DONNINA C. HALLEY, G.R. No.

157549
Petitioner,
Present:

CARPIO MORALES, Chairperson,

BRION,
-versus- BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

Promulgated:
PRINTWELL, INC.,
Respondent. May 30, 2011
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J:

Stockholders of a corporation are liable for the debts of the corporation up to the extent
of their unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield
from liability, because the veil may be lifted to avoid defrauding corporate creditors.

Weaffirm with modification the decisionpromulgated on August 14,

2002,[1]whereby the Court of Appeals(CA) upheld thedecision of the Regional Trial Court,
Branch 71, in Pasig City (RTC),[2]ordering the defendants (including the petitioner)to pay
to Printwell, Inc. (Printwell) the principal sum of P291,342.76 plus interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media

Philippines, Inc. (BMPI), which, at its incorporation on November 12, 1987, [3]had an
authorized capital stock of P3,000,000.00 divided into 300,000 shares each with a par
value of P10.00,of which 75,000 were initially subscribed, to wit:

Subscriber No. of Total Amount paid

shares subscription
 Donnina C. Halley 35,000 P 350,000.00 P87,500.00
Roberto V. Cabrera, 18,000 P 180,000.00 P45,000.00
Jr.
Albert T. Yu 18,000 P 180,000.00 P45,000.00
Zenaida V. Yu 2,000 P 20,000.00 P5,000.00
Rizalino C. Vineza 2,000 P 20,000.00 P5,000.00
TOTAL 75,000 P750,000.00 P187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned

Printwell for the printing of the magazine Philippines, Inc. (together with wrappers and
subscription cards) that BMPI published and sold. For that purpose, Printwell extended
30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell
several orders on credit, evidenced byinvoices and delivery receipts
totalingP316,342.76.Considering that BMPI paidonlyP25,000.00,Printwell suedBMPIon
January 26, 1990 for the collection of the unpaid balance of P291,342.76 in the RTC.[4]

On February 8, 1990,Printwell amended thecomplaint in order to implead as

defendants all the original stockholders and incorporators to recover on theirunpaid
subscriptions, as follows:[5]

Name Unpaid Shares

Donnina C. Halley P 262,500.00
Roberto V. Cabrera, Jr. P135,000.00
Albert T. Yu P135,000.00
Zenaida V. Yu P15,000.00
Rizalino C. Vieza P15,000.00
TOTAL P 562,500.00

The defendants filed a consolidated answer,[6]averring that they all had paid their
subscriptions in full; that BMPI had a separate personality from those of its stockholders;
thatRizalino C. Vieza had assigned his fully-paid up sharesto a certain Gerardo R. Jacinto
in 1989; andthat the directors and stockholders of BMPI had resolved to dissolve BMPI
during the annual meetingheld on February 5, 1990.
To prove payment of their subscriptions, the defendantstockholderssubmitted in
evidenceBMPI official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no.
222, OR no. 223, andOR no. 227,to wit:

Receipt No. Date Name Amount

217 November 5, 1987 Albert T. Yu P 45,000.00
218 May 13, 1988 Albert T. Yu P 135,000.00
220 May 13, 1988 Roberto V. Cabrera, Jr. P 135,000.00
221 November 5, 1987 Roberto V. Cabrera, Jr. P 45,000.00
222 November 5, 1987 Zenaida V. Yu P 5,000.00
223 May 13, 1988 Zenaida V. Yu P 15,000.00
227 May 13, 1988 Donnina C. Halley P 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an audit

report dated March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the
SEC and the BIR);[7](b) BMPIbalance sheet[8] and income statement[9]as of December 31,
1988; (c) BMPI income tax return for the year 1988 (stamped received by the BIR);[10](d)
journal vouchers;[11](e) cash deposit slips;[12] and(f)Bank of the Philippine Islands (BPI)
savings account passbookin the name of BMPI.[13]

Ruling of the RTC

On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting the
allegation of payment in full of the subscriptions in view of an irregularity in the issuance
of the ORs and observingthat the defendants had used BMPIs corporate personality to
evade payment and create injustice, viz:

The claim of individual defendants that they have fully paid their
subscriptions to defend[a]nt corporation, is not worthy of consideration,
because:

a) in the case of defendants-spouses Albert and Zenaida Yu, it will be

noted that the alleged payment made on May 13, 1988 amounting
to P135,000.00, is covered by Official Receipt No. 218 (Exh. 2),
whereas the alleged payment made earlier on November 5, 1987,
amounting to P5,000.00, is covered by Official Receipt No. 222 (Exh.
3). This is cogent proof that said receipts were belatedly issued just
 to suit their theory since in the ordinary course of business, a receipt
issued earlier must have serial numbers lower than those issued on a
later date. But in the case at bar, the receipt issued on November 5,
1987 has serial numbers (222) higher than those issued on a later
date (May 13, 1988).

b) The claim that since there was no call by the Board of Directors of
defendant corporation for the payment of unpaid subscriptions will
not be a valid excuse to free individual defendants from liability.
Since the individual defendants are members of the Board of
Directors of defendantcorporation, it was within their exclusive
power to prevent the fulfillment of the condition, by simply not
making a call for the payment of the unpaid subscriptions. Their
inaction should not work to their benefit and unjust enrichment at
the expense of plaintiff.
Assuming arguendo that the individual defendants have paid their
unpaid subscriptions, still, it is very apparent that individual defendants
merely used the corporate fiction as a cloak or cover to create an injustice;
hence, the alleged separate personality of defendant corporation should be
disregarded (Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30
June 1988).[14]
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to
Printwell pro rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits A,

A-1 to A-9), and, as appearing from the Articles of Incorporation, individual
defendants have the following unpaid subscriptions:
Names Unpaid Subscription
Donnina C. Halley P262,500.00
Roberto V. Cabrera, Jr. 135.000.00
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------
Total P562,500.00

and it is an established doctrine that subscriptions to the capital stock of a

corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims (Philippine National Bank vs. Bitulok Sawmill,
Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to
release a subscriber to its capital stock from the obligation to pay for his
shares, and any agreement to this effect is invalid (Velasco vs. Poizat, 37
Phil. 802).
 The liability of the individual stockholders in the instant case shall be
pro-rated as follows:

Names Amount
Donnina C. Halley P149,955.65
Roberto V. Cabrera, Jr. 77,144.55
Albert T. Yu 77,144.55
Zenaida V. Yu 8,579.00
Rizalino V. Vineza 8,579.00
------------------
Total P321,342.75[15]

The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants, ordering defendants to pay to plaintiff the amount
of P291,342.76, as principal, with interest thereon at 20% per annum, from
date of default, until fully paid, plus P30,000.00 as attorneys fees, plus costs
of suit.

Defendants counterclaims are ordered dismissed for lack of merit.

SO ORDERED.[16]

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoVieza defined the following errors
committed by the RTC, as follows:

I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-
STOCKHOLDERS LIABLE FOR THE LIABILITIES OF THE DEFENDANT
CORPORATION.

II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE
EXTENT OF THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF
ANY, THE TRIAL COURT NONETHELESS ERRED IN NOT FINDING
THAT APPELLANTS-STOCKHOLDERS HAVE, AT THE TIME THE SUIT
WAS FILED, NO SUCH UNPAID SUBSCRIPTIONS.
On their part, Spouses Albert and Zenaida Yu averred:

I.
THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO
DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA YUS
EXHIBITS 2 AND 3 DESPITE THE UNREBUTTED TESTIMONY THEREON
BY APPELLANT ALBERT YU AND THE ABSENCE OF PROOF
CONTROVERTING THEM.

II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES
ALBERT AND ZENAIDA YU PERSONALLY LIABLE FOR THE
CONTRACTUAL OBLIGATION OF BUSINESS MEDIA PHILS., INC.
DESPITE FULL PAYMENT BY SAID DEFENDANTS-APPELLANTS OF
THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY
THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
PERSONALITY IN ABSENCE OF ANY SHOWING OF EXTRA-ORDINARY
CIRCUMSTANCES THAT WOULD JUSTIFY RESORT THERETO.

II.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE
THAT INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-
APPELLEES CLAIM BASED ON THEIR RESPECTIVE SUBSCRIPTION.
NOTWITHSTANDING OVERWHELMING EVIDENCE SHOWING FULL
SETTLEMENT OF SUBSCRIBED CAPITAL BY THE INDIVIDUAL
DEFENDANTS.

On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to the
corporate personality would createan injustice becausePrintwell would thereby be at a
loss against whom it would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a means
of perpetrating fraud or an illegal act or as a vehicle for the evasion of an
 existing obligation, the circumvention of statutes, the achievements or
perfection of 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 (First Philippine
International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under
this 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 obligations or to justify wrong (Claparols vs. CIR, 65 SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on

credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount of
P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe appellee the amount of P291,342.76.
The said goods were delivered to and received by BMPI but it failed to pay
its overdue account to appellee as well as the interest thereon, at the rate of
20% per annum until fully paid. It was also during this time that appellants
stockholders were in charge of the operation of BMPI despite the fact that
they were not able to pay their unpaid subscriptions to BMPI yet greatly
benefited from said transactions. In view of the unpaid subscriptions, BMPI
failed to pay appellee of its liability, hence appellee in order to protect its
right can collect from the appellants stockholders regarding their unpaid
subscriptions. To deny appellee from recovering from appellants would
place appellee in a limbo on where to assert their right to collect from BMPI
since the stockholders who are appellants herein are availing the defense of
corporate fiction to evade payment of its obligations.[17]

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine,
under which corporate debtors might look to the unpaid subscriptions for the satisfaction
of unpaid corporate debts, stating thus:

It is an established doctrine that subscription to the capital stock of a

corporation constitute a fund to which creditors have a right to look up to
for satisfaction of their claims, and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made that the funds,

which consists of the payment of subscriptions of the stockholders, is where
the creditors can claim monetary considerations for the satisfaction of their
claims. If these funds which ought to be fully subscribed by the
stockholders were not paid or remain an unpaid subscription of the
 corporation then the creditors have no other recourse to collect from the
corporation of its liability. Such occurrence was evident in the case at bar
wherein the appellants as stockholders failed to fully pay their unpaid
subscriptions, which left the creditors helpless in collecting their claim due
to insufficiency of funds of the corporation. Likewise, the claim of
appellants that they already paid the unpaid subscriptions could not be
given weight because said payment did not reflect in the Articles of
Incorporations of BMPI that the unpaid subscriptions were fully paid by the
appellants stockholders. For it is a rule that a stockholder may be sued
directly by creditors to the extent of their unpaid subscriptions to the
corporation (Keller vs. COB Marketing, 141 SCRA 86).

Moreover, a corporation has no power to release a subscription or its capital

stock, without valuable consideration for such releases, and as against
creditors, a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the
Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366).[18]

The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of
full payment of the subscriptions to the capital stock unworthy of consideration; andheld
that the veil of corporate fiction could be pierced when it was used as a shield to
perpetrate a fraud or to confuse legitimate issues, to wit:

Finally, appellants SPS YU, argued that the fact of full payment for the
unpaid subscriptions was incontrovertibly established by competent
testimonial and documentary evidence, namely Exhibits 1, 2, 3 & 4, which
were never disputed by appellee, clearly shows that they should not be held
liable for payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned

exhibits, to wit:

Exh: 1 YU Official Receipt No. 217 dated November 5,

1987 amounting to P45,000.00 allegedly representing the initial
payment of subscriptions of stockholder Albert Yu.
Exh: 2 YU Official Receipt No. 218 dated May 13, 1988 amounting
to P135,000.00 allegedly representing full payment of balance of
subscriptions of stockholder Albert Yu. (Record p. 352).
 Exh: 3 YU Official Receipt No. 222 dated November 5,
1987 amounting to P5,000.00 allegedly representing the initial
payment of subscriptions of stockholder Zenaida Yu.
Exh: 4 YU Official Receipt No. 223 dated May 13, 1988 amounting
to P15,000.00 allegedly representing the full payment of balance of
subscriptions of stockholder Zenaida Yu. (Record p. 353).

Based on the above exhibits, we are in accord with the lower courts
findings that the claim of the individual appellants that they fully paid their
subscription to the defendant BMPI is not worthy of consideration, because,
in the case of appellants SPS. YU, there is an inconsistency regarding the
issuance of the official receipt since the alleged payment made on May 13,
1988 amounting to P135,000.00 was covered by Official Receipt No. 218
(Record, p. 352), whereas the alleged payment made earlier on November 5,
1987 amounting to P5,000.00 is covered by Official Receipt No. 222 (Record,
p. 353). Such issuance is a clear indication that said receipts were belatedly
issued just to suit their claim that they have fully paid the unpaid
subscriptions since in the ordinary course of business, a receipt is issued
earlier must have serial numbers lower than those issued on a later date.
But in the case at bar, the receipt issued on November 5, 1987 had a serial
number (222) higher than those issued on May 13, 1988 (218). And even
assuming arguendo that the individual appellants have paid their unpaid
subscriptions, still, it is very apparent that the veil of corporate fiction may
be pierced when made as a shield to perpetuate fraud and/or confuse
legitimate issues. (Jacinto vs. Court of Appeals, 198 SCRA 211).[19]

Spouses Halley and Vieza moved for a reconsideration, but the CA denied their motion
for reconsideration.

Issues

Only Donnina Halley has come to the Court to seek a further review, positing the
following for our consideration and resolution, to wit:

I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE
DECISION THAT DID NOTSTATE THE FACTS AND THE LAW UPON
 WHICH THE JUDGMENT WAS BASED BUT MERELY COPIED THE
CONTENTS OF RESPONDENTS MEMORANDUM ADOPTING THE SAME
AS THE REASON FOR THE DECISION

II.
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF
THE REGIONAL TRIAL COURT WHICH ESSENTIALLY ALLOWED THE
PIERCING OF THE VEIL OF CORPORATE FICTION

III.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE
TRUST FUND DOCTRINE WHEN THE GROUNDS THEREFOR HAVE
NOT BEEN SATISFIED.

On the first error, the petitioner contends that the RTC lifted verbatim from the
memorandum of Printwell; and submits that the RTCthereby violatedthe requirement
imposed in Section 14, Article VIII of the Constitution[20] as well as in Section 1,Rule 36 of
the Rules of Court,[21]to the effect that a judgment or final order of a court should state
clearly and distinctly the facts and the law on which it is based. The petitioner claims that
the RTCs violation indicated that the RTC did not analyze the case before rendering its
decision, thus denying her the opportunity to analyze the decision; andthat a suspicion of
partiality arose from the fact that the RTC decision was but a replica of Printwells
memorandum.She cites Francisco v. Permskul,[22] in which the Court has stated that the
reason underlying the constitutional requirement, that every decision should clearly and
distinctly state the facts and the law on which it is based, is to inform the reader of how
the court has reached its decision and thereby give the losing party an opportunity to
study and analyze the decision and enable such party to appropriately assign the errors
committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC
erroneously pierced the veil of corporate fiction despite the absence of cogent proof
showing that she, as stockholder of BMPI, had any hand in transacting with Printwell;
thatthe CA and the RTC failed to appreciate the evidence that she had fully paid her
subscriptions; and the CA and the RTCwrongly relied on the articles of incorporation in
determining the current list of unpaid subscriptions despite the articles of
incorporationbeing at best reflectiveonly of the pre-incorporation status of BMPI.
As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the
propriety of disregarding the separate personalities of BMPI and its stockholdersby
piercing the thin veil that separated them; and (b) the application of the trust fund
doctrine.

Ruling

The petition for review fails.

I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the memorandum of
Printwell in writing its decision, and did not analyze the records on its own, thereby
manifesting a bias in favor of Printwell, is unfounded.

It is noted that the petition for review merely generally alleges that starting from
its page 5, the decision of the RTC copied verbatim the allegations of herein Respondents
in its Memorandum before the said court, as if the Memorandum was the draft of the
Decision of the Regional Trial Court of Pasig,[23]but fails to specify either the portions
allegedly lifted verbatim from the memorandum, or why she regards the decision as
copied. The omission renders thepetition for review insufficient to support her
contention, considering that the mere similarityin language or thought between
Printwells memorandum and the trial courts decisiondid not necessarily justify the
conclusion that the RTC simply lifted verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may

occasionally viewa partys memorandum or brief as worthy of due consideration either
entirely or partly. When he does so, the judgemay adopt and incorporatein his
adjudicationthe memorandum or the parts of it he deems suitable,and yet not be guilty of
the accusation of lifting or copying from the memorandum.[24] This isbecause ofthe
avowed objective of the memorandum to contribute in the proper illumination and
correct determination of the controversy.Nor is there anything untoward in the
congruence of ideas and views about the legal issues between himself and the party
drafting the memorandum.The frequency of similarities in argumentation, phraseology,
expression, and citation of authorities between the decisions of the courts and the
memoranda of the parties, which may be great or small, can be fairly attributable tothe
adherence by our courts of law and the legal profession to widely knownor universally
accepted precedents set in earlier judicial actions with identical factual milieus or posing
related judicial dilemmas.

We also do not agree with the petitioner that the RTCs manner of writing the
decisiondeprivedher ofthe opportunity to analyze its decisionas to be able to assign errors
on appeal. The contrary appears, considering that she was able to impute and
assignerrors to the RTCthat she extensively discussed in her appeal in the CA, indicating
her thorough analysis ofthe decision of the RTC.

Our own readingof the trial courts decision persuasively shows that the RTC did
comply with the requirements regarding the content and the manner of writing a
decision prescribed in the Constitution and the Rules of Court. The decision of the RTC
contained clear and distinct findings of facts, and stated the applicablelaw and
jurisprudence, fully explaining why the defendants were being held liable to the
plaintiff. In short, the reader was at once informed of the factual and legal reasons for the
ultimate result.

II
Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two
reasons, namely: (a) to reach the unpaid subscriptions because it appeared that such
subscriptions were the remaining visible assets of BMPI; and (b) to avoid multiplicity of
suits.[25]

The petitionersubmits that she had no participation in the transaction between

BMPI and Printwell;that BMPI acted on its own; and that shehad no hand in persuading
BMPI to renege on its obligation to pay. Hence, she should not be personally liable.

We rule against the petitioners submission.

 Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers,[26]such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to promote the ends of
justice.[27]The corporate personality may be disregarded, and the individuals composing
the corporation will be treated as individuals, if the corporate entity is being used as a
cloak or cover for fraud or illegality;as a justification for a wrong; as an alter ego, an
adjunct, or a business conduit for the sole benefit of the stockholders.[28] As a general
rule, a corporation is looked upon as a legal entity, unless and until sufficient reason to
the contrary appears. Thus,the courts always presume good faith, andfor that reason
accord prime importance to the separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly and convincingly
established.[29]It thus behooves the courts to be careful in assessing the milieu where the
piercing of the corporate veil shall be done.[30]

Although nowhere in Printwells amended complaint or in the testimonies

Printwell offered can it be read or inferred from that the petitioner was instrumental in
persuading BMPI to renege onits obligation to pay; or that sheinduced Printwell to
extend the credit accommodation by misrepresenting the solvency of BMPI toPrintwell,
her personal liability, together with that of her co-defendants, remainedbecause the CA
found her and the other defendant stockholders to be in charge of the operations of BMPI
at the time the unpaid obligation was transacted and incurred, to wit:
In the case at bench, it is undisputed that BMPI made several orders
on credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount
of P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe(d) appellee the amount
of P291,342.76. The said goods were delivered to and received by BMPI but
it failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during
this time that appellants stockholders were in charge of the operation of
BMPI despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are
 appellants herein are availing the defense of corporate fiction to evade
payment of its obligations.[31]

It follows, therefore, that whether or not the petitioner persuaded BMPI to renege
on its obligations to pay, and whether or not she induced Printwell to transact with BMPI
were not gooddefensesin the suit.

III
Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant
stockholders, including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause

she had already fully paid her subscriptions to the capital stock of BMPI. She thus
insiststhat both lower courts erred in disregarding the evidence on the complete payment
of the subscription, like receipts, income tax returns, and relevant financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

xxx rule that the property of a corporation is a trust fund for the
payment of creditors, but such property can be called a trust fund only by
way of analogy or metaphor. As between the corporation itself and its
creditors it is a simple debtor, and as between its creditors and stockholders
its assets are in equity a fund for the payment of its debts.[32]

The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,[33]was adopted in our jurisdiction in Philippine Trust Co. v. Rivera,[34]where
thisCourt declared that:

It is established doctrine that subscriptions to the capital of a

corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can maintain
 an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx[35]

We clarify that the trust fund doctrineis not limited to reaching the stockholders
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts. [36]All assets and
property belonging to the corporation held in trust for the benefit of creditors thatwere
distributed or in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part,[37] without a valuable consideration,[38] or fraudulently, to the prejudice
of creditors.[39]The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its
debt.[40]To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good
unpaid balances upon their subscriptions, it is only necessary to establish that
thestockholders have not in good faith paid the par value of the stocks of the
corporation.[41]

The petitionerposits that the finding of irregularity attending the issuance of the
receipts (ORs) issued to the other stockholders/subscribers should not affect her
becauseher receipt did not suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR
issued in her favor,we still cannot sustain the petitioners defense of full payment of her
subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that even
where the plaintiff must allege nonpayment, the general rule is that the burden rests on
the defendant to prove payment, rather than on the plaintiff to prove nonpayment. In
other words, the debtor bears the burden of showing with legal certainty that the
obligation has been discharged by payment.[42]
 Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other

settlement between the seller and the buyer of goods, thedebtor or thecreditor, or
theperson rendering services, and theclient or thecustomer.[43]Althougha receipt is the
best evidence of the fact of payment, it isnot conclusive, but merely presumptive;nor is it
exclusive evidence,considering thatparole evidence may also establishthe fact of
payment.[44]

The petitioners ORNo. 227,presentedto prove the payment of the balance of her
subscription, indicated that her supposed payment had beenmade by means of a check.
Thus, to discharge theburden to prove payment of her subscription, she had to adduce
evidence satisfactorily proving that her payment by check wasregardedas payment under
the law.

Paymentis defined as the delivery of money.[45]Yet, because a check is not money

and only substitutes for money, the delivery of a check does not operate as payment and
does not discharge the obligation under a judgment.[46] The delivery of a bill of exchange
only produces the fact of payment when the bill has been encashed. [47]The following
passage fromBank of Philippine Islands v. Royeca[48]is enlightening:

Settled is the rule that payment must be made in legal tender. A check
is not legal tender and, therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an instrument does not,
by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by
commercial document is actually realized.

To establish their defense, the respondents therefore had to

present proof, not only that they delivered the checks to the
petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the
respondents could have easily produced the cancelled checks as
evidence to prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed because they
were not notified of the dishonor of the checks and three years had
already lapsed since they issued the checks.
 Because of this failure of the respondents to present sufficient proof of
payment, it was no longer necessary for the petitioner to prove non-
payment, particularly proof that the checks were dishonored. The burden of
evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued in

exchange of the check did not satisfactorily establish her allegation of full payment of her
subscription. Indeed, she could not even inform the trial court about the identity of her
drawee bank,[49]and about whether the check was cleared and its amount paid to
BMPI.[50]In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit
presented, had no bearing on the issue of payment of the subscription because they did
not by themselves prove payment. ITRsestablish ataxpayers liability for taxes or a
taxpayers claim for refund. In the same manner, the deposit slips and entries in the
passbook issued in the name of BMPI were hardly relevant due to their not reflecting the
alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support their
allegation of complete payment of their respective subscriptions with the stock and
transfer book of BMPI. Indeed, books and records of a corporation (including the stock
and transfer book) are admissible in evidence in favor of or against the corporation and
its members to prove the corporate acts, its financial status and other matters (like the
status of the stockholders), and are ordinarily the best evidence of corporate acts and
proceedings.[51]Specifically, a stock and transfer book is necessary as a measure of
precaution, expediency, and convenience because it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of
showing the ownership of stock and like matters.[52]That she tendered no explanation
why the stock and transfer book was not presented warrants the inference that the book
did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such
a certificate covering her subscription might have been a reliable evidence of full payment
of the subscriptions, considering that under Section 65 of the Corporation Code a
certificate of stock issues only to a subscriber who has fully paid his subscription. The lack
of any explanation for the absence of a stock certificate in her favor likewise warrants an
unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on
the articles of incorporationas proof of the liabilities of the stockholders subscribing to
BMPIs stocks, averring that the articles of incorporationdid not reflect the latest
subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-
incorporation status of a corporation, the lower courts reliance on that document to
determine whether the original subscribersalready fully paid their subscriptions or not
was neither unwarranted nor erroneous. As earlier explained, the burden of establishing
the fact of full payment belonged not to Printwell even if it was the plaintiff, but to the
stockholders like the petitioner who, as the defendants, averredfull payment of their
subscriptions as a defense. Their failure to substantiate their averment of full payment, as
well as their failure to counter the reliance on the recitals found in the articles of
incorporation simply meant their failure or inability to satisfactorily prove their defense of
full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as
BMPIs creditor,had a right to reachher unpaid subscription in satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the
proportion to their shares in the capital stock of BMPI); and held the petitionerpersonally
liable onlyin the amount of P149,955.65.

We do not agree. The RTC lacked the legal and factual support for its prorating the
liability. Hence, we need to modify the extent of the petitioners personal liability to
Printwell. The prevailing rule is that a stockholder is personally liable for the financial
obligations of the corporation to the extent of his unpaid subscription.[53]In view ofthe
petitioners unpaid subscription being worth P262,500.00, shewas liable up to that
amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation,

interest is fixed at 12% per annum from the date the amended complaint was filed on
February 8, 1990 until the obligation (i.e., to the extent of the petitioners personal liability
of P262,500.00) is fully paid.[54]

Lastly, we find no basis togrant attorneys fees, the award for which must be
supported by findings of fact and of law as provided under Article 2208 of the Civil
Code[55]incorporated in the body of decision of the trial court. The absence of the
requisite findings from the RTC decision warrants the deletion of the attorneys fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm with

modification the decision promulgated on August 14, 2002by ordering the petitionerto
pay to Printwell, Inc. the sum of P262,500.00, plus interest of 12% per annum to be
computed from February 8, 1990 until full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.

OFFICE OF THE PRESIDENT G.R. No. 183445

and PRESIDENTIAL ANTI-GRAFT

COMMISSION,
Present:
Petitioners,

PERALTA, J., Acting Chairperson,

BERSAMIN,*

ABAD,
 - versus - MENDOZA, and

SERENO,** JJ.

CALIXTO R. CATAQUIZ, Promulgated:

Respondent. September 14, 2011

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

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the January 31, 2008 Decision[1] and the June 23, 2008 Resolution[2] of the
Court of Appeals (CA) in CA-G.R. SP No. 88736 entitled Calixto R. Cataquiz v. Office of the
President and Concerned Employees of the LLDA (CELLDA), which reversed and set aside
the Amended Resolution[3] dated February 10, 2005 of the Office of the President (OP).

The Facts

Respondent Calixto R. Cataquiz (Cataquiz) was appointed as General Manager of

the Laguna Lake Development Authority (LLDA) on April 16, 2001.[4]
 On April 1, 2003, a majority of the members of the Management Committee and
the rank-and-file employees of the LLDA submitted to then Department of Environment
and Natural Resources (DENR) Secretary Elisea G. Gozun (Secretary Gozun) their Petition
for the Ouster of Cataquiz as LLDA General Manager[5] on the grounds of corrupt and
unprofessional behavior and management incompetence.

In response, Secretary Gozun ordered the formation of an investigating team to

conduct an inquiry into the allegations against Cataquiz. The results of the fact-finding
activity were submitted in a Report[6] dated May 21, 2003 in which it was determined that
respondent may be found guilty for acts prejudicial to the best interest of the government
and for violations of several pertinent laws and regulations. Consequently, the
investigating team recommended that the case be forwarded to the Presidential Anti-
Graft Commission (PAGC) for proper investigation.

In her Memorandum[7] for the President dated May 23, 2003, Secretary Gozun
reported that there is prima facie evidence to support some accusations against Cataquiz
which may be used to pursue an administrative or criminal case against him. It was
further noted that respondent lost his leadership credibility. In light of these, she
recommended that Cataquiz be relieved from his position and that he be investigated by
PAGC.

On June 6, 2003, in a letter[8] to then President Gloria Macapagal-Arroyo (President

Arroyo), the Concerned Employees of the Laguna Lake Development
Authority (CELLDA), a duly organized employees union of the LLDA, expressed their
support for the petition to oust Cataquiz and likewise called for his immediate
replacement.

Thereafter, CELLDA formally filed its Affidavit Complaint[9] dated September 5,

2003 before PAGC charging Cataquiz with violations of Republic Act (R.A.) No. 3019 (The
Anti-Graft and Corrupt Practices Act), Executive Order (E.O.) No. 292 (The
Administrative Code) and R.A. No. 6713 (Code of Conduct and Ethical Standards for
Public Officials and Employees), to wit:

Violation of Section 3(e) of Republic Act 3019 in relation to Section 46 b(8)

and (27), Chapter VI, Book V of EO 292.

a. That respondent directly transacted with 35 fishpen operators and

authorized [the] payment of fishpen fees based on negotiated prices
in violation of LLDA Board Resolution No. 28, Series of 1996 as
alleged.

b. That respondent allegedly approved additional fishpen areas in

the Lake without the approval of the Board and in violation of the
existing Zoning and Management Plan (ZOMAP) of the Laguna de
Bay that allows a carrying capacity of 10,000 hectares [of] fishpen
structures in the lake based on scientific and technical studies.

c. That respondent allegedly condoned or granted reductions of

fines and penalties imposed by the Public Hearing Committee, the
duly authorized adjudicatory body of the LLDA. The condonation
was allegedly without the concurrence of LLDA Board of Directors.

d. That respondent allegedly caused the dismissal of some cases

pending with the LLDA without the concurrence of the Public
Hearing Committee.

e. That on June 4, 2002, respondent allegedly appropriated and

disbursed the amount of Five Hundred Thousand Pesos
(₱500,000.00) from LLDA funds and confidential funds without any
authority from the Department of Budget and Management.

f. That respondent allegedly contracted the services of several

consultants without prior written concurrence from the Commission
on Audit.
 g. That on December 19, 2001, respondent allegedly appropriated and
disbursed LLDA funds for the grant of gifts to indigent residents of
San Pedro, Laguna. Said appropriation is not within the approved
budget neither was it sanctioned by the Board of Directors, as
alleged.

h. That respondent allegedly allowed a Taiwanese company identified

as Phil-Tai Fishing and Trade Company to occupy and utilize certain
portions of LLDA facilities located at Km. 70, Barangay Bangyas,
Calauan, Laguna without any contract nor authority from the LLDA
Board.

i. That respondent allegedly authorized the direct procurement of

fish breeders from Delacon Realty and Development Corporation
without the required bidding in accordance with COA rules and
regulations.

Violation of Section 7(d) of Republic Act 6713:

a. That respondent allegedly solicited patronage from regulated
industries in behalf of RVQ Productions, Inc. for the promotion of its
film entry to the 2002 Metro Manila Film Festival entitled Home
Alone the Riber.

Violation of Section 5(a) of Republic Act 6713:

a. That respondent allegedly failed to act promptly and expeditiously

on official documents, requests, papers or letters sent by the public
or those which have been processed and completed staff work for his
appropriate action.[10]

On December 5, 2003, PAGC issued a Resolution[11] recommending to the President

that the penalty of dismissal from the service with the accessory penalties of
disqualification for re-employment in the public service and forfeiture of government
retirement benefits be imposed upon Cataquiz.
 Thereafter, on December 8, 2003, Cataquiz was replaced by Fatima A.S. Valdez,
who then assumed the position of Officer-in-Charge/General Manager and Chief
Operating Officer of the LLDA by virtue of a letter of appointment dated December 3,
2003 issued by President Arroyo.[12]

In its Decision[13] dated June 29, 2004, the OP adopted by reference the findings
and recommendations of PAGC. The dispositive portion thereof reads:

WHEREFORE, as recommended by the PAGC, respondent Calixto

R. Cataquiz, is hereby DISMISSED FROM THE SERVICE, with the
accessory penalties of disqualification from re-employment to government
service and forfeiture of retirement benefits, effective immediately upon
receipt of this order.

SO ORDERED.

Aggrieved, Cataquiz filed his Motion for Reconsideration and/or for New
Trial[14]
dated August 4, 2004, arguing that: (1) prior to the issuance by the PAGC of its
Resolution and by the OP of its Decision, he was already removed from office, thereby
making the issue moot and academic; and (2) he cannot be found guilty for violating a
resolution which was foreign to the charges against him or for acts which did not
constitute sufficient cause for his removal in office, as shown by acts and documents
which subsequently became available to him, entitling him to a new trial.
 On February 10, 2005, the OP issued an Amended Resolution,[15] imposing on
Cataquiz the penalties of disqualification from re-employment in the government service
and forfeiture of retirement benefits, in view of the fact that the penalty of dismissal was
no longer applicable to him because of his replacement as General Manager of the LLDA.

Cataquiz elevated his case to the CA via a petition for review[16] dated March 2,
2005, raising the same issues presented in his Motion for Reconsideration and/or New
Trial before the OP.

The CA promulgated its Decision on January 31, 2008, which reversed and set aside
the Amended Resolution of the OP. In so resolving, the CA reasoned that the accessory
penalties of disqualification from employment in the government service and forfeiture of
retirement benefits could no longer be imposed because the principal penalty of dismissal
was not enforced, following the rule that the accessory penalty follows the principal
penalty. The CA also agreed with Cataquiz that he could not be held liable for a violation
of Board Resolution No. 68 of the LLDA, which when examined, was found not to be
related to fishpen awards. If at all, the applicable rule would be Board Resolution No. 28,
as suggested by Cataquiz himself. Said resolution though would be an invalid basis
because it was not approved by the President pursuant to Section 4(k) of R.A. No. 4850
(An Act Creating the Laguna Lake Development Authority). Finally, the CA found that
the offenses charged against Cataquiz under R.A. No. 4850 constituted acts that were
within his authority as general manager of the LLDA to perform.

Not in conformity, the OP and the PAGC (petitioners) filed this petition for review.
 After the submission of respondents comment[17] and the petitioners
reply,[18] Cataquiz filed an Urgent Motion for Judicial Notice[19] dated August 13,
2009 urging the Court to take judicial notice of the Resolution[20] rendered by the Office
of the Ombudsman (Ombudsman) on November 30, 2004 which recommended the
dismissal of the charges against him for violation of R.A. No. 3019.

The Issues

Petitioners cite the following errors as grounds for the allowance of the petition:

I.

The Court of Appeals gravely erred when it reversed in toto the

findings of the OP and PAGC without stating clearly and distinctly
the reasons therefor, which is contrary to the Constitution and the
Rules of Court; the findings of the Court of Appeals are conclusions
without citation of specific evidence on which they are based.

II.

The Court of Appeals erred because its judgment is based on a

misapprehension of facts;

III.

The Court of Appeals erred when it went beyond the issues of the
case;

IV.

The findings of the Court of Appeals are contrary to the findings of

the OP, PAGC and DENR Fact Finding Committee, [and]

V.

The OP and PAGC correctly found respondent to be unfit in public

service, thus it did not err in imposing the accessory penalties of
 disqualification from employment in the government service and
forfeiture of retirement benefits.[21]

Cataquiz, on the other hand, submits the following arguments in his Memorandum:[22]

I.

The dismissal by the Ombudsman of the cases against the

respondent under the same set of facts further constitute the law of
the case between the parties which necessitates the dismissal of this
appeal and further supports the correctness of the decision of the
Court of Appeals.

II.

The Court of Appeals did not commit any error when it

reversed the amended resolution of the petitioner Office of the
President.[23]

The issues can be condensed into four essential questions:

(1) Whether the CA made an incorrect determination of the facts of the case
warranting review of its factual findings by the Court;

(2) Whether the dismissal by the Ombudsman of the charges against Cataquiz serves as a
bar to the decision of the OP;
(3) Whether Cataquiz can be made to suffer the accessory penalties of disqualification
from re-employment in the public service and forfeiture of government retirement
benefits, despite his dismissal from the LLDA prior to the issuance by the PAGC and the
OP of their decision and resolution, respectively; and

(4) Whether Cataquiz can be charged with a violation of Board Resolution No. 28, despite
the clerical error made by the PAGC in indicating the Board Resolution number to be No.
68.

The Courts Ruling

The Court finds merit in the petition.

Findings of fact of the appellate court

can be reviewed

As a general rule, only questions of law can be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court.[24] Since this Court is not a trier of facts,
findings of fact of the appellate court are binding and conclusive upon this
Court.[25] There are, however, several recognized exceptions to this rule, namely:

(1) When the conclusion is a finding grounded entirely on speculation,

surmises and conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;

 (4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case, and the same is contrary to the admissions of both
appellant and appellee;

(7) When the findings are contrary to those of the trial court;

(8) When the findings of fact are conclusions without citation of

specific evidence on which they are based;

(9) When the facts set forth in the petition as well as in the petitioners main
and reply briefs, are not disputed by the respondents; and

(10) When the findings of fact of the Court of Appeals are premised on the
supposed absence of evidence and contradicted by the evidence on
record.[26] [Emphases supplied]

In this case, the findings of the CA are contrary to those of PAGC which
recommended Cataquiz dismissal for violating Section 3(e) of R.A. No. 3019, in relation to
Section 46(b)(27), Chapter 6, Subtitle A, Title I, Book V of E.O. 292. Likewise, the
Investigating Team of the DENR also agreed that there exists evidence that could sustain
a finding of respondents violation of several laws and regulations.

The result of PAGCs investigation, however, was simply brushed aside by the CA,
without citing any evidence on which its findings were based. In ignoring the meticulous
discussion of PAGCs conclusions and in absolving Cataquiz from any wrongdoing, the CA
cavalierly declared as follows:

The petitioner likewise presented to us in support of his petition the

argument that he had sufficient authority to do what had been complained
against him. We have examined the charges against the provisions of R.A.
No. 4850 and we found that the said acts could be sustained because they
were within his powers as general manager of the Laguna Lake
 Development Authority as implied from express powers granted to him by
the law. Moreover, the records of the Authority show that transactions
resulting into contracts in the Authoritys trading activities have been done
by previous general managers of the Authority even without prior approval
by the board. Ordinary corporate practices likewise point out to the fact
that a general manager, having the general management and control of its
business and affairs, has implied and apparent authority to do acts or make
any contracts in its behalf falling within the scope of the ordinary and usual
business of the company, especially so when, relative to a contract that the
petitioner had entered into with Phil-Tai Fishing and Trade Company, the
Office of the Government Corporate Counsel had formally acceded
thereto.[27]

As plain as that, without any analysis of the evidence on record or a comprehensive

discussion on how the decision was arrived at, the CA absolved Cataquiz of the acts he
was accused of committing during his service as General Manager of the LLDA.

Section 14, Article VIII of the 1987 Constitution mandates that decisions must
clearly and distinctly state the facts and the law on which it is based. Decisions of courts
must be able to address the issues raised by the parties through the presentation of a
comprehensive analysis or account of factual and legal findings of the court.[28] It is
evident that the CA failed to comply with these requirements. PAGC, in its Resolution
dated December 5, 2003, discussing each of the twelve allegations against Cataquiz,
determined that he should be dismissed from the government service and that he could
be held liable under Section 3(e) of R.A. No. 3019, in relation to Section 46(b)(27),
Chapter 6, Subtitle A, Title I, Book V of E.O. No. 292, to wit:

R.A. No. 3019

Section 3. Corrupt practices of public officers. In addition to acts or

omissions of public officers already penalized by existing law, the following
shall constitute corrupt practices of any public officer and are hereby
declared to be unlawful:
 (e) Causing any undue injury to any party, including
the Government, or giving any private party any unwarranted
benefits, advantage or preference in the discharge of his
official administrative or judicial functions through manifest
partiality, evident bad faith or gross inexcusable negligence.
This provision shall apply to officers and employees of offices
or government corporations charged with the grant of
licenses or permits or other concessions.

E.O. No. 292

Section 46. Discipline: General Provisions.

xxx

(b) The following shall be grounds for disciplinary

action:

xxx

(27) Conduct prejudicial to the best

interest of the service

The one-paragraph pronouncement of the CA that Cataquiz had authority to

perform the acts complained of is grossly insufficient to overturn the determination by
PAGC that he should be punished for acts prejudicial to the LLDA committed during his
service as General Manager of the said agency. It should be emphasized that findings of
fact of administrative agencies will not be interfered with and shall be considered binding
and conclusive upon this Court provided that there is substantial evidence to support
such findings.[29] Substantial evidence has been defined as that amount of relevant
evidence which a reasonable mind might accept as adequate to justify a conclusion[30] or
evidence commonly accepted by reasonably prudent men in the conduct of their
affairs.[31]
 After a diligent review of the evidence presented and the pleadings filed, this Court
finds that there is substantial evidence to justify the conclusion of PAGC that Cataquiz
should be punished with the penalty of dismissal, along with its accessory penalties, for
committing acts prejudicial to the best interest of the government and for giving undue
advantage to a private company in the award of fishpens. Thus, the PAGC was correct
when it wrote:

I.

[I]n the first allegation, respondent Cataquiz impliedly admitted his

direct transaction with 35 fishpen operators and the payment of fishpen
fees without conducting a public bidding. In respondents defense, he raised
the invalidity of Board Resolution No. 68 [sic] which provides for guidelines
in public bidding for fishpen areas. Respondent argued that Board
Resolution No. 68 [sic] is an unreasonable exercise of the Boards legislative
power since public bidding has never been intended by RA 4850, the
enabling law of LLDA.

The Commission finds the contention of the respondent bereft of

merit. Section 25-A of RA 4850 authorizes the Board to formulate,
prescribe, amend and repeal rules and regulations to govern the conduct of
business of the Authority and it is the function of the respondent in his
capacity as General Manager to implement and administer the policies,
programs and projects approved by the Board pursuant to Section 26 (b) of
RA 4850. While it is true that a Board Resolution draws life from the
enabling statute, the Commission cannot find any inconsistency between
the former and the latter. The Board Resolution No. 68 [sic] is still within
the bounds of RA 4850 and is germane to its purpose in promoting a
balanced growth of the Laguna Lake. Thus, the validity of the questioned
Resolution stands. It becomes now the duty of the respondent to
implement the Resolution and not to question its legality nor disregard it.

In the case at hand, respondents act of not giving credence to the

Board Resolution resulted to undue prejudice to the best interest of the
public service considering that the Authority incurred Revenue loss from
the direct transaction of respondent Cataquiz amounting to Seven Hundred
Fifty Five Thousand Seven Hundred Pesos ₱755,700.00.
 The presumption that the official duty has been regularly performed
was overcome by the fact that the government was deprived of much
needed revenue as a result of the act committed by respondent Cataquiz.

xxxx

III.

The Commission finds that the act of respondent Cataquiz in

condoning penalties and reducing the fines imposed by the Public Hearing
Committee (PHC) of the LLDA has no basis in law. The premise of the
respondent citing Section 26 (b) giving him the executive prerogative and
Section 4 (a) justifying the condonation and reduction is misplaced. A
careful examination of the aforementioned provisions would reveal that
Section 26 (b) does not vest the respondent the executive prerogative. Said
provision gives him the authority to execute and administer the policies,
plans, programs and projects approved by the Board. There is no showing
that the condonation of penalties and reduction of fines has been approved
by the Board. Section 26 (b) is clear in its terms that before respondent
executes any policy, program or project, the same has to be approved by the
Board. Thus, there is no executive prerogative to speak of.

The Commission agrees with the contention of the complainant that

Section 4 (d) refers to additional power and function of the Authority and
not to the respondent. Of equal importance is that Section 4 (d) does not
confer him the authority to condone penalties nor reduce fines. Said
provision is referring to Orders requiring the discontinuance of
pollution.When the law is clear it needs no further interpretation.

The contention of respondent Cataquiz that there is nothing in

Section 25-A that states that the approval of the Board is necessary has no
leg to stand on. Same provision gives the Board the implied power to do
such other acts and perform such other functions as may be necessary to
carry out the provisions of this Charter.

In relation to this is Section 31 of RA 4850 that gives the Board the

authority to create such other divisions and positions as may be deemed
necessary for the efficient, economic and effective conduct of the activity of
the Authority.
 The findings of the PHC, although a recommendatory body, must be
accorded great respect. The penalties imposed by the PHC cannot be
substituted by the respondent without any basis and the latter cannot
simply claim that he has the sole authority to condone penalties and reduce
fines.

Evidently respondents act of condonation of penalties and reduction

of fines was uncalled for. Thus, his act resulted to undue prejudice to the
best interest of the service and will set a dangerous precedent to the justice
system of the government.

IV.

In the same vein, the dismissal of the pending case against Twenty
First Century Resources Inc. by the respondent has no basis in law. Section
26 of RA 4850 clearly enumerates the powers and functions of respondent,
to wit:

xxx.

a. Submit for consideration of the Board the policies and

measures which he believes to be necessary to carry out
the purposes and provisions of this Act;

b. Execute and administer the policies, plan, programs and

projects approved by the Board;

c. Direct and supervise the operation and internal

administration of the Authority. The General Manager
may delegate certain administrative responsibilities to
other officers of the Authority subject to the rules and
regulations of the Board;

d. Appoint officials and employees below the rank of

division heads to positions in the approved budget upon
written recommendation of the division head concerned
 using as guide the standard set forth in the Authoritys
merit system;

e. Submit quarterly reports to the Board on personnel

selection, placement and training;

f. Submit to the NEDA an annual report and such other

reports as may be required, including the details of the
annual and supplemental budgets of the Authority;

g. Perform such other functions as may be provided by law.

From the aforementioned section, nowhere can the Commission find

any grant of power to adjudicate in favor of respondent Cataquiz and the
latter cannot hide under the cloak of managerial prerogative absent any law
that justifies his act of dismissing the case. To reiterate, the dismissal of the
case against Twenty First Century is an act clearly prejudicial to the best
interest of the service. Consequently, the Authority was deprived of a
committed service to the government and this fact cannot be overlooked
upon by the Commission.

xxxx

VI.

The contract of service for consultancy duly signed by the respondent and
the legal consultants of LLDA is not in accordance with Section 212 of the
Government Accounting and Auditing Manual (GAAM) 86 which provides
that:

Payment of public funds of retainer fees of private law

practitioners who are so hired and employed without the
prior written concurrence and acquiescence by the Solicitor
 General of the Government Corporate Counsel, as the case
may be, as well as the written concurrence of the Commission
on Audit, shall be disallowed in audit and the same shall be a
personal liability of the official concerned.

The contention of the respondent that the LLDA Administrative

Section failed to advise him regarding the requisites laid down by law
cannot stand. Occupying an executive position, respondent is required to
exercise diligence in the highest degree in the performance of his
duties. Respondent cannot pass responsibility to other Division which in
the first place, he has supervision and control of, pursuant to Section 31 of
RA 4850. Supervision as defined is the overseeing or the power or authority
of an officer to see that subordinate officers perform their duties. If the
latter fail or neglect to fulfill them, the former may take such action or step
as prescribed by law to make them perform their duties. Control on the
other hand, is the power of an officer to alter or modify or nullify or set
aside what a subordinate officer has done in the performance of his duties
and to substitute the judgment of the former for that of the latter. There is
therefore a given authority to the respondent by law to regulate the acts of
the Administrative Division and respondent cannot simply evade
responsibility by invoking the shortcomings of his subordinates. In signing
the contract, without verifying compliance of existing laws, respondent falls
short of the required competence expected of him in the performance of his
official functions. Incompetence, has been defined as lack of ability, legal
qualification or fitness to discharge the required duty; want of physical or
intellectual or moral fitness.

xxxx

VIII.

The Commission finds that the transaction entered into by the

respondent and Phil-Tai Fishing and Trade Company is violative of Section
3 (e) of RA 3019. The elements of Section 3 (e) are as follows:

1. The accused is a public officer discharging official

administrative, or judicial functions or private persons in
conspiracy with them;
 2. The public officer committed the prohibited act during
the performance of his official duty or in relation to his
public position;

3. The public officer acted with manifest partiality, evident

bad faith or gross inexcusable negligence; and

4. His action caused undue injury to the Government or

any private party or gave any party any unwarranted
benefit, advantage or preference.

Applying the first element, respondent Cataquiz is a public officer

within the legal term of RA 3019 which provides that Public officer includes
elective and appointive officials and employees, permanent or temporary,
whether in the classified or unclassified or exempt from service receiving
compensation, even nominal from the government xxx. Clearly, respondent
is a public officer discharging official functions in transacting with Phil-Tai
to occupy and utilize portions of LLDA facilities locate (sic) at Km. 70 Brgy.
Bangyas, Calauan, Laguna.

Relating to the second element in the instant case, respondent in the

exercise of his official duties allowed Phil-Tai to use the LLDA facility
without the concurrence of the Board of Directors of LLDA where the
corporate powers of the Authority lies as explicitly provided in Section 16 of
RA 4850.

Applying the third element, respondent Cataquiz acted with

manifest partiality when by reason of his office he allowed Phil-Tai to
occupy the LLDA facility without any contract and without the approval of
the Board of Directors. The privilege granted was by virtue of a joint
venture proposal which was never authorized by the Board as admitted by
the respondent in his position paper. In fact the proposal is still awaiting
resolution from the board. Partiality is synonymous with bias which excites
a disposition to see and report matters as they are wished for rather than as
they are.
 Manifest means obvious to the understanding, evident to the mind,
not obscure or hidden and is synonymous with open, clear, visible,
unmistakable, indubitable, indisputable, evident and self-evident.

There was manifest partiality when respondent Cataquiz entered a

transaction with Phil-Tai disregarding the requirements set forth by RA
4850 which requires the approval of the Board. Worse, the joint venture
proposal by Phil-Tai which was accepted by the respondent took place
without any contract at all. The contention of the respondent that Phil-Tai
is only given the authority to conduct a preliminary study and including the
technical survey and Pilot testing at the aforesaid facility for the purpose of
determining its structural integrity and commercial viability cannot prevail
over the records available at hand.

The findings of DENR officials in their ocular inspection on May 13,

2003 would disclose that Phil-Tai is in actual possession of the LLDA facility
and personally witnessed the actual harvesting of tilapia from the fishpond
owned by LLDA. The report of DENR officials contains that the act of the
respondent is prejudicial to the interest of the government mainly because
there was no contract executed between LLDA and Phil-Tai.

Moreover, the Memorandum from the Division Chief III Jose K.

Cario III of the Community Development Division would reveal that Phil-
Tai is introducing exotic aquatic species in one of the earthen ponds at
LLDA Calauan Complex. RA 8550 otherwise known as the Philippine
Fisheries Code of 1998 provides that the introduction of foreign crustaceans
such as crayfish in Philippine waters without a sound ecological, biological
and environmental justification based on scientific studies is
prohibited. There is, therefore, an unwarranted act by Phil-Tai which is
prejudicial to the government.

Applying the fourth element in the case at bar, respondent Cataquiz

gave Phil-Tai unwarranted benefit, advantage or preference when he
entertained the joint venture proposal without any consideration. In fact, as
stated in respondents position paper, LLDA was assured by Phil-Tai that in
the event the agreement does not materialize, it will remove all its
equipment without damage to the LLDA aqua culture facilities. Be it noted
that the assurance was not made in writing.
 Respondent refused to discern the adverse consequences of the joint
venture proposal considering that no available remedy was left to the
government in case of untoward incidents that may arise. The transaction
entered into is at most unenforceable because the agreements therein was
(sic) not put into writing. The transaction cannot be tolerated by the
Commission and the unwarranted benefit that Phil-Tai is enjoying deserves
much consideration because it puts the government into a very
disadvantageous situation.

xxxx

X.

The Commission finds that the promotion of the film entry of RVQ
Productions by respondent Cataquiz does not offend Section 7 (d) of RA
6713 which provides as follows:

Public officials and employees shall not solicit or

accept, directly or indirectly, any gift, gratuity, favor,
entertainment, loan or anything of monetary value from any
person in the course of their official duties, or in connection
with any operation being regulated by, or any transaction
which may be affected by the functions of their office.

There was no undue solicitation of patronage of the film considering

that the tickets sold are voluntary participation of interested employees. In
fact, no monetary consideration was received nor accepted by the
respondent.

Of important consideration, however, is the use of government

vehicles in the delivery of movie tickets and the collection of payments
thereof to different industrial establishments. Respondent Cataquiz in his
official capacity as the General Manager of LLDA, approved the use of
government vehicles and drivers for the promotion of the movie.

The impropriety of using government property in favor of a (sic)

RVQ Production, a private entity cannot be countenanced as this is
prejudicial to the best interest of the service.The very purpose of the use of
the government property has not been properly served. [32] [Underscoring
supplied]

xxxx
The dismissal of the criminal case against

Respondent does not bar the finding

of administrative liability.

Cataquiz claims that the dismissal by the Ombudsman of the case against him
constitutes the law of the case between him and the OP which necessitates the dismissal
of the petition before this Court.

At the outset, the Court would like to highlight the fact that Cataquiz never raised
this issue before the CA, despite having had ample time to do so. The records show that
the Ombudsman promulgated its resolution on November 30, 2004, more than three
months prior to the filing by the respondent of his petition before the CA on March 2,
2005.[33]Nevertheless, he only chose to mention this after the CA had rendered its decision
and after the submission of his comment on the petition at bench. This is evidently a
desperate effort on his part to strengthen his position and support the decision of the CA
exonerating him from any administrative liability. The Court has consistently ruled that
issues not previously ventilated cannot be raised for the first time on
appeal.[34] Otherwise, to consider such issues and arguments belatedly raised by a party
would be tantamount to a blatant disregard of the basic principles of fair play, justice and
due process.[35] Therefore, this issue does not merit the attention of the Court.

Even if the Court were to overlook this procedural lapse, Cataquiz argument would
still fail. The Ombudsman Resolution dated November 30, 2004 recommending the
dismissal of the charges against him pertains only to the criminal case against him and
not the administrative case, which is the subject matter of the case at bench. As can be
gleaned from the Resolution, the charges referred to by the Ombudsman were for
respondents alleged violation of Section 3(b) and (c) of R.A. No. 3019 or for malversation
of public funds and fraud against the public treasury.[36]

It is a basic rule in administrative law that public officials are under a three-fold
responsibility for a violation of their duty or for a wrongful act or omission, such that they
may be held civilly, criminally and administratively liable for the same act. [37] Obviously,
administrative liability is separate and distinct from penal and civil liability.[38] In the case
of People v. Sandiganbayan,[39]the Court elaborated on the difference between
administrative and criminal liability:

The distinct and independent nature of one proceeding from the

other can be attributed to the following: first, the difference in the quantum
of evidence required and, correlatively, the procedure observed and
sanctions imposed; and second, the principle that a single act may offend
against two or more distinct and related provisions of law, or that the same
act may give rise to criminal as well as administrative liability.[40]

Accordingly, the dismissal of the criminal case by the Ombudsman does not foreclose
administrative action against Cataquiz.[41] His absolution from criminal liability is not
conclusive upon the OP, which subsequently found him to be administratively liable. The
pronouncement made by the Ombudsman cannot serve to protect the respondent from
further administrative prosecution. A contrary ruling would be unsettling as it would
undermine the very purpose of administrative proceedings, that is, to protect the public
service and uphold the time-honored principle that a public office is a public trust.[42]

Respondent can be imposed with

the accessory penalties.

Removal or resignation from office is not a bar to a finding of administrative
liability.[43] Despite his removal from his position, Cataquiz can still be held
administratively liable for acts committed during his service as General Manager of the
LLDA and he can be made to suffer the corresponding penalties. The subsequent finding
by the OP that Cataquiz is guilty of the charges against him with the imposition of the
penalty of dismissal and its corresponding accessory penalties is valid.

It cannot be disputed that Cataquiz was a presidential appointee.[44] As such, he

was under the direct disciplining authority of the President who could legitimately have
him dismissed from service. This is pursuant to the well-established principle that the
Presidents power to remove is inherent in his power to appoint.[45] Therefore, it is well
within the authority of the President to order the respondents dismissal.

Cataquiz argues that his removal has rendered the imposition of the principal penalty of
dismissal impossible. Consequently, citing the rule that the accessory follows the
principal, he insists that the accessory penalties may no longer be imposed on him.[46]

The respondent is mistaken.

In the case of In Re: Complaint of Mrs. Corazon S. Salvador against Spouses Noel
and Amelia Serafico,[47] despite the resignation from government service by the employee
found guilty of grave misconduct, disgraceful and immoral conduct and violation of the
Code of Conduct for Court Personnel, thereby making the imposition of the penalty of
dismissal impossible, this Court nevertheless imposed the accessory penalties of forfeiture
of benefits with prejudice to re-employment in any branch or instrumentality of
government.

Similarly instructive is the case of Pagano v. Nazarro, Jr.[48] where the Court held
that:
 The instant case is not moot and academic, despite the petitioners
separation from government service. Even if the most severe of
administrative sanctions that of separation from service may no longer be
imposed on the petitioner, there are other penalties which may be imposed
on her if she is later found guilty of administrative offenses charged against
her, namely, the disqualification to hold any government office and the
forfeiture of benefits.[49]

Based on the foregoing, it is clear that the accessory penalties of disqualification from re-
employment in public service and forfeiture of government retirement benefits can still
be imposed on the respondent, notwithstanding the impossibility of effecting the
principal penalty of dismissal because of his removal from office.

PAGCs typographical error

can be corrected.

One of the charges against Cataquiz is for directly transacting with 35 fishpen operators
and authorizing payment of fishpen fees based on negotiated prices, in contravention of
the directive of Board Resolution No. 28, which requires the conduct of a public
bidding. The PAGC Resolution dated December 5, 2003, recommending the dismissal of
Cataquiz erroneously indicated that he violated Board Resolution No. 68, instead of No.
28.[50] The CA then sustained his contention that he could not be found guilty for
violating Board Resolution No. 68 of the LLDA because such resolution was not related to
fishpen awards and that his right to due process was violated when the OP found him
guilty of violating the said resolution. It further added that even if the respondent was
charged with acting in contravention with Board Resolution No. 28, the said resolution
would be invalid for not having been duly approved by the President.
Petitioners, however, claim that it was merely a typographical or clerical error on the part
of PAGC which was unfortunately adopted by the OP.[51] Cataquiz apparently will not be
unduly prejudiced by the correction of the PAGC resolution. In the counter-affidavit he
filed before the PAGC, he was able to exhaustively argue against the allegation that he
had violated Board Resolution No. 28.[52] Hence, he cannot feign ignorance of the true
charges against him.

In this regard, the Court agrees with the petitioners.

It is clear from the pleadings submitted before PAGC particularly in the Affidavit
Complaint filed by CELLDA against Cataquiz and in the Counter-Affidavit submitted by
the latter that the resolution referred to as having been violated by the respondent was
Board Resolution No. 28, and not No. 68, as was erroneously indicated in the PAGC
Resolution. Thus, pursuant to the rule that the judgment should be in accordance with
the allegations and the evidence presented,[53] the typographical error contained in the
PAGC Resolution can be amended. Clerical errors or any ambiguity in a decision can be
rectified even after the judgment has become final by reference to the pleadings filed by
the parties and the findings of fact and conclusions of law by the court.[54]

A careful perusal of the PAGCs discussion on the violation of the questioned board
resolution discloses that PAGC was undoubtedly referring to Board Resolution No. 28
which approved the policy guidelines for public bidding of the remaining free fishpen
areas in Laguna de Bay, and not Resolution No. 68 which had nothing at all to do with
fishpen awards. Therefore, the reference to Board Resolution No. 68, instead of Board
Resolution No. 28, in the PAGC Resolution is unmistakably a typographical error on the
part of PAGC but, nonetheless, rectifiable.
 Moreover, the respondents counter-affidavit shows that he had knowledge of the
fact that he was being charged with violation of Board Resolution No. 28. He even argued
that the said resolution was an invalid and illegal administrative rule. His position was
that the resolution issued by the Board of Directors of LLDA was an unreasonable
exercise of its legislative power because the enabling law of LLDA, R.A. No. 4850, did not
require the public bidding of free fishpen areas.[55] Then, in his motion for reconsideration
before the OP, he argued that the resolution was invalid because it was never approved by
the President, contrary to Section 4(k) of R.A. No. 4850 (as amended by Presidential
Decree No. 813) which provides:

(K) For the purpose of effectively regulating and monitoring

activities in Laguna de Bay. The Authority shall have exclusive jurisdiction
to issue new permit for the use of the lake waters for any projects or
activities in/or affecting the said lake including navigation, construction,
and operation of fishpens, fish enclosures, fish corrals and the like, and to
impose necessary safeguards for lake quality control and management and
to collect necessary fees for said activities and projects: Provided, That the
fees collected for fisheries may be shared between the Authority and other
government agencies and political subdivisions in such proportion as may
be determined by the President of the Philippines upon recommendation of
the Authoritys Board: Provided further, That the Authoritys Board may
determine new areas of fishery development or activities which it may place
under the supervision of the Bureau of Fisheries and Aquatic Resources
taking into account the overall development plans and programs for Laguna
de Bay and related bodies of water: Provided, finally, That the Authority
shall subject to the approval of the President of the Philippines
promulgate such rules and regulations which shall govern fisheries
development activities in Laguna de Bay which shall take into
consideration among others the following: socio-economic amelioration of
bona-fide resident fishermen whether individually or collectively in the
form of cooperatives, lakeshore town development, a master plan for fish
construction and operation, communal fishing ground for lakeshore town
residents, and preference to lakeshore town residents in hiring laborers for
fishery projects. [Emphasis supplied]

Regrettably, the CA sustained the respondents argument. A careful examination of

the abovementioned law shows that presidential approval is only required for rules and
regulations which shall govern fisheries development activities in Laguna de Bay. The
question then is whether Board Resolution No. 28 falls under that category of rules
subject to approval by the President. The answer is in the negative.

The Revised Laguna de Bay Zoning and Management Plan[56] allocated 10,000
hectares of the lake surface areas for fishpen operators. In the event that the area would
not be fully occupied after all qualified operators had been assigned their respective
fishpen areas, the residual free areas would be opened for bidding to other prospective
qualified applicants. Accordingly, Board Resolution No. 28 simply set forth the guidelines
for the public bidding of the remaining free fishpen areas in Laguna de Bay.[57] It did not
require presidential approval because it did not regulate any fisheries development
activities. Hence, the questioned resolution cannot be declared invalid on the basis of the
CAs ratiocination that the resolution lacked the approval of the President.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals

is REVERSED and SET ASIDE and another judgment entered reinstating the June 29,
2004Decision of the Office of the President, as amended by its February 10,
2005 Amended Resolution.

SO ORDERED.

PAUL LEE TAN, ANDREW G.R. No. 153468

LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus -
PAUL SYCIP and MERRITTO
LIM, Promulgated:
Respondents. August 17, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ.:

For stock corporations, the quorum referred to in Section 52 of the Corporation Code

is based on the number of outstanding voting stocks. For nonstock corporations, only those

who are actual, living members with voting rights shall be counted in determining the

existence of a quorum during members meetings. Dead members shall not be counted.

The Case

The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court

seeks the reversal of the January 23[2] and May 7, 2002,[3] Resolutions of the Court of

Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal

filed by petitioners with the CA. Allegedly, without the proper authorization of the other

petitioners, the Verification and Certification of Non-Forum Shopping were signed by

only one of them -- Atty. Sabino Padilla Jr.The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational

corporation with fifteen (15) regular members, who also constitute the board of

trustees.[4] During the annual members meeting held on April 6, 1998, there were only

eleven (11)[5] living member-trustees, as four (4) had already died. Out of the eleven, seven

(7)[6] attended the meeting through their respective proxies. The meeting was convened

and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who

argued that there was no quorum.[7] In the meeting, Petitioners Ernesto Tanchi, Edwin

Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-

trustees.

When the controversy reached the Securities and Exchange Commission (SEC),

petitioners maintained that the deceased member-trustees should not be counted in the

computation of the quorum because, upon their death, members automatically lost all

their rights (including the right to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void

for lack of quorum. She held that the basis for determining the quorum in a meeting of

members should be their number as specified in the articles of incorporation, not simply

the number of living members.[8] She explained that the qualifying phrase entitled to vote

in Section 24[9] of the Corporation Code, which provided the basis for determining a

quorum for the election of directors or trustees, should be read together with Section

89.[10]

The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS,

insofar as it prescribed the mode of filling vacancies in the board of trustees, must be

interpreted in conjunction with Section 29[12] of the Corporation Code. The SEC en banc
denied the appeal of petitioners and affirmed the Decision of the hearing officer in

toto.[13] It found to be untenable their contention that the word members, as used in

Section 52[14] of the Corporation Code, referred only to the living members of a nonstock

corporation.[15]

As earlier stated, the CA dismissed the appeal of petitioners, because the

Verification and Certification of Non-Forum Shopping had been signed only by Atty.

Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority

to sign for the rest of the petitioners.

Hence, this Petition.[16]

Issues

Petitioners state the issues as follows:

Petitioners principally pray for the resolution of the legal question of

whether or not in NON-STOCK corporations, dead members should still be
counted in determination of quorum for purposed of conducting the
Annual Members Meeting.

Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum primarily on
the ground that members rights are personal and non-transferable as
provided in Sections 90 and 91 of the Corporation Code of the Philippines.

The SEC ruled against the petitioners solely on the basis of a 1989 SEC
Opinion that did not even involve a non-stock corporation as petitioner
GCHS.
The Honorable Court of Appeals on the other hand simply refused to
resolve this question and instead dismissed the petition for review on a
technicality the failure to timely submit an SPA from the petitioners
 authorizing their co-petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the petition on behalf of the
rest of the petitioners.

Petitioners humbly submit that the action of both the SEC and the Court of
Appeals are not in accord with law particularly the pronouncements of this
Honorable Court in Escorpizo v. University of Baguio (306 SCRA
497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC
Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been
given the petition below and the merits of the case decided in petitioners
favor.[17]

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying

the Petition below, on the basis of a defective Verification and Certification; and 2)

whether dead members should still be counted in the determination of the quorum, for

purposes of conducting the annual members meeting.

The Courts Ruling

The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification
of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and

Certification of Non-Forum Shopping were signed by only one, not by all, of the

petitioners; further, it failed to show proof that the signatory was authorized to sign on

behalf of all of them. Subsequently, however, petitioners submitted a Special Power of

Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf.[18]
 In the interest of substantial justice, this initial procedural lapse may be

excused. [19] There appears to be no intention to circumvent the need for proper

verification and certification, which are aimed at assuring the truthfulness and

correctness of the allegations in the Petition for Review and at discouraging forum

shopping.[20] More important, the substantial merits of petitioners case and the purely

legal question involved in the Petition should be considered special circumstances[21] or

compelling reasons that justify an exception to the strict requirements of the verification

and the certification of non-forum shopping.[22]

Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of electing

directors or trustees[23] and transacting some other business calling for or requiring the

action or consent of the shareholders or members,[24] such as the amendment of the

articles of incorporation and bylaws, sale or disposition of all or substantially all corporate

assets, consolidation and merger and the like, or any other business that may properly

come before the meeting.

Under the Corporation Code, stockholders or members periodically elect the board of

directors or trustees, who are charged with the management of the corporation. [25] The

board, in turn, periodically elects officers to carry out management functions on a day-to-

day basis. As owners, though, the stockholders or members have residual powers over

fundamental and major corporate changes.

While stockholders and members (in some instances) are entitled to receive profits, the

management and direction of the corporation are lodged with their representatives and

agents -- the board of directors or trustees.[26] In other words, acts of management pertain

to the board; and those of ownership, to the stockholders or members. In the latter case,

the board cannot act alone, but must seek approval of the stockholders or members.[27]

Conformably with the foregoing principles, one of the most important rights of a

qualified shareholder or member is the right

to vote -- either personally or by proxy -- for the directors or trustees who are to manage

the corporate affairs.[28] The right to choose the persons who will direct, manage and

operate the corporation is significant, because it is the main way in which a stockholder

can have a voice in the management of corporate affairs, or in which a member in a

nonstock corporation can have a say on how the purposes and goals of the corporation

may be achieved.[29] Once the directors or trustees are elected, the stockholders or

members relinquish corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general

rule is that every member of a nonstock corporation, and every legal owner of shares in a

stock corporation, has a right to be present and to vote in all corporate meetings.

Conversely, those who are not stockholders or members have no right to vote.[30] Voting

may be expressed personally, or through proxies who vote in their representative

capacities.[31] Generally, the right to be present and to vote in a meeting is determined by

the time in which the meeting is held.[32]

Section 52 of the Corporation Code states:

Section 52. Quorum in Meetings. Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in
the case of non-stock corporations.

In stock corporations, the presence of a quorum is ascertained and counted on the basis

of the outstanding capital stock, as defined by the Code thus:

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

The Right to Vote in

Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks. [33] It

is settled that unissued stocks may not be voted or considered in determining whether a

quorum is present in a stockholders meeting, or whether a requisite proportion of the

stock of the corporation is voted to adopt a certain measure or act. Only

stock actually issued and outstanding may be voted.[34] Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the

articles of incorporation or declared delinquent[35] under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never

passed to the ownership of stockholders; or, having so passed, have again been purchased

by the corporation.[36] These shares are not to be taken into consideration in determining

majorities. When the law speaks of a

given proportion of the stock, it must be construed to mean the shares that have

passed from the corporation, and that may be voted.[37]

Section 6 of the Corporation Code, in part, provides:

Section 6. Classification of shares. The shares of stock of stock corporations may be

divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code: Provided,
further, that there shall always be a class or series of shares which have
complete voting rights.

xxxxxxxxx

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
 5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that

the intention of the lawmakers was to base the quorum mentioned in Section 52 on the

number of outstanding voting stocks.[38]

The Right to Vote in

Nonstock Corporations

In nonstock corporations, the voting rights attach to membership.[39] Members vote as

persons, in accordance with the law and the bylaws of the corporation. Each member

shall be entitled to one vote unless so limited, broadened, or denied in the articles of

incorporation or bylaws.[40] We hold that when the principle for determining the quorum

for stock corporations is applied by analogy to nonstock corporations, only those who

are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members

representing the actual number of voting rights, not

the number or numerical constant that may originally be specified in the articles of

incorporation, constitutes the quorum.[41]

The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase

majority vote of the members; likewise Section 48 of the Corporation Code refers to 50

percent of 94 (the number of registered members of the association mentioned therein)

plus one. The best evidence of who are the present members of the corporation is the

membership book; in the case of stock corporations, it is the stock and transfer book.[43]

Section 25 of the Code specifically provides that a majority of the directors or trustees, as

fixed in the articles of incorporation, shall constitute a quorum for the transaction of

corporate business (unless the articles of incorporation or the bylaws provide for a greater

majority). If the intention of the lawmakers was to base the quorum in the meetings of

stockholders or members on their absolute number as fixed in the articles of

incorporation, it would have expressly specified so.Otherwise, the only logical conclusion

is that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder
 Having thus determined that the quorum in a members meeting is to be reckoned

as the actual number of members of the corporation, the next question to resolve is what

happens in the event of the death of one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the

death of a shareholder, the executor or administrator duly appointed by the Court is

vested with the legal title to the stock and entitled to vote it. Until a settlement and

division of the estate is effected, the stocks of the decedent are held by the administrator

or executor.[44]

On the other hand, membership in and all rights arising from a nonstock corporation are

personal and non-transferable, unless the articles of incorporation or the bylaws of the

corporation provide otherwise.[45] In other words, the determination of whether or not

dead members are entitled to exercise their voting rights (through their executor or

administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be

terminated by the death of the member.[46] Section 91 of the Corporation Code further

provides that termination extinguishes all the rights of a member of the corporation,

unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped

from the membership roster in the manner and for the cause provided for in the By-Laws
of GCHS are not to be counted in determining the requisite vote in corporate matters or

the requisite quorum for the annual members meeting. With 11 remaining members, the

quorum in the present case should be 6. Therefore, there being a quorum, the annual

members meeting, conducted with six[47] members present, was valid.

Vacancy in the
Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation

Code provides:
SECTION 29. Vacancies in the office of director or trustee. -- Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, may be
filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected
only for the unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those

remaining still constitute a quorum. The phrase may be filled in Section 29 shows that the

filling of vacancies in the board by the remaining directors or trustees constituting a

quorum is merely permissive, not mandatory.[48] Corporations, therefore, may choose

how vacancies in their respective boards may be filled up -- either by the remaining

directors constituting a quorum, or by the stockholders or members in a regular or

special meeting called for the purpose.[49]

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its

board of directors; that is, by a majority vote of the remaining members of the board.[50]

While a majority of the remaining corporate members were present, however, the

election of the four trustees cannot be legally upheld for the obvious reason that it was

held in an annual meeting of the members, not of the board of trustees. We are not

unmindful of the fact that the members of GCHS themselves also constitute the trustees,

but we cannot ignore the GCHS bylaw provision, which specifically prescribes that

vacancies in the board must be filled up by the remaining trustees. In other words, these

remaining member-trustees must sit as a board in order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the

board and that by the constituent members of the corporation. The board of trustees

must act, not individually or separately, but as a body in a lawful meeting. On the other

hand, in their annual meeting, the members may be represented by their respective

proxies, as in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the

Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of

the board of trustees of Grace Christian High School (GCHS) may convene and fill up the

vacancies in the board, in accordance with this Decision. No pronouncement as to costs

in this instance.

SO ORDERED.
G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals
in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance
of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No. 84197) was dismissed but in all other
respects the trial court's decision was affirmed.

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

WHEREFORE, judgment is rendered against defendant Jacob S. Lim

requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the
rate of 12% per annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966, until full payment is
made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further required to pay cross party
 plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half,
the amount of Pl84,878.74 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.

xxx xxx xxx

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

against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as
attorney's fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the

amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action

was filed in good faith. The fact that the properties of the Bormaheco and
the Cervanteses were attached and that they were required to file a
counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with moral
or exemplary damages. Furthermore, the rights exercised were provided for
in the Rules of Court, and it was the court that ordered it, in the exercise of
its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-

party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be liable for damages in
performing an act which is clearly within its power and which is the reason
for its being, then nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as
owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type
aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R.
No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of
JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in
both petitions) contributed some funds used in the purchase of the above aircrafts and
spare parts. The funds were supposed to be their contributions to a new corporation
proposed by Lim to expand his airline business. They executed two (2) separate
indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana
and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from
and against any/all damages, losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives
should or may pay or cause to be paid or become liable to pay on them of whatever kind
and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor
of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the
former. It was stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of
Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to
the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request

payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco
and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim
alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer

had reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount
of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not
stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover

the amount from defendants, hence, it instituted the action is utterly
devoid of merit. Plaintiff did not even present any evidence that it is the
attorney-in-fact of the reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a person to be a real party in
interest in whose name an action must be prosecuted, he must appear to be
the present real owner of the right sought to be enforced (Moran, Vol. I,
Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be benefited or injured by the
 judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a
present substantial interest as distinguished from a mere expectancy or a
future, contingent, subordinate or consequential interest (Garcia v. David,
67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III,
414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667,
669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as

the real party in interest as it has already been paid by the reinsurer the
sum of P295,000.00 — the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff

Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total amount
of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it
is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New
Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding
that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never
been raised by any of the parties herein both in their answers in the court below and in
their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the re-
insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was
never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
 xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much

of its obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer

still any claim against defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record on Appeal, p. 359,
Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond
it had executed in favor of JDA, collected the proceeds of such reinsurance
in the sum of P295,000, and paid with the said amount the bulk of its
alleged liability to JDA under the said surety bond, it is plain that on this
score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is

suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer says:
The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety
Corporation is representing the reinsurers to recover the amount.' In other
words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint
that Pioneer is suing as attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that

'Every action must be prosecuted in the name of the real party
in interest.' This provision is mandatory. The real party in
interest is the party who would be benefitted or injured by the
judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is

not a real party in interest, that there is no law permitting an
action to be brought by an attorney-in-fact. Arroyo v. Granada
 and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and
Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it
paid to JDA is the difference between the two amounts, or P3,666.28. This is
the amount for which Pioneer may sue defendants, assuming that the
indemnity agreement is still valid and effective. But since the amount
realized from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim
against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect
of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument
that the respondents had no interest in the reinsurance contract as this is strictly between
the petitioner as insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by

subrogation as are acquired in similar cases where the original insurer pays
a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd
925).

The rules of practice in actions on original insurance policies are in general

applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v.
Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the
loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):
 Note that if a property is insured and the owner receives the indemnity
from the insurer, it is provided in said article that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the aggrieved
party is the one entitled to recover the deficiency. Evidently, under this legal
provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-
fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was
not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that it
is entitled to recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence
to substantiate its finding that the counter-indemnitors are not liable to the petitioner.
The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to

be valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in
Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties

have impaired and rendered insufficient the security under
 the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no
other security for the claim sought to be enforced by this action, which
necessarily means that the indemnity agreement had ceased to have any
force and effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel

mortgage on the planes and spare parts, no longer has any further action
against the defendants as indemnitors to recover any unpaid balance of the
price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.

Independently of the preceding proposition Pioneer's election of the

remedy of foreclosure precludes any further action to recover any unpaid
balance of the price.

SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the payments to
JDA, the alternative remedies open to Pioneer were as provided in Article
1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by

extrajudicial foreclosure and the instant suit. Such being the case, as
provided by the aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance and any
agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through

the contention that Pioneer is not the vendor but JDA. The reason is that
Pioneer is actually exercising the rights of JDA as vendor, having subrogated
it in such rights. Nor may the application of the provision be validly
opposed on the ground that these defendants and defendant Maglana are
not the vendee but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

The principal hereof shall be paid in eight equal successive

three months interval installments, the first of which shall be
due and payable 25 August 1965, the remainder of which ...
shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due
and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum

executed by SAL or Lim and JDA, modifying the maturity dates of the
obligations, as follows:

The principal hereof shall be paid in eight equal successive

three month interval installments the first of which shall be
due and payable 4 September 1965, the remainder of which ...
shall be due and payable on the 4th day ... of each succeeding
months and the last of which shall be due and payable 4th
June 1967.

Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding
three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates,

effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But
if that were so, there would have been the corresponding documents in the
form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was
the extinguishment of the obligations and of the surety bond secured by the
indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan
Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co.
v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the
 guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension time referred to herein, (New
Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson &
Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer

paid the same. Consequently, Pioneer has no more cause of action to
recover from these defendants, as supposed indemnitors, what it has paid
to JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these

defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made
after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from
Pioneer and its surety by reason of the filing of the instant case against
them and the attachment and garnishment of their properties. The instant
action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No.
84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose

agreement was to do business through the corporate vehicle but who failed
to incorporate the entity in which they had chosen to invest? How are the
losses to be treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form? This Petition
presents these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to
incorporate, a de facto partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in proportion to
their contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the petitioner as
their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants'

cross-claims in the total amount of P184,878.74 as correctly found by the
trial court, with interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half of the said amount
to Bormaheco and the Cervanteses and the other one-half to defendant
Maglana. It is established in the records that defendant Lim had duly
received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed
by the supposed charter and the laws of the state relating thereto and not
by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96
Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt,
but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to come
short of creating a corporation within the statute, they become in legal
effect partners inter se, and their rights as members of the company to the
property acquired by the company will be recognized (Smith v. Schoodoc
Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369).
So, where certain persons associated themselves as a corporation for the
development of land for irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the associates in an
action between them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for
 ordinarily persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472,
29 L.Ed. 688), and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to subscribe for stock
in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of
the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other stockholders,
who were also directors, will not be implied in the absence of an agreement,
so as to make the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus
Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found through Exhibit 58, that
the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner
Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the cross-
claims of the respondents to the effect that they were induced and lured by the petitioner
to make contributions to a proposed corporation which was never formed because the
petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes
and Maglana to expand his airline business. Lim was to procure two DC-3's
from Japan and secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery
to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate
his airline in accordance with their agreement and proceeded to acquire the
planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the
money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim,
cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which the
latter considered as their lawful contribution and participation in the
proposed corporation to be known as SAL. Arrangements and negotiations
were undertaken by defendant Lim. Down payments were advanced by
defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh.
E- 1). Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time
of this trickery and misrepresentation of the other, Jacob Lim, when the
herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim,
thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants
Bormaheco and Cervanteses, to defendant Lim, to surrender the possession
of the two planes and their accessories and or return the amount advanced
by the former amounting to an aggregate sum of P 178,997.14 as evidenced
by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record shows
that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

[G.R. No. 124535. September 28, 2001]

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS,
BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK,
FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF
 LIPA CITY, INC., petitioners, vs. HONORABLE COURT OF APPEALS,
HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE
COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as
Hearing Officer, REYNALDO VILLANUEVA, SR., AVELINA M. VILLANUEVA,
CATALINO VILLANUEVA, ANDRES GONZALES, AURORA LACERNA, CELSO
LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA
USI, respondents.

DECISION
YNARES-SANTIAGO, J.:

Before us is a petition for review on certiorari assailing the Decision of the Court of
Appeals dated February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-
G.R. SP No. 38861.
The instant controversy arose from a dispute between the Rural Bank of Lipa City,
Incorporated (hereinafter referred to as the Bank), represented by its officers and
members of its Board of Directors, and certain stockholders of the said bank. The records
reveal the following antecedent facts:
Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa
City, executed a Deed of Assignment,[1] wherein he assigned his shares, as well as those of
eight (8) other shareholders under his control with a total of 10,467 shares, in favor of the
stockholders of the Bank represented by its directors Bernardo Bautista, Jaime Custodio
and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his wife,
Avelina, executed an Agreement[2] wherein they acknowledged their indebtedness to the
Bank in the amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt
will be paid out of the proceeds of the sale of their real property described in the
Agreement.
At a meeting of the Board of Directors of the Bank on November 15, 1993, the
Villanueva spouses assured the Board that their debt would be paid on or before
December 31 of that same year; otherwise, the Bank would be entitled to liquidate their
shareholdings, including those under their control. In such an event, should the proceeds
of the sale of said shares fail to satisfy in full the obligation, the unpaid balance shall be
secured by other collateral sufficient therefor.
When the Villanueva spouses failed to settle their obligation to the Bank on the due
date, the Board sent them a letter[3] demanding: (1) the surrender of all the stock
certificates issued to them; and (2) the delivery of sufficient collateral to secure the
balance of their debt amounting to P3,346,898.54. The Villanuevas ignored the banks
demands, whereupon their shares of stock were converted into Treasury Stocks. Later,
the Villanuevas, through their counsel, questioned the legality of the conversion of their
shares.[4]
 On January 15, 1994, the stockholders of the Bank met to elect the new directors and
set of officers for the year 1994. The Villanuevas were not notified of said meeting. In a
letter dated January 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva spouses,
questioned the legality of the said stockholders meeting and the validity of all the
proceedings therein. In reply, the new set of officers of the Bank informed Atty. Ignacio
that the Villanuevas were no longer entitled to notice of the said meeting since they had
relinquished their rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and Exchange
Commission (SEC), a petition for annulment of the stockholders meeting and election of
directors and officers on January 15, 1994, with damages and prayer for preliminary
injunction[5], docketed as SEC Case No. 02-94-4683. Joining them as co-petitioners were
Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo Reyes,
Alejandro Tonogan, and Elena Usi. Named respondents were the newly-elected officers
and directors of the Rural Bank, namely: Bernardo Bautista, Jaime Custodio, Octavio
Katigbak, Francisco Custodio and Juanita Bautista.
The Villanuevas main contention was that the stockholders meeting and election of
officers and directors held on January 15, 1994 were invalid because: (1) they were
conducted in violation of the by-laws of the Rural Bank; (2) they were not given due
notice of said meeting and election notwithstanding the fact that they had not waived
their right to notice; (3) they were deprived of their right to vote despite their being
holders of common stock with corresponding voting rights; (4) their names were
irregularly excluded from the list of stockholders; and (5) the candidacy of petitioner
Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo
Bautista and company during the said meeting.
On February 16, 1994, the SEC issued a temporary restraining order enjoining the
respondents, petitioners herein, from acting as directors and officers of the Bank, and
from performing their duties and functions as such.[6]
In their joint Answer,[7] the respondents therein raised the following defenses:
1) The petitioners have no legal capacity to sue;
2) The petition states no cause of action;
3) The complaint is insufficient;
4) The petitioners claims had already been paid, waived, abandoned, or otherwise
extinguished;
5) The petitioners are estopped from challenging the conversion of their shares.
Petitioners, respondents therein, thus moved for the lifting of the temporary
restraining order and the dismissal of the petition for lack of merit, and for the upholding
of the validity of the stockholders meeting and election of directors and officers held on
January 15, 1994. By way of counterclaim, petitioners prayed for actual, moral and
exemplary damages.
 On April 6, 1994, the Villanuevas application for the issuance of a writ of preliminary
injunction was denied by the SEC Hearing Officer on the ground of lack of sufficient basis
for the issuance thereof. However, a motion for reconsideration[8] was granted on
December 16, 1994, upon finding that since the Villanuevas have not disposed of their
shares, whether voluntarily or involuntarily, they were still stockholders entitled to notice
of the annual stockholders meeting was sustained by the SEC. Accordingly, a writ of
preliminary injunction was issued enjoining the petitioners from acting as directors and
officers of the bank.[9]
Thereafter, petitioners filed an urgent motion to quash the writ of preliminary
injunction,[10] challenging the propriety of the said writ considering that they had not yet
received a copy of the order granting the application for the writ of preliminary
injunction.
With the impending 1995 annual stockholders meeting only nine (9) days away, the
Villanuevas filed an Omnibus Motion[11] praying that the said meeting and election of
officers scheduled on January 14, 1995 be suspended or held in abeyance, and that the 1993
Board of Directors be allowed, in the meantime, to act as such. One (1) day before the
scheduled stockholders meeting, the SEC Hearing Officer granted the Omnibus Motion
by issuing a temporary restraining order preventing petitioners from holding the
stockholders meeting and electing the board of directors and officers of the Bank.[12]
A petition for Certiorari and Annulment with Damages was filed by the Rural Bank,
its directors and officers before the SEC en banc,[13] naming as respondents therein SEC
Hearing Officer Enrique L. Flores, Jr., and the Villanuevas, erstwhile petitioners in SEC
Case No. 02-94-4683. The said petition alleged that the orders dated December 16, 1994
and January 13, 1995, which allowed the issuance of the writ of preliminary injunction and
prevented the bank from holding its 1995 annual stockholders meeting, respectively, were
issued by the SEC Hearing Officer with grave abuse of discretion amounting to lack or
excess of jurisdiction.Corollarily, the Bank, its directors and its officers questioned the
SEC Hearing Officers right to restrain the stockholders meeting and election of officers
and directors considering that the Villanueva spouses and the other petitioners in SEC
Case No. 02-94-4683 were no longer stockholders with voting rights, having already
assigned all their shares to the Bank.
In their Comment/Opposition, the Villanuevas and other private respondents argued
that the filing of the petition for certiorari was premature and there was no grave abuse of
discretion on the part of the SEC Hearing Officer, nor did he act without or in excess of
his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition for certiorari in an
Order,[14] which stated:

In the case now before us, petitioners could not show any proof of despotic or arbitrary
exercise of discretion committed by the hearing officer in issuing the assailed orders save
and except the allegation that the private respondents have already transferred their
stockholdings in favor of the stockholders of the Bank. This, however, is the very issue of
the controversy in the case a quo and which, to our mind, should rightfully be litigated
and proven before the hearing officer. This is so because of the undisputed fact the (sic)
private respondents are still in possession of the stock certificates evidencing their
stockholdings and as held by the Supreme Court in Embassy Farms, Inc. v. Court of
Appeals, et al., 188 SCRA 492, citing Nava v. Peers Marketing Corp., the non-delivery of the
stock certificate does not make the transfer of the shares of stock effective. For an
effective transfer of stock, the mode of transfer as prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein
petitioner, particularly Section 83 thereof, to support the claim that the private
respondents are no longer stockholders of the Bank is misplaced. The said law applies to
acquisition of shares of stock by the corporation in the exercise of a stockholders right of
appraisal or when the said stockholder opts to dissent on a specific corporate act in those
instances provided by law and demands the payment of the fair value of his shares. It
does not contemplate a transfer whereby the stockholder, in the exercise of his right to
dispose of his shares (jus disponendi) sells or assigns his stockholdings in favor of another
person where the provisions of Section 63 of the same Code should be complied with.

The hearing officer, therefore, had a basis in issuing the questioned orders since the
private respondents rights as stockholders may be prejudiced should the writ of
injunction not be issued. The private respondents are presumably stockholders of the
Bank in view of the fact that they have in their possession the stock certificates
evidencing their stockholdings. Until proven otherwise, they remain to be such and the
hearing officer, being the one directly confronted with the facts and pieces of evidence in
the case, may issue such orders and resolutions which may be necessary or reasonable
relative thereto to protect their rights and interest in the meantime that the said case is
still pending trial on the merits.

A subsequent motion for reconsideration[15] was likewise denied by the SEC en

banc in a Resolution[16] dated September 29, 1995.
A petition for review was thus filed before the Court of Appeals, which was docketed
as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 and the Resolution dated
September 29, 1995 of the SEC en banc in SEC EB No. 440. The ultimate issue raised
before the Court of Appeals was whether or not the SEC en banc erred in finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave
abuse of discretion that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further
stated that it does not contemplate a transfer whereby the stockholders, in the exercise of
his right to dispose of his shares (Jus Disponendi) sells or assigns his stockholdings in
favor of another person where the provisions of Sec. 63 of the same Code should be
complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the
fact that they have in their possession the stock certificates evidencing their
stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed

Decision[17] dismissing the petition for review for lack of merit. The appellate court found
that:

The public respondent is correct in holding that the Hearing Officer did not commit
grave abuse of discretion. The officer, in exercising his judicial functions, did not exercise
his judgment in a capricious, whimsical, arbitrary or despotic manner. The questioned
Orders issued by the Hearing Officer were based on pertinent law and the facts of the
case.

Section 63 of the Corporation Code states: x x x Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by
the owner x x x. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in 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 or
certificates and the number of shares transferred.

In the case at bench, when private respondents executed a deed of assignment of their
shares of stocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by
Bernardo Bautista, Jaime Custodio and Octavio Katigbak, title to such shares will not be
effective unless the duly indorsed certificate of stock is delivered to them. For an effective
transfer of shares of stock, the mode and manner of transfer as prescribed by law should
be followed. Private respondents are still presumed to be the owners of the shares and to
be stockholders of the Rural Bank.

We find no reversible error in the questioned orders.

Petitioners motion for reconsideration was likewise denied by the Court of Appeals in
an Order[18] dated March 29, 1996.
Hence, the instant petition for review seeking to annul the Court of Appeals decision
dated February 27, 1996 and the resolution dated March 29, 1996. In particular, the
decision is challenged for its ruling that notwithstanding the execution of the deed of
assignment in favor of the petitioners, transfer of title to such shares is ineffective until
and unless the duly indorsed certificate of stock is delivered to them. Moreover,
petitioners faulted the Court of Appeals for not taking into consideration the acts of
disloyalty committed by the Villanueva spouses against the Bank.
 We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in affirming the order of the
SEC en banc, which in turn upheld the order of the SEC Hearing Officer, for the said
rulings were in accordance with law and jurisprudence.
The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
vice president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stocks so
issued are personal property and may be transferred by delivery of the certificate or
certificates 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 recorded in 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 or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Underscoring ours)

Petitioners argue that by virtue of the Deed of Assignment,[19] private respondents

had relinquished to them any and all rights they may have had as stockholders of the
Bank. While it may be true that there was an assignment of private respondents shares to
the petitioners, said assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the owners, their attorneys-in-
fact or any other person legally authorized to make the transfer. Moreover, petitioners
admit that the assignment of shares was not coupled with delivery, the absence of which
is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the
transferee.[20] Thus, title may be vested in the transferee only by delivery of the duly
indorsed certificate of stock.[21]
We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law.[22] The requirements are:
(a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by
the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) To be valid against third parties, the transfer must be recorded in the
books of the corporation. As it is, compliance with any of these requisites has not been
clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite endorsement and
delivery, the assignment was valid between the parties, meaning the private respondents
as assignors and the petitioners as assignees.While the assignment may be valid and
binding on the petitioners and private respondents, it does not necessarily make the
transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the
status of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. Parenthetically, the private
respondents cannot, as yet, be deprived of their rights as stockholders, until and unless
the issue of ownership and transfer of the shares in question is resolved with finality.
There being no showing that any of the requisites mandated by law[23] was complied
with, the SEC Hearing Officer did not abuse his discretion in granting the issuance of the
preliminary injunction prayed for by petitioners in SEC Case No. 02-94-4683 (herein
private respondents). Accordingly, the order of the SEC en banc affirming the ruling of
the SEC Hearing Officer, and the Court of Appeals decision upholding the SEC en
banc order, are valid and in accordance with law and jurisprudence, thus warranting the
denial of the instant petition for review.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their
directors, the temporary restraining order issued by the SEC Hearing Officer on January
13, 1995 must be lifted. However, private respondents shall be notified of the meeting and
be allowed to exercise their rights as stockholders thereat.
While this case was pending, Republic Act No. 8799[24] was enacted, transferring to
the courts of general jurisdiction or the appropriate Regional Trial Court the SECs
jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-
A.[25] One of those cases enumerated is any controversy arising out of intra-corporate or
partnership relations, between and among stockholders, members, or associates, between
any and/or all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity. The instant controversy clearly falls under this category of
cases which are now cognizable by the Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of
the Regional Trial Courts to try and decide cases formerly cognizable by the SEC. For the
Fourth Judicial Region, specifically in the Province of Batangas, the RTC of Batangas City,
Branch 32 is the designated court.[26]
WHEREFORE, in view of all the foregoing, the instant petition for review on
certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 38861 are hereby AFFIRMED. The case is ordered REMANDED to the Regional Trial
Court of Batangas City, Branch 32, for proper disposition. The temporary restraining
order issued by the SEC Hearing Officer dated January 13, 1995 is ordered LIFTED.
SO ORDERED.

[G.R. No. 141994. January 17, 2005]

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND
EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE,
(AMEC-BCCM) and ANGELITA F. AGO, respondents.

DECISION
CARPIO, J.:

The Case

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals
affirmed with modification the 14 December 1992 Decision[3] of the Regional Trial Court
of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.

The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and
Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is
owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi City,
the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC) and its administrators. Claiming that
the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean of AMECs
College of Medicine, filed a complaint for damages[7] against FBNI, Rima and Alegre on 27
February 1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at
AMEC-BCCM, advise them to pass all subjects because if they fail in any subject
they will repeat their year level, taking up all subjects including those they have
passed already. Several students had approached me stating that they had consulted
with the DECS which told them that there is no such regulation. If [there] is no such
regulation why is AMEC doing the same?

xxx
Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx

Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMECs
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be moved to a later date
because the school is still searching for the appropriate instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and
has been surviving for the past few years since its inception because of funds support
from foreign foundations. If you will take a look at the AMEC premises youll find out that
the names of the buildings there are foreign soundings. There is a McDonald Hall. Why
not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the
support of foreign foundations for AMEC is substantial, isnt it? With the report which is
the basis of the expose in DZRC today, it would be very easy for detractors and enemies of
the Ago family to stop the flow of support of foreign foundations who assist the medical
school on the basis of the latters purpose. But if the purpose of the institution (AMEC) is
to deceive students at cross purpose with its reason for being it is possible for these
foreign foundations to lift or suspend their donations temporarily.[8]

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School
and the AMEC-Institute of Mass Communication in their effort to minimize
expenses in terms of salary are absorbing or continues to accept rejects. For
example how many teachers in AMEC are former teachers of Aquinas University but were
removed because of immorality? Does it mean that the present administration of AMEC
have the total definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping ground, garbage,
not merely of moral and physical misfits. Probably they only qualify in terms of
intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies.
She is too old to work, being an old woman. Is the AMEC administration exploiting the
very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric
situation zero visibility the plane cannot land, meaning she is very old, low pay follows.
By the way, Dean Justita Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but AMEC has patiently
made use of her.

xxx
MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically
misfit people. What does this mean? Immoral and physically misfits as teachers.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your
are no longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont
insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is
not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly
can get by thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society outside
of campus will be liabilities rather than assets. What do you expect from a doctor
who while studying at AMEC is so much burdened with unreasonable imposition? What
do you expect from a student who aside from peculiar problems because not all students
are rich in their struggle to improve their social status are even more burdened with false
regulations. xxx[9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations, and as such,
destroyed plaintiffs (AMEC and Ago) reputation. AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the selection and supervision of
its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer[10] alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and
Alegre claimed that they were plainly impelled by a sense of public duty to report the
goings-on in AMEC, [which is] an institution imbued with public interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense,
Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to
Dismiss[11] on FBNIs behalf. The trial court denied the motion to dismiss. Consequently,
FBNI filed a separate Answer claiming that it exercised due diligence in the selection and
supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the
broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an
apprenticeship and training program after passing the interview. FBNI likewise claimed
that it always reminds its broadcasters to observe truth, fairness and objectivity in their
broadcasts and to refrain from using libelous and indecent language. Moreover, FBNI
requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP)
accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and Alegre
liable for libel except Rima. The trial court held that the broadcasts are libelous per se.
The trial court rejected the broadcasters claim that their utterances were the result of
straight reporting because it had no factual basis. The broadcasters did not even verify
their reports before airing them to show good faith. In holding FBNI liable for libel, the
trial court found that FBNI failed to exercise diligence in the selection and supervision of
its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation
was when he agreed with Alegres expos. The trial court found Rimas statement within the
bounds of freedom of speech, expression, and of the press. The dispositive portion of the
decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the
degree of damages caused by the controversial utterances, which are not found by
this court to be really very serious and damaging, and there being no showing that
indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun
Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are
hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-
Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral
damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on
the other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed
the trial courts judgment with modification. The appellate court made Rima solidarily
liable with FBNI and Alegre. The appellate court denied Agos claim for damages and
attorneys fees because the broadcasts were directed against AMEC, and not against her.
The dispositive portion of the Court of Appeals decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the

modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I]
and Hermo[g]enes Alegre.

SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
 The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts
are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima and Alegres claim that they
were actuated by their moral and social duty to inform the public of the students gripes
as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court
of Appeals ruled that the broadcasts were made with reckless disregard as to whether
they were true or false. The appellate court pointed out that FBNI, Rima and Alegre failed
to present in court any of the students who allegedly complained against AMEC. Rima
and Alegre merely gave a single name when asked to identify the students. According to
the Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters
claim that they were impelled by their moral and social duty to inform the public about
the students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1)
AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC
obtained the services of Dean Justita Lola to minimize expenses on its employees salaries;
and (3) AMEC burdened the students with unreasonable imposition and false
regulations.[16]
The Court of Appeals held that FBNI failed to exercise due diligence in the selection
and supervision of its employees for allowing Rima and Alegre to make the radio
broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos
claim for damages and attorneys fees because the libelous remarks were directed against
AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre
solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts Ruling

 We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of
Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the legal basis
for its complaint, a reading of the complaint reveals that AMECs cause of action is based
on Articles 30 and 33 of the Civil Code. Article 30[18] authorizes a separate civil action to
recover civil liability arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article
19[20] of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 [21] and
2180[22] of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I.
Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or

imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the
memory of one who is dead.[24]
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and
Alegres remarks such as greed for money on the part of AMECs administrators; AMEC is a
dumping ground, garbage of xxx moral and physical misfits; and AMEC students who
graduate will be liabilities rather than assets of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution where physically
and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students gripes. FBNI
alleges that there is no evidence that ill will or spite motivated Rima and Alegre in
making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to
obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators.
FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to
show adequately their good intention and justifiable motive in airing the supposed gripes
of the students. As hosts of a documentary or public affairs program, Rima and Alegre
should have presented the public issues free from inaccurate and misleading
information.[26] Hearing the students alleged complaints a month before the
expos,[27] they had sufficient time to verify their sources and information. However, Rima
and Alegre hardly made a thorough investigation of the students alleged gripes. Neither
did they inquire about nor confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre testified that he merely went to
AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students because they were many
and not because there is proof that what they are saying is true.[28] This plainly shows
Rima and Alegres reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting.
Significantly, some courts in the United States apply the privilege of neutral reportage in
libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republishers
subjective awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the
broadcasts. Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall within the
coverage of qualifiedly privileged communications for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the
doctrine of fair comment, thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that while in
general every discreditable imputation publicly made is deemed false, because every man
is presumed innocent until his guilt is judicially proved, and every false imputation is
deemed malicious, nevertheless, when the discreditable imputation is directed against a
public person in his public capacity, it is not necessarily actionable. In order that such
discreditable imputation to a public official may be actionable, it must either be a
false allegation of fact or a comment based on a false supposition. If the comment
is an expression of opinion, based on established facts, then it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is

genuinely imbued with public interest. The welfare of the youth in general and AMECs
students in particular is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in court, nor
even gave name of a single student who made the complaint to them, much less present
written complaint or petition to that effect. To accept this defense of defendants is too
dangerous because it could easily give license to the media to malign people and
establishments based on flimsy excuses that there were reports to them although they
could not satisfactorily establish it. Such laxity would encourage careless and
irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as
of Sept. 22, 1987 or more than 2 years before the controversial broadcast, accreditation to
offer Physical Therapy course had already been given the plaintiff, which certificate is
signed by no less than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful
enough to verify. And yet, defendants were very categorical and sounded too positive
when they made the erroneous report that plaintiff had no permit to offer Physical
Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of
plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over
the air, not a single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No evidence was presented
to prove the bases for these claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with zero
visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75
years old. xxx Even older people prove to be effective teachers like Supreme Court Justices
who are still very much in demand as law professors in their late years. Counsel for
defendants is past 75 but is found by this court to be still very sharp and effective. So is
plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.

The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.[33]

Had the comments been an expression of opinion based on established facts, it is

immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.[34] However, the comments of Rima and Alegre were not backed
up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa
Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal bias,
prejudice and inaccurate and misleading information. x x x Furthermore,
the station shall strive to present balanced discussion of issues. x x x.

xxx

7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the
provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and

announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.[36] (Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast industry.
The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry
on its own members. The Radio Code is a public warranty by the radio broadcast industry
that radio broadcast practitioners are subject to a code by which their conduct are
measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live
up to the code of conduct of their profession, just like other professionals. A professional
code of conduct provides the standards for determining whether a person has acted
justly, honestly and with good faith in the exercise of his rights and performance of his
duties as required by Article 19[37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully causes loss or
injury to another has acted in a manner contrary to morals or good customs under Article
21[38] of the Civil Code.
II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a

corporation.[39]
A juridical person is generally not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock.[40] The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral damages.
However, the Courts statement in Mambulao that a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral damages is
an obiter dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] of
the Civil Code. This provision expressly authorizes the recovery of moral damages in cases
of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether
the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for
moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such
a case, evidence of an honest mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages.[46] Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the
recovery of some damages.[47] In this case, the broadcasts are libelous per se. Thus, AMEC
is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record
shows that even though the broadcasts were libelous per se, AMEC has not suffered any
substantial or material damage to its reputation. Therefore, we reduce the award of moral
damages from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis
for the award of attorneys fees. FBNI adds that the instant case does not fall under the
enumeration in Article 2208[48] of the Civil Code.
 The award of attorneys fees is not proper because AMEC failed to justify satisfactorily
its claim for attorneys fees. AMEC did not adduce evidence to warrant the award of
attorneys fees. Moreover, both the trial and appellate courts failed to explicitly state in
their respective decisions the rationale for the award of attorneys fees. [49] In Inter-Asia
Investment Industries, Inc. v. Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception
rather than the rule, and counsels fees are not to be awarded every time a party wins a
suit. The power of the court to award attorneys fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without which the award
is a conclusion without a premise, