?
HELD: No. For a corporation to be entitled to operate a
public utility it is not necessary that it be organized with
60 per cent of its capital owned by Filipinos from the
start. A corporation formed with capital that is entirely
alien may subsequently change the nationality of its
capital through transfer of shares to Filipino citizens.
Conversely, a corporation originally formed with
Filipino capital may subsequently change the national
status of said capital through transfer of shares to
foreigners. What need is there then for a corporation
that intends to operate a public utility to have, at the
time of its formation, 60 per cent of its capital owned by
Filipinos alone? That condition may anytime be attained
thru the necessary transfer of stocks. The moment for
determining whether a corporation is entitled to operate
as a public utility is when it applies for a franchise,
certificate, or any other form of authorization for that
purpose. And that can be done after the corporation has
already come into being and not while it is still being
formed. And at that moment, the corporation must show
that it has complied not only with the requirement of the
Constitution as to the nationality of its capital, but also
with the requirements of the Civil Aviation Law if it is a
common carrier by air, the Revised Administrative
Code if it is a common carrier by water, and the Public
Service Law if it is a common carrier by land or other
kind of public service.
Francisco Tatad vs
Jesus Garcia, Jr.
G.r. no. 114222, April 6, 1995
In 1989, the government planned to build a railway transit line
along EDSA. No bidding was made but certain corporations
were invited to prequalify. The only corporation to qualify was
the EDSA LRT Consortium which was obviously formed for
this particular undertaking. An agreement was then made
between the government, through the Department of
Transportation and Communication (DOTC), and EDSA LRT
Consortium. The agreement was based on the Build-
Operate-Transfer scheme provided for by law (RA 6957,
amended by RA 7718). Under the agreement, EDSA LRT
Consortium shall build the facilities, i.e., railways, and shall
supply the train cabs. Every phase that is completed shall be
turned over to the DOTC and the latter shall pay rent for the
same for 25 years. By the end of 25 years, it was projected
that the government shall have fully paid EDSA LRT
Consortium. Thereafter, EDSA LRT Consortium shall sell the
facilities to the government for $1.00.
However, Senators Francisco Tatad, John Osmeña, and
Rodolfo Biazon opposed the implementation of said
agreement as they averred that EDSA LRT Consortium is a
foreign corporation as it was organized under Hongkong
laws; that as such, it cannot own a public utility such as the
EDSA railway transit because this falls under the nationalized
areas of activities. The petition was filed against Jesus
Garcia, Jr. in his capacity as DOTC Secretary.
ISSUE: Whether or not the petition shall prosper.
HELD: No. The Supreme Court made a clarification. The SC
ruled that EDSA LRT Consortium, under the agreement,
does not and will not become the owner of a public utility
hence, the question of its nationality is misplaced. It is true
that a foreign corporation cannot own a public utility but in
this case what EDSA LRT Consortium will be owning are the
facilities that it will be building for the EDSA railway project.
There is no prohibition against a foreign corporation to own
facilities used for a public utility. Further, it cannot be said
that EDSA LRT Consortium will be the one operating the
public utility for it will be DOTC that will operate the railway
transit. DOTC will be the one exacting fees from the people
for the use of the railway and from the proceeds, it shall be
paying the rent due to EDSA LRT Consortium. All that EDSA
LRT Consortium has to do is to build the facilities and receive
rent from the use thereof by the government for 25 years – it
will not operate the railway transit. Although EDSA LRT
Consortium is a corporation formed for the purpose of
building a public utility it does not automatically mean that it
is operating a public utility. The moment for determining the
requisite Filipino nationality is when the entity applies for a
franchise, certificate or any other form of authorization for
that purpose.
Narra Nickel Mining and Development Corp. vs Redmont Consolidated
Mines Corporation
G.R. No. 195580 April 21, 2014
Facts: Sometime in December 2006, respondent Redmont Consolidated
Mines Corp. (Redmont), a domestic corporation organized and existing under
Philippine laws, took interest in mining and exploring certain areas of the
province of Palawan. After inquiring with the Department of Environment
and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by
Mineral Production Sharing Agreement (MPSA) applications of petitioners
Narra, Tesoro and McArthur. Petitioner McArthur, through its predecessor-
in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an
MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural
Resources (DENR). Subsequently, SMMI was issued MPSA-AMA-IVB-153
covering an area of over 1,782 hectares in Barangay Sumbiling, Municipality
of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area
of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and
EP were then transferred to Madridejos Mining Corporation (MMC) and, on
November 6, 2006, assigned to petitioner McArthur. Petitioner Narra
acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which
previously filed an application for an MPSA with the MGB, Region IV-B,
DENR on January 6, 1992. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas
and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA
application in favor of Narra. Another MPSA application of SMMI was filed
with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly
EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa
Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently
conveyed, transferred and assigned its rights and interest over the said MPSA
application to Tesoro. On January 2, 2007, Redmont filed before the Panel of
Arbitrators (POA) of the DENR three (3) separate petitions for the denial of
petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-
IVB-154 and MPSA IV-1-12. In the petitions, Redmont alleged that at least
60% of the capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder of
petitioners, it was the driving force behind petitioners’ filing of the MPSAs
over the areas covered by applications since it knows that it can only
participate in mining activities through corporations which are deemed
Filipino citizens. Redmont argued that given that petitioners’ capital stocks
were mostly owned by MBMI, they were likewise disqualified from engaging
in mining activities through MPSAs, which are reserved only for Filipino
citizens.
Issue: Whether or not the petitioner corporations are Filipino and can validly
be issued MPSA and EP.
Held: No. The SEC Rules provide for the manner of calculating the Filipino
interest in a corporation for purposes, among others, of determining
compliance with nationality requirements (the ‘Investee Corporation’). Such
manner of computation is necessary since the shares in the Investee
Corporation may be owned both by individual stockholders (‘Investing
Individuals’) and by corporations and partnerships (‘Investing Corporation’).
The said rules thus provide for the determination of nationality depending on
the ownership of the Investee Corporation and, in certain instances, the
Investing Corporation.
Under the SEC Rules, there are two cases in determining the nationality of
the Investee Corporation. The first case is the ‘liberal rule’, later coined by
the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares
belonging to corporations or partnerships at least 60% of the capital of which
is owned by Filipino citizens shall be considered as of Philippine nationality.’
Under the liberal Control Test, there is no need to further trace the ownership
of the 60% (or more) Filipino stockholdings of the Investing Corporation
since a corporation which is at least 60% Filipino-owned is considered as
Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains
to the portion in said Paragraph 7 of the 1967 SEC Rules which states, “but
if the percentage of Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality.” Under the Strict Rule or
Grandfather Rule Proper, the combined totals in the Investing Corporation
and the Investee Corporation must be traced (i.e., “grandfathered”) to
determine the total percentage of Filipino ownership. Moreover, the ultimate
Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee
Corporation.
In other words, based on the said SEC Rule and DOJ Opinion, the
Grandfather Rule or the second part of the SEC Rule applies only when the
60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the
joint venture corporation with Filipino and foreign stockholders with less
than 60% Filipino stockholdings [or 59%] invests in other joint venture
corporation which is either 60-40% Filipino-alien or the 59% less Filipino).
Stated differently, where the 60-40 Filipino- foreign equity ownership is not
in doubt, the Grandfather Rule will not apply.
Sulo ng Bayan vs. Araneta
[GR L-31061, 17 August 1976]
Facts: On 26 April 1966, Sulo ng Bayan, Inc. filed an accion de
revindicacion with the Court of First Instance of Bulacan, Fifth
Judicial District, Valenzuela, Bulacan, against Gregorio Araneta
Inc. (GAI), Paradise Farms Inc., National Waterworks & Sewerage
Authority (NAWASA), Hacienda Caretas Inc., and the Register of
Deeds of Bulacan to recover the ownership and possession of a
large tract of land in San Jose del Monte, Bulacan, containing an
area of 27,982,250 sq. ms., more or less, registered under the
Torrens System in the name of GAI, et. al.'s predecessors-in-
interest (who are members of the corporation). On 2 September
1966, GAI filed a motion to dismiss the amended complaint on the
grounds that (1) the complaint states no cause of action; and (2)
the cause of action, if any, is barred by prescription and laches.
Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to
dismiss based on the same grounds. NAWASA did not file any
motion to dismiss. However, it pleaded in its answer as special and
affirmative defenses lack of cause of action by Sulo ng Bayan Inc.
and the barring of such action by prescription and laches. On 24
January 1967, the trial court issued an Order dismissing the
(amended) complaint. On 14 February 1967, Sulo ng Bayan filed a
motion to reconsider the Order of dismissal, arguing among others
that the complaint states a sufficient cause of action because the
subject matter of the controversy in one of common interest to the
members of the corporation who are so numerous that the present
complaint should be treated as a class suit. The motion was denied
by the trial court in its Order dated 22 February 1967.
Sulo ng Bayan appealed to the Court of Appeals. On 3 September
1969, the Court of Appeals, upon finding that no question of fact
was involved in the appeal but only questions of law and
jurisdiction, certified the case to the Supreme Court for resolution
of the legal issues involved in the controversy.
Issue:
1. Whether the corporation (non-stock) may institute
an action in behalf of its individual members for the
recovery of certain parcels of land allegedly owned by said
members, among others.
2. Whether the complaint filed by the corporation in
behalf of its members may be treated as a class suit
Held:
1. It is a doctrine well-established and obtains both at law and in
equity that a corporation is a distinct legal entity to be considered
as separate and apart from the individual stockholders or members
who compose it, and is not affected by the personal rights,
obligations and transactions of its stockholders or members. The
property of the corporation is its property and not that of the
stockholders, as owners, although they have equities in it.
Properties registered in the name of the corporation are owned by
it as an entity separate and distinct from its members. Conversely,
a corporation ordinarily has no interest in the individual property of
its stockholders unless transferred to the corporation, "even in the
case of a one-man corporation." The mere fact that one is president
of a corporation does not render the property which he owns or
possesses the property of the corporation, since the president, as
individual, and the corporation are separate similarities. Similarly,
stockholders in a corporation engaged in buying and dealing in real
estate whose certificates of stock entitled the holder thereof to an
allotment in the distribution of the land of the corporation upon
surrender of their stock certificates were considered not to have
such legal or equitable title or interest in the land, as would support
a suit for title, especially against parties other than the corporation.
It must be noted, however, that the juridical personality of the
corporation, as separate and distinct from the persons composing
it, is but a legal fiction introduced for the purpose of convenience
and to subserve the ends of justice. This separate personality of
the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work -an injustice, or where necessary to achieve
equity. It has not been claimed that the members have assigned or
transferred whatever rights they may have on the land in question
to the corporation. Absent any showing of interest, therefore, a
corporation, has no personality to bring an action for and in behalf
of its stockholders or members for the purpose of recovering
property which belongs to said stockholders or members in their
personal capacities.
2. In order that a class suit may prosper, the following requisites
must be present: (1) that the subject matter of the controversy is
one of common or general interest to many persons; and (2) that
the parties are so numerous that it is impracticable to bring them
all before the court. Here, there is only one party plaintiff, and the
corporation does not even have an interest in the subject matter of
the controversy, and cannot, therefore, represent its members or
stockholders who claim to own in their individual capacities
ownership of the said property. Moreover, a class suit does not lie
in actions for the recovery of property where several persons claim
partnership of their respective portions of the property, as each one
could alleged and prove his respective right in a different way for
each portion of the land, so that they cannot all be held to have
identical title through acquisition/prescription.
Magsaysay-Labrador, et. al. vs. Court of Appeals
[GR 58168, 19 December 1989]
Facts: On 9 February 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, for the
annulment of the Deed of Assignment executed by the late Senator
in favor of SUBIC (as a result of which TCT 3258 was cancelled
and TCT 22431 issued in the name of SUBIC), for the annulment
of the Deed of Mortgage executed by SUBIC in favor of
FILMANBANK (dated 28 April 1977 in the amount of P
2,700,000.00), and cancellation of TCT 22431 by the Register of
Deeds, and for the latter to issue a new title in her favor. On 7
March 1979, Concepcion Magsaysay-Labrador, Soledad
Magsaysay-Cabrera, Luisa Magsaysay-Corpuz, Felicidad
Magsaysay, and Mercedes Magsaysay-Diaz, sisters of the late
senator, filed a motion for intervention on the ground that on 20
June 1978, their brother conveyed to them 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 26 July 1979, the trial 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, the 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 Magsaysay sisters
have against the late Senator or against SUBIC for that matter can
be ventilated in a separate proceeding. The motion for
reconsideration of the Magsaysay sisters was denied. Hence, the
petition for review on certiorari.

Issue: Whether the Magsaysay sister, allegedly stockholders of

SUBIC, are interested parties in a case where corporate properties
are in dispute.

Held: Viewed in the light of Section 2, Rule 12 of the Revised Rules

of Court, the Magsaysay sisters have no legal interest in the
subject matter in litigation so as to entitle them to intervene in the
proceedings. 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 . Here, the interest, if it exists at all, of the Magsaysay
sisters 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.