Republic of the Philippines implementation of the Supplemental MOA, PHILCOMSAT subscribed to
SUPREME COURT ₱79,050,000,000 shares of LMI.7 Sometime in 1997, LMI changed its name to PHC. It
Manila
SECOND DIVISION
G.R. No. 203023 June 17, 2015
PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION and PHILCOMSAT
HOLDINGS CORPORATION,Petitioners,
vs.
SANDIGANBAYAN 5th DIVISION and PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT, Respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
filed by Philippine Communications Satellite Corporation (PHILCOMSAT) and
PHILCOMSAT Holdings Corporation (PHC) [petitioners] against respondents, the
Sandiganbayan and the Presidential Commission on Good Government (PCGG).
Petitioners are assailing the Sandiganbayan's Resolution1 promulgated on 3 May 2012
dismissing their complaint in Civil Case No. SB-12-CVL-0001, and the
Resolution2 promulgated on 14 August 2012 denying their motion for reconsideration.
The Facts
PHC is a domestic corporation listed in the Philippine Stock Exchange (PSE). It was
previously known as Liberty Mines, Inc. (LMI) and had been previously engaged in the
discovery, exploitation, development and exploration of oils.3
On 13 September 1995, Oliverio G.Laperal (Laperal), then Chairman of the Board and
President of LMI, and Honorio Poblador III, then President of PHILCOMSAT, signed a
Memorandum of Agreement4 for the latter to gain controlling interest in LMI through an
increase in its authorized capital stock.5
On 24 June 1996, Laperal and PHILCOMSAT executed a Supplemental Memorandum of
Agreement6 reiterating the increase in capital stock of LMI from six billion shares to100
billion shares with par value of P0.01 per share equivalent to ₱1 billion. As part of its
declassified its shares and amended its primary purpose to become a holding company.
PHC then filed its application with the PSE for listing the shares representing the
increase in its capital stock. Included in this application were the PHC shares owned by
PHILCOMSAT.8
Pending the PSE’s final approval of PHC’s application for listing of the shares, the PCGG
on 1 March 2005, through its then Chairman Camilo L. Sabio (Chairman Sabio), made a
written request to suspend the listing of the increase in PHC’s capital stock citing as
reason the need to settle the conflicting claims of the two sets of board of directors of the
Philippine Overseas Telecommunication Corporation (POTC) and PHILCOMSAT.9
In a letter10 dated 22 March 2005, the PSE informed the PCGG that the PSE Listing
Committee deferred action on the company’s listing application and instead referred the
matter to the PSE General Counsel to ascertain the applicability of the provisions on
disqualifications for listing as provided under the PSE Revised Listing Rules.
On 7 June 2005, the PCGG sent another letter11 to the PSE reiterating its request to
defer the listing of PHC shares.
In November 2007, then President Gloria Macapagal-Arroyo appointed new government
nominees to the POTC and PHILCOMSAT boards to replace Enrique Locsin, Manuel
Andal, Julio Jalandoni and Guy de Leon. POTC owns 100% of PHILCOMSAT.
On 19 November 2007, in a special stockholders’ meeting attended by POTC’s private
stockholders and Presidential Management Staff Undersecretary Enrique D. Perez, as
representative and proxy of the Republic of the Philippines, and observed by Securities
and Exchange Commission (SEC) representatives, the following were elected directors:
Daniel C. Gutierrez (government)
Santiago J. Ranada (government)
Erlinda I. Bildner (private)
Katrina C. Ponce-Enrile (private)
Marietta K. Ilusorio (private)
Pablo L. Lobregat (private)
 Honorio A. Poblador III (private) Lorna P. Kapunan (private)

Allan S. Montaño (government) Immediately after, at the meeting of the new and unified Board of Directors of
PHILCOMSAT, the following were elected officers:
Francisca Benedicto-Paulino (private)
Abraham R. Abesamis – Chairman
Immediately thereafter, the new directors elected POTC’s new set of officers:
Pablo L. Lobregat – Vice-Chairman
Daniel C. Gutierrez – Chairman
Erlinda I. Bildner – President
Erlinda I. Bildner – Vice-Chairman
Marietta K. Ilusorio – Vice-President
Katrina C. Ponce-Enrile – President
Katrina C. Ponce-Enrile – Treasurer
Marietta K. Ilusorio – Treasurer
Rafael A. Poblador – Asst. Treasurer
Rafael A. Poblador – Asst. Treasurer
John Benedict B. Sioson – Secretary
Victoria C. delos Reyes – Secretary
On 7 May 2008, the PCGG issued En Banc Resolution No. 2008-00912 recognizing the
On the same day, PHILCOMSAT held a special stockholders’ meeting attended by validity of the POTC’s and PHILCOMSAT’s respective stockholders’ meetings and
Erlinda I. Bildner as proxy for POTC. At the request of the Republic of the Philippines, elections, both held on 19 November 2007:
the three government representatives were nominated to the PHILCOMSAT Board of
Directors. The following were elected: NOW, THEREFORE, be it RESOLVED, as it is hereby RESOLVED, that:

Abraham R. Abesamis (government) 1. The PCGG recognize[s] the validity of the 19 November 2007, POTC/PHILCOMSAT
stockholders’ meeting and confirm[s] as valid the election of the following government
Ramon P. Jacinto (government) nominees: Atty. Daniel C. Gutierrez, Justice Santiago J. Ranada and Atty. Allan S.
Montano to the Board of Directors of POTC and Radm. Abraham R. Abesamis, Mr.
Rodolfo G. Serrano, Jr. (government) Ramon P. Jacinto and Mr. Rodolfo G. Serrano,Jr. to the Board of Directors of
PHILCOMSAT;
Erlinda I. Bildner (private)
x x x x13
Katrina C. Ponce-Enrile (private)
In a letter14 dated 25 July 2011, Katrina C. Ponce-Enrile (Ponce-Enrile), then President of
POTC, wrote to then PCGG Chairman Andres D. Bautista (Chairman Bautista)
Pablo L. Lobregat (private)
demanding that the PCGG rescind its objection to the listing of the increase in PHC’s
capital stock.
Honorio A. Poblador III (private)
When PCGG failed to reply, PHILCOMSAT sent a final demand Letter15 reiterating its
Marietta K. Ilusorio (private) demand for PCGG to withdraw its objection to the listing of the increase in PHC’s capital
stock.
On 11 January 2012, Ponce-Enrile received a letter16 from Chairman Bautista, informing
her that, among others, the agency was discussing the matter with the Department of
Finance and that the two would give a joint recommendation thereafter. However, the
PCGG never communicated said recommendation to PHILCOMSAT.
On 1 February 2012, PHILCOMSAT filed a complaint17 before the Sandiganbayan
against PCGGto compel the latter to withdraw its opposition to the listing of the increase
in PHC’s capital stock. PHILCOMSAT argued that PCGG had already recognized the
validity of the stockholders’ meetings in the two corporations, which "practically erased"
the alleged conflict between the two sets of directors.18
The PCGG filed a motion to dismiss the complaint, which PHILCOMSAT subsequently
opposed. The Sandiganbayan’s Ruling
On 3 May 2012, the Sandiganbayan issued the assailed Resolution, the dispositive
portion of which reads:
WHEREFORE, premises considered, defendant Presidential Commission on Good
Government (PCGG)’s Motion to Dismiss dated 8 March 2012 is hereby GRANTED for
lack of jurisdiction over the subject matter.
SO ORDERED.19
The Sandiganbayan held that, based on the allegations in the complaint, the action was
one for specific performance since it sought to have PCGG withdraw its objection to the
listing of the increase in PHC’s capital stock at the PSE. Following Section 1920 of Batas
Pambansa Blg.129 (B.P. 129), as amended by Republic Act No. 7691 (R.A. 7691), the
Regional Trial Court (RTC) has exclusive jurisdiction over the case. It said:
In our considered view, the allegations in the complaint show that it is primarily one for
specific performance as it prays that the PCGG be directed to withdraw its objection to
the listing of PHILCOMSAT’s shares in PHC, hence, incapable of pecuniary estimation
and within the RTC’s jurisdiction.21
The Sandiganbayan also ruled that the case was a "dispute among its directors," and
thus, was an intra-corporate dispute, viz:22
The determination of whether or not the PCGG should withdraw its request to defer the
listing of the PHILCOMSAT shares until the conflicting claims between the two sets of
board of directors of POTC and PHILCOMSAT is settled, is an intra-corporate
controversy. (Emphasis in the original) On 14 August 2012, the Sandiganbayan denied
petitioners’ motion for reconsideration. It reiterated its earlier ruling that it did not have
jurisdiction over the controversy since it was an intra-corporate dispute.
In plaintiffs’ complaint, it was stated that: "The Republic of the Philippines is the 34.9%
owner of POTC, which wholly owns PHILCOMSAT, which in turn, owns 81% of PHC. As
such, the Republic of the Philippines, with 28.7% indirect ownership in PHC, also its
largest single beneficial owner, continues to sustain the incalculable loss of holding
illiquid or unmarketable shares in a publicly listed company." Evidently, while the PCGG
may not be a stockholder, director, officer, member or even associate of the plaintiff
corporations, it bears emphasis that the Commission has an interest in the PHC shares
prompting the PCGG to request the PSE to suspend the listing of the SEC approved
increase in capital stock of PHC. The Commission’s interest in the aforesaid shares
determines the "nature of the question under controversy" in the instant case and
consequently, the reiteration of this Court’s pronouncement in the assailed Resolution of
having no jurisdiction over the subject matter of the instant case.23
The Issue
Petitioners are now before the Court on a petition for review on certiorari under Rule 45
raising this sole assignment of error:
The Sandiganbayan erred in dismissing the case a quo for lack of jurisdiction on [the]
ground that the action allegedly involves an intra-corporate controversy.24
Petitioners’ arguments
Petitioners argue that the allegations in the complaint do not qualify as an intra-corporate
controversy because "not a single element of an intra-corporate controversy exists in this
case."25
Petitioners claim that, first, the cause of action in this case – to compel PCGG to
withdraw its objection to the listing of PHILCOMSAT’s shares in PHC – is not an intra-
corporate dispute,26 since PCGG is not a stockholder, director, officer, member or even
associate of the plaintiff corporation.27
Second, petitioners insist that the "subject matter of the case a quo, that is, to have
respondent PCGG withdraw its objections to the listing of [PHILCOMSAT’s] shares in
PHC, does not fall in any of the cases that may be considered intra-corporate
controversy, as enumerated in Section 5 of PD 902-A."28 It argues that "the issue in this
case does not even involve POTC and/or the shares that the Republic owns therein to
the extent of thirty five percent (35%). The issue specifically pertains to petitioner
[PHILCOMSAT’s] shares in petitioner PHC where the respondent PCGG, through abuse
of authority, objected to the listing in the Philippine Stock Exchange. While the
government (Republic of the Philippines) owns 35% of POTC, the latter has a separate
and distinct legal personality with petitioner PHILCOMSAT and PHC. x x x. Respondent
PCGG, which is not even the registered owner of a single PHILCOMSAT share has no
personality to meddle in PHC’s affairs and block the listing of PHILCOMSAT’s share in
the stock exchange. The twin element of corporate relationship and intra-corporate
issues were never met in the complaint."29
Third, petitioners state that PCGG has ceased to have a valid and justifiable reason for
blocking the listing of the increase in PHC’s capital stock because "the appointment of
new government nominees and the stockholders’ meetings of POTC, PHILCOMSAT and
PHC in 2007 paved the way for unified boards and erased whatever alleged uncertainty
that existed previously on who has control over these corporations."30
More importantly, with its 7 May 2008 En Banc Resolution No. 2008-009, the PCGG
itself has recognized the valid election of the POTC, PHILCOMSAT and PHC boards
and, therefore, the basis for its objection is no longer obtaining.31
Lastly, petitioners argue that the PCGGis a co-equal body with the RTC and since co-
equal bodies have no power to control the other, the RTC cannot compel the PCGG to
follow its order.32
The PCGG’s arguments
On the other hand, the PCGG, through the Office of the Solicitor General, raised the
following arguments in its Comment:33
I. THE RESPONDENT COURT IS BEREFT OF JURISDICTION OVER
PETITIONERS’ COMPLAINT.
II. PETITIONERS’ PROTESTATIONS NOTWITHSTANDING, THE COMPLAINT
DESERVES OUTRIGHT DISMISSAL BECAUSE:
A. PETITIONERS HAVE NOT ALLEGED ANY CAUSE OF ACTION TO
ENTITLE THEM TO THE RELIEF DEMANDED.
B. PETITIONERS FAILED TO IMPLEAD THE REPUBLIC AS
INDISPENSABLE PARTY.
C. ASSUMING THAT THE STATE HAS BEEN IMPLEADED THROUGH
THE PCGG, THIS CASE SHOULD NONETHELESS BE DISMISSED ON
THE GROUND THAT THE STATE MAY NOT BE SUED WITHOUT ITS
CONSENT.
D. THE PRESENT SUIT IS BARRED BY LITIS PENDENTIA.
E. PETITIONERS’ COUNSEL FAILED TO COMPLY WITH BAR
MATTER NO. 1922 DATED JUNE 3, 2008.
The PCGG contends that "the controversy does not emanate from, nor does it relate to
any functions of the PCGG of recovering ill-gotten wealth, or any incident arising from, or
incidental to such duty."34 Rather, the PCGG posits that the acts complained of are in the
nature of an intra-corporate controversy. It avers that "the nature of petitioners’ claim
refers to the enforcement of the parties’ rights under the Corporation Code and internal
rules of the corporation, particularly affecting the propriety of publicly listing in the
Philippine Stock Exchange (PSE) of the 790 million shares of PHILCOMSAT with
PHC."35 The PCGG emphasized that "the matter of compelling the PCGG x x x to
withdraw its objection regarding the listing of shares in PHC, which objection is an
exercise of ownership rights, is an intra-corporate controversy and outside the jurisdiction
of the respondent court."36
The Court's Ruling
The petition has no merit and is, therefore, denied.
The Complaint involves an Intra-corporate Controversy
Intra-corporate controversy
To determine if a case involves an intra-corporate controversy, the courts have applied
two tests: the relationship test and the nature of the controversy test.
Under the relationship test, the existence of any of the following relationships makes the
conflict intra-corporate: (1) between the corporation, partnership or association and the
public; (2) between the corporation, partnership or association and the State insofar as
its franchise, permit or license to operate is concerned; (3) between the corporation,
partnership or association and its stockholders, partners, members or officers; and (4)
among the stockholders, partners or associates themselves.37
On the other hand, the nature of the controversy test dictates that "the controversy must
not only be rooted in the existence of an intra-corporate relationship, but must as well
pertain to the enforcement of the parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation."38
A combined application of the relationship test and the nature of the controversy test has
become the norm in determining whether a case is an intra-corporate controversy,39 to be
"heard and decided by the [b]ranches of the RTC specifically designated by the Court to
try and decide such cases."40
Relationship test
Under the relationship test, an intra-corporate controversy arises when the conflict is
"between the corporation, partnership or association and its stockholders, partners,
members or officers." Petitioners insist that the PCGG is not a stockholder, partner,
member or officer of the corporation. This is misleading and inaccurate.
The PCGG was created under Executive Order No. 1 (E.O. 1) to assist the President in:
(a) The recovery of all ill-gotten wealth accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, whether located in the Philippines or abroad, including the takeover
or sequestration of all business enterprises and entities owned or controlled by
them, during his administration, directly or through nominees, by taking undue
advantage of their public office and/or using their powers, authority, influence,
connections or relationship.
(b) The investigation of such cases of graft and corruption as the President may
assign to the Commission from time to time.
(c) The adoption of safeguards to ensure that the above practices shall not be
repeated in any manner under the new government, and the institution of
adequate measures to prevent the occurrence of corruption.41
This Court, in PCGG v. Peña,42 further explained:
In the discharge of its vital task "to recover the tremendous wealth plundered from the
people by the past regime in the most execrable thievery perpetrated in all history," or
"organized pillage" (to borrow a phrase from the articulate Mr. Blas Ople), the
Commission was vested with the ample power and authority
(a) x x x
(b) to sequester or place or cause to be placed under its control or possession
any building or office wherein any ill-gotten wealth or properties may be found,
and any records pertaining thereto, in order to prevent their destruction,
concealment or disappearance which would frustrate or hamper the investigation
or otherwise prevent the Commission from accomplishing its task.
(c) to provisionally takeover in the public interest or to prevent the disposal or
dissipation of business enterprises and properties taken over by the government
of the Marcos Administration or by entities or persons close to former President
Marcos, until the transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
(d) to enjoin or restrain any actual or threatened commission of acts by any
person or entity that may render moot and academic, or frustrate or otherwise
make ineffectual the efforts of the Commission to carry out its task under this
Order. x x x.43
In Republic v. Sandiganbayan,44 the Court settled that, due to the Compromise
Agreement validly entered into by the Republic through the PCGG, the Republic of the
Philippines now owns 4,727 shares of POTC.
As it stands today, the Republic of the Philippines owns 34.9% of POTC, which wholly
owns PHILCOMSAT, which in turn owns 81% of PHC.45 The Republic, then, has an
interest in the proper operations of the PHC, however indirect this interest may seem to
be.
Chairman Sabio, while himself not a stockholder of the subject corporations, was acting
as head of the PCGG, which is the agency tasked to adopt safeguards so that incidents
of graft and corruption, as well as cases of abuse of "powers, authority, influence,
connections or relationship" in these corporations are eliminated.46
The Republic acts through its lawfully designated representatives or nominees. Thus,
PCGG nominees and directors sit in the boards of directors of sequestered corporations
not for themselves but on behalf of the Republic. It is their duty to protect and advance
the interests of the Republic of the Philippines.
Nature of the controversy test
The nature of the controversy test examines the controversy in relation to the
"enforcement of the parties’ correlative rights and obligations under the Corporation
Code and the internal and intra-corporate regulatory rules of the corporation."47
The controversy in the present case stems from the act of Chairman Sabio in requesting
the PSE to suspend the listing of PHC’s increase in capital stock because of still
unresolved issues on the election of the POTC’s and PHILCOMSAT’s respective boards
of directors.
1âwphi1
The act of Chairman Sabio in asking the SEC to suspend the listing of PHC’s shares was
done in pursuit of protecting the interest of the Republic of the Philippines, a legitimate
stockholder in PHC’s controlling parent company, POTC. The character of the shares
held by the PCGG/Republic, on whose behalf the PCGG Chairman is presumed to be
acting, is irrelevant to Chairman Sabio’s actions. Any shareholder, harboring any
apprehensions or concerns, could have done the same or posed the same objection. It
was an act that had no relation to any proceeding or question of ill-gotten wealth or
sequestration. The PCGG was merely protecting the rights and interest of the Republic
of the Philippines.
From the foregoing, it is clear that the dispute in the present case is an intra-corporate
controversy.
The Sandiganbayan has no Jurisdiction
As such, it is clear that the jurisdiction lies with the regular courts and not with the
Sandiganbayan.
Section 5 of Presidential Decree No. 902-A conferred original and exclusive jurisdiction
over intra-corporate disputes on the SEC. However, Section 5.2of R.A. 8799, transferred
the jurisdiction over such cases to courts of general jurisdiction, or the appropriate RTC.48
Petitioners, however, further argue that the case must be decided by the Sandiganbayan
because the RTC is co-equal to the PCGG and therefore would have no authority to
issue an order to the latter.49
The following pronouncements of this Court are instructive:
Under Section 2 of Executive Order No. 14, the Sandiganbayan has exclusive and
original jurisdiction over all cases regarding "the funds, moneys, assets and properties
illegally acquired by Former President Ferdinand E. Marcos, Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents, or
nominees," civil or criminal, including incidents arising from such cases. The Decision of
the Sandiganbayan is subject to review on certiorari exclusively by the Supreme Court.
In the exercise of its functions, the PCGG is a co-equal body with the regional trial courts
and co-equal bodies have no power to control the other. The regional trial courts and the
Court of Appeals have no jurisdiction over the PCGG in the exercise of its powers under
the applicable Executive Orders and Section 26, Article XVIII of the 1987 Constitution
and, therefore, may not interfere with and restrain or set aside the orders and actions of
the PCGG.50
Further:
The issue of whether or not the Regional Trial Courts have jurisdiction over the
Presidential Commission on Good Government in the exercise of the latter’s powers and
functions under the applicable Executive Orders and Section 26, Article XVIII of the 1987
Constitution has been laid to rest in PCGG vs. Hon. Emmanuel G. Peña, et al., G.R. No.
77663, April 12, 1988 where Mr. Chief Justice Claudio Teehankee articulated the opinion
of an almost unanimous court as follows:
On the issue of jurisdiction squarely raised, as above indicated, the Court sustains
petitioner’s stand and holds that regional trial courts and the Court of Appears for that
matter have no jurisdiction over the Presidential Commission on Good Government in
the exercise of its powers under the applicable Executive Orders and Article XVIII,
Section 26 of the Constitution and therefore may not interfere with and restrain or set
aside the orders and actions of the Commission. Under Section 2 of the President’s
Executive Order No. 14 issued on May 7, 1986, all cases of the Commission regarding
"the Funds, Moneys, Assets and Properties Illegally Acquired or Misappropriated by
Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close
Relatives, Subordinates, Business Associates, Dummies, Agents or Nominees" whether
civil or criminal, are lodged within the "exclusive and original jurisdiction of the
Sandiganbayan" and all incidents arising from, incidental to, or related to, such cases
necessarily fall likewise under the Sandiganbayan’s exclusive and original jurisdiction
subject to review on certiorari exclusively by the Supreme Court.51 (Emphasis supplied)
As the Court has already conclusively ruled, the RTC is co-equal to the PCGG only in
relation to cases falling under the latter’s function under the applicable Executive Orders,
specifically Section 2 of E.O. 14, and Section 26, Article XVIII of the 1987 Constitution.
Note that in this case, the acts complained of do not pertain to the PCGG’s function
under the aforementioned provisions of law and the Constitution, i.e., it is not a case
involving "the Funds, Moneys, Assets and Properties Illegally Acquired or
Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez
Marcos, their Close Relatives, Subordinates, Business Associates, Dummies, Agents or
Nominees, whether civil or criminal, x x x" nor can it be considered an "[incident] arising
from, incidental to, or related to"52 such cases.
Rather, the PCGG, acting as representative of the Republic, was exercising a duty of a
stockholder to ensure the proper and lawful exercise of corporate acts.
Based on the foregoing, the Sandiganbayan correctly dismissed the complaint for lack of
jurisdiction.
WHEREFORE, the petition is DENIED. The Resolutions of the Sandiganbayan in Civil
Case No. SB-12-CVL-0001 promulgated on 3 May 2012 and 14 August 2012 are
AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. L-23241 March 14, 1925
HENRY FLEISCHER, plaintiff-appellee,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of Oriental
Negros on the 14th day of August, 1923, against the board of directors of the Botica
Nolasco, Inc., a corporation duly organized and existing under the laws of the Philippine
Islands. The plaintiff prayed that said board of directors be ordered to register in the
books of the corporation five shares of its stock in the name of Henry Fleischer, the
plaintiff, and to pay him the sum of P500 for damages sustained by him resulting from
the refusal of said body to register the shares of stock in question. The defendant filed a
demurrer on the ground that the facts alleged in the complaint did not constitute sufficient
cause of action, and that the action was not brought against the proper party, which was
the Botica Nolasco, Inc. The demurrer was sustained, and the plaintiff was granted five
days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the Botica
Nolasco, Inc., alleging that he became the owner of five shares of stock of said
corporation, by purchase from their original owner, one Manuel Gonzalez; that the said
shares were fully paid; and that the defendant refused to register said shares in his name
in the books of the corporation in spite of repeated demands to that effect made by him
upon said corporation, which refusal caused him damages amounting to P500. Plaintiff
prayed for a judgment ordering the Botica Nolasco, Inc. to register in his name in the
books of the corporation the five shares of stock recorded in said books in the name of
Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to pay the
costs. The defendant again filed a demurrer on the ground that the amended complaint
did not state facts sufficient to constitute a cause of action, and that said amended
complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the
court.
The defendant answered the amended complaint denying generally and specifically each
and every one of the material allegations thereof, and, as a special defense, alleged that
the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the
plaintiff said shares at the par value of P100 a share, plus P90 as dividends
corresponding to the year 1922, and that said offer was refused by the plaintiff. The
defendant prayed for a judgment absolving it from all liability under the complaint and
directing the plaintiff to deliver to the defendant the five shares of stock in question, and
to pay damages in the sum of P500, and the costs.
Upon the issue presented by the pleadings above stated, the cause was brought on for
trial, at the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano,
judge, held that, in his opinion, article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in conflict with Act No.
1459 (Corporation Law), especially with section 35 thereof; and rendered a judgment
ordering the defendant corporation, through its board of directors, to register in the books
of said corporation the said five shares of stock in the name of the plaintiff, Henry
Fleischer, as the shareholder or owner thereof, instead of the original owner, Manuel
Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several assignment of
error, all of which, in substance, raise the question whether or not article 12 of the by-
laws of the corporation is in conflict with the provisions of the Corporation Law (Act No.
1459).
There is no controversy as to the facts of the present case. They are simple and may be
stated as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in question,
Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he
assigned and delivered said five shares to the plaintiff, Henry Fleischer, by
accomplishing the form of endorsement provided on the back thereof, together with other
credits, in consideration of a large sum of money owed by Gonzalez to Fleischer
(Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo Miciano, who
was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on
behalf of the corporation, said shares of stock, at their par value of P100 a share, for
P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation
had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that the
plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano
to register said shares in his name; that Doctor Miciano refused to do so, saying that it
would be in contravention of the by-laws of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days after the
assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to
the Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry
Fleischer be noted transferred to Fleischer's name. He also acknowledged in said written
statement the preferential right of the corporation to buy said five shares (Exhibit 3). On
June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling
his written statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on
June 15, 1923, replied, declaring that his written statement was in conformity with the by-
laws of the corporation; that his letter of June 14th was of no effect, and that the shares
in question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or not article
12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the
Corporation Law (Act No. 1459). Appellant invoked said article as its ground for denying
the request of the plaintiff that the shares in question be registered in his (plaintiff's)
name, and for claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said
shares from Gonzalez. Appellant now contends that article 12 of the said by-laws is in
conformity with the provisions of Act No. 1459. Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra
persona, pero para que estas transferencias tengan validez legal, deben constar
en los registros de la Corporacion con el debido endoso del accionista a cuyo
nombre se ha expedido la accion o acciones que se transfieran, o un documento
de transferencia. Entendiendose que, ningun accionista transferira accion alguna
a otra persona sin participar antes por escrito al Secretario-Tesorero. En
igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la
accion o acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica
Nolasco, Inc., governing the transfer of shares of stock of said corporation. The latter
part of said article creates in favor of the Botica Nolasco, Inc., a preferential right to buy,
under the same conditions, the share or shares of stock of a retiring shareholder. Has
said corporation any power, under the Corporation Law (Act. No. 1459), to adopt such
by-law?
The particular provisions of the Corporation Law referring to transfer of shares of stock
are as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the fixing or
changing of the number of its officers and directors within the limits prescribed by
law, and for the transferring of its stock, the administration of its corporate affairs,
etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided into shares for
which certificates signed by the president or the vice-president, countersigned by
the secretary or clerk and sealed with the seal of the corporation, shall be issued
in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer
is entered and noted upon the books of the corporation so as to show the names
of the parties to the transaction, that date of the transfer, the number of the
certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not
inconsistent with any existing law, for the transferring of its stock. It follows from said
provision, that a by-law adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. The law on this subject is found
in section 35 of Act No. 1459 above quoted. Said section specifically provides that the
shares of stock "are personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc." Said section 35 defines the nature, character and
transferability of shares of stock. Under said section they are personal property and may
be transferred as therein provided. Said section contemplates no restriction as to whom
they may be transferred or sold. It does not suggest that any discrimination may be
created by the corporation in favor or against a certain purchaser. The holder of shares,
as owner of personal property, is at liberty, under said section, to dispose of them in
favor of whomsoever he pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in adopting a by-law governing
transfer of shares of stock should take into consideration the specific provisions of
section 35 of Act No. 1459, and said by-law should be made to harmonize with said
provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the
corporation has transcended the limits fixed by law in the same section, and has not
taken into consideration the provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not contradictory to
the general policy of the laws of the land. (Supreme Commandery of the Knights of the
Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must be
reasonable and for a corporate purpose, and always within the charter limits. They must
always be strictly subordinate to the constitution and the general laws of the land. They
must not infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep.,
332.) They must not disturb vested rights or impair the obligation of a contract, take away
or abridge the substantial rights of stockholder or member, affect rights of property or
create obligations unknown to the law. (People's Home Savings Bank vs. Superior Court,
104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South Florida
Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock must be
found in the governing statute or the charter. Restrictions upon the traffic in stock
must have their source in legislative enactment, as the corporation itself cannot
create such impediments. By-law are intended merely for the protection of the
corporation, and prescribe regulation and not restriction; they are always subject
to the charter of the corporation. The corporation, in the absence of such a
power, cannot ordinarily inquire into or pass upon the legality of the transaction
by which its stock passes from one person to another, nor can it question the
consideration upon which a sale is based. A by-law cannot take away or abridge
the substantial rights of stockholder. Under a statute authorizing by- laws for the
transfer of stock, a corporation can do no more than prescribe a general mode of
transfer on the corporate books and cannot justify an unreasonable restriction
upon the right of sale. (4 Thompson on Corporations, sec. 4137, p. 674.
The right of unrestrained transfer of shares inheres in the very nature of a
corporation, and courts will carefully scrutinize any attempt to impose restrictions
or limitations upon the right of stockholders to sell and assign their stock. The
right to impose any restraint in this respect must be conferred upon the
corporation either by the governing statute or by the articles of the corporation. It
cannot be done by a by-law without statutory or charter authority. (4 Thompson
on Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property, the general
rule (subject to exceptions hereafter pointed out and discussed) is that every
owner of corporate shares has the same uncontrollable right to alien them which
attaches to the ownership of any other species of property. A shareholder is
under no obligation to refrain from selling his shares at the sacrifice of his
personal interest, in order to secure the welfare of the corporation, or to enable
another shareholder to make gains and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to prevent or to
restrain transfers of its shares, unless such power is expressly conferred in its
charter or governing statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining such transfers, unless
derived from authority expressly granted by the legislature, would be regarded as
impositions in restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this question. They
hold that the power of a corporation to enact by-laws restraining the sale and transfer of
shares, should not only be in harmony with the law or charter of the corporation, but such
power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found in
section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be
valid, except as between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the number of shares transferred."
This restriction is necessary in order that the officers of the corporation may know who
are the stockholders, which is essential in conducting elections of officers, in calling
meeting of stockholders, and for other purposes. but any restriction of the nature of that
imposed in the by-law now in question, is ultra vires, violative of the property rights of
shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the appellee. He
had no knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzalez and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first
offering them to the corporation for a period of thirty days is not binding upon an
assignee of the stock as a personal contract, although his assignor knew of the
by-law and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co.,
21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to
an unauthorized by-law has only the effect of a contract by, and enforceable
against, the assignor; the assignee is not bound by such by-law by virtue of the
assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be valid
unless approved by the board of directors, while it may be enforced as a
reasonable regulation for the protection of the corporation against worthless
 stockholders, cannot be made available to defeat the rights of third persons.
(Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any
right of action against the defendant corporation, but against the president and secretary
thereof, inasmuch as the signing and registration of shares is incumbent upon said
officers pursuant to section 35 of the Corporation Law. This contention cannot be
sustained now. The question should have been raised in the lower court. It is too late to
raise it now in this appeal. Besides, as stated above, the corporation was made
defendant in this action upon the demurrer of the attorney of the original defendant in the
lower court, who contended that the Botica Nolasco, Inc., should be made the party
defendant in this action. Accordingly, upon order of the court, the complaint was
amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer and register stock in cases like the present,
mandamus will lie to compel the officers of the corporation to transfer said stock upon the
books of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision of the
lower court is in accordance with law and should be and is hereby affirmed, with costs.
So ordered.
G.R. No. 182770 September 17, 2014
WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,
vs.
FE CORAZON LABAYEN, Respondent.
DECISION
BRION, J.:
We review in this petition for review on certiorari1 the decision2 dated September 28,
2007 and the resolution3 dated April 28, 2008 of the Court of Appeals (CA) in CA-G.R.
CV No. 68289 that affirmed with modification the decision4 of the Regional Trial Court
(RTC), Branch 77, Quezon City.
The Factual Background
The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a
management and consultant firm. The petitioner, WPM International Trading, Inc.
(WPM), is a domestic corporation engaged in the restaurant business, while Warlito P.
Manlapaz (Manlapaz) is its president.
Sometime in 1990, WPM entered into a management agreement with the respondent, by
virtue of which the respondent was authorized to operate, manage and rehabilitate
Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the
respondent looked for a contractor who would renovate the two existing Quickbite outlets
in Divisoria, Manila and Lepanto St., University Belt, Manila. Pursuant to the agreement,
the respondent engaged the services of CLN Engineering Services (CLN) to renovate
Quickbite-Divisoria at the cost of ₱432,876.02.
On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its
possession was delivered to the respondent. However, out of the ₱432,876.02
renovation cost, only the amount of ₱320,000.00 was paid to CLN, leaving a balance of
₱112,876.02.
Complaint for Sum of Money (Civil Case No. Q-90-7013)
On October 19, 1990, CLN filed a complaint for sum of money and damages before the
RTC against the respondent and Manlapaz, which was docketed as Civil Case No. Q-90-
7013. CLN later amended the complaint to exclude Manlapaz as defendant. The
respondent was declared in default for her failure to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN
actual damages inthe amount of ₱112,876.02 with 12% interest per annum from June
18,1990 (the date of first demand) and 20% of the amount recoverable as attorney’s
fees.
Complaint for Damages (Civil Case No. Q-92-13446)
Thereafter, the respondent instituted a complaint for damages against the petitioners,
WPM and Manlapaz. The respondent alleged that in Civil Case No. Q-90-7013, she was
adjudged liable for a contract that she entered into for and in behalf of the petitioners, to
which she should be entitled to reimbursement; that her participation in the management
agreement was limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri),
CLN’s general manager; that it was actually Manlapaz and Neri who agreed on the terms
and conditions of the agreement; that when the complaint for damages was filed against
her, she was abroad; and that she did not know of the case until she returned to the
Philippines and received a copy of the decision of the RTC.
In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus
interest at 12%per annum from June 18, 1990 until fully paid; and 20% of the award as
attorney’s fees. She likewise prayed that an award of ₱100,000.00 as moral damages
and ₱20,000.00 as attorney’s fees be paid to her.
In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar
Alcansajewho was in-charge with the daily operations of the Quickbite outlets; that when
Alcansaje left WPM, the remaining directors were compelled to hire the respondent as
manager; that the respondent had entered intothe renovation agreement with CLN in her
own personal capacity; that when he found the amount quoted by CLN too high, he
instructed the respondent to either renegotiate for a lower price or to look for another
contractor; that since the respondent had exceeded her authority as agent of WPM, the
renovation agreement should only bind her; and that since WPM has a separate and
distinct personality, Manlapaz cannot be made liable for the respondent’s claim.
Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by
way of counterclaim, for the award of ₱350,000.00 as moral and exemplary damages
and ₱50,000.00 attorney’s fees.
The RTC, through an order dated March 2, 1993 declared WPM in default for its failure
to file a responsive pleading.
The Decision of the RTC
In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz.
The RTC found that based on the records, there is a clear indication that WPM is a mere
instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are
considered one and the same. The RTC also found that Manlapaz had complete control
over WPM considering that he is its chairman, president and treasurer at the same time.
The RTC thus concluded that Manlapaz is liable in his personal capacity to reimburse the
respondent the amount she paid to CLN inconnection with the renovation agreement.
The petitioners appealed the RTC decision with the CA. There, they argued that in view
of the respondent’s act of entering into a renovation agreement with CLN in excess of
her authority as WPM’s agent, she is not entitled to indemnity for the amount she paid.
Manlapaz also contended that by virtue ofWPM’s separate and distinct personality, he
cannot be madesolidarily liable with WPM.
The Ruling of the Court of Appeals
On September 28, 2007, the CA affirmed, with modification on the award of attorney’s
fees, the decision of the RTC.The CA held that the petitioners are barred from raising as
a defense the respondent’s alleged lack of authority to enter into the renovation
agreement in view of their tacit ratification of the contract.
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same
based on the following: (1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz
had complete control over WPM because he concurrently held the positions of president,
chairman of the board and treasurer, in violation of the Corporation Code; (3) two of the
four other stockholders of WPM are employed by Manlapaz either directly or indirectly;
(4) Manlapaz’s residence is the registered principal office of WPM; and (5) the acronym
"WPM" was derived from Manlapaz’s initials. The CA applied the principle of piercing the
veil of corporate fiction and agreed with the RTC that Manlapaz cannot evade his liability
by simply invoking WPM’s separate and distinct personality.
After the CA's denial of their motion for reconsideration, 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 gravely erred in sustaining the RTC’s application of
the principle of piercing the veil of corporate fiction. They argue that the legal fiction of
corporate personality could only be discarded upon clear and convincing proof that the
corporation is being used as a shield to avoid liability or to commit a fraud. Since the
respondent failed to establish that any of the circumstances that would warrant the
piercing is present, Manlapaz claims that he cannot be made solidarily liable with WPM
to answerfor damages allegedly incurred by the respondent.
The petitioners further argue that, assuming they may be held liable to reimburse to the
respondentthe amount she paid in Civil Case No. Q-90-7013, such liability is only limited
to the amount of ₱112,876.02, representing the balance of the obligation to CLN, and
should not include the twelve 12% percent interest, damages and attorney’s fees.
The Issues
The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business
conduit of Manlapaz; and (2) whether Manlapaz is jointly and severally liable with WPM
to the respondent for reimbursement, damages and interest.
Our Ruling
We find merit in the petition.
We note, at the outset, that the question of whether a corporation is a mere
instrumentality or alter-ego of another is purely one of fact.5 This is also true with respect
to the question of whether the totality of the evidence adduced by the
respondentwarrants the application of the piercing the veil of corporate fiction doctrine.6
Generally, factual findings of the lower courts are accorded the highest degree of
respect, if not finality. When adopted and confirmed by the CA, these findings are final
and conclusive and may not be reviewed on appeal,7save in some recognized
exceptions8 among others, when the judgment is based on misapprehension of facts.
We have reviewed the records and found that the application of the principle of piercing
the veil of corporate fiction is unwarranted in the present case.
On the Application ofthe Principle of Piercing the Veil of Corporate Fiction
The rule is settled that a corporation has a personality separate and distinct from the
persons acting for and in its behalf and, in general, from the people comprising
it.9 Following this principle, the obligations incurred by the corporate officers, orother
persons acting as corporate agents, are the direct accountabilities ofthe corporation they
represent, and not theirs. Thus, a director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the corporation;10 it is only
in exceptional circumstances that solidary liability will attach to them.
Incidentally, 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 aninstrumentality, agency, conduit or adjunct of another
corporation.11
Piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements, 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 beenused 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 right; and
(3) The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of.
The absence of any ofthese elements prevents piercing the corporate veil.12
In the present case, the attendantcircumstances do not establish that WPM is a mere
alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not
show that WPM was organized and controlled, and its affairs conducted in a manner that
made it merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in
Martinez v. Court of Appeals,13 the mere ownership by a singlestockholder of even all or
nearly all of the capital stocks ofa corporation is not by itself a sufficient ground to
disregard the separate corporate personality. To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly
established.14
Likewise, the records of the case do not support the lower courts’ finding that Manlapaz
had control or domination over WPM or its finances. That Manlapaz concurrentlyheld the
positions of president, chairman and treasurer, or that the Manlapaz’s residence is the
registered principal office of WPM, are insufficient considerations to prove that he had
exercised absolutecontrol over WPM.
In this connection, we stress thatthe control necessary to invoke the instrumentality or
alter ego rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so tospeak, no
separate mind, will or existence of its own, and is but a conduit for its principal. 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.
Here, the respondent failed to prove that Manlapaz, acting as president, had absolute
control over WPM. Even granting that he exercised a certain degree of control over the
1âw phi 1
finances, policies and practices of WPM, in view of his position as president, chairman
and treasurer of the corporation, such control does not necessarily warrant piercing the
veil of corporate fiction since there was not a single proof that WPM was formed to
defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and the respondent knew and acted
on the knowledgethat they were dealing with WPM for the renovation of the latter’s
restaurant, and not with Manlapaz. That WPM later reneged on its monetary obligation to
CLN, resulting to the filing of a civil case for sum of money against the respondent, does
not automatically indicate fraud, in the absence of any proof to support it.
This Court also observed that the CA failed to demonstrate how the separate and distinct
personalityof WPM was used by Manlapaz to defeat the respondent’s right for
reimbursement. Neither was there any showing that WPM attempted to avoid liability or
had no property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which
the latter could be held solidarily liable with WPM, and considering that there was no
proof that WPM had insufficient funds, there was no sufficient justification for the RTC
and the CA to have ruled that Manlapaz should be held jointly and severally liable to the
respondent for the amount she paid to CLN. Hence, only WPM is liable to indemnify the
respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon
and thus, must be done with caution.15 It can only be done if it has been clearly
established that the separate and distinct personality of the corporation is used to justify
a wrong, protect fraud, or perpetrate a deception. The court 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; it cannot be presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified
refusal to pay a just debt. Under Article 2220 of the New Civil Code,16 moral damages
may be awarded in cases of a breach of contract where the defendant acted fraudulently
or in bad faith or was guilty of gross negligence amounting to bad faith.

In the present case, when payment for the balance of the renovation cost was
demanded, WPM, instead of complying with its obligation, denied having authorized the
respondent to contract in its behalf and accordingly refused to pay. Such cold refusal to
pay a just debt amounts to a breach of contract in bad faith, as contemplated by Article
2220. Hence, the CA's order to pay moral damages was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the
Court of Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that petitioner Warlito P.
Manlapaz is ABSOLVED from any liability under the renovation agreement.

SO ORDERED.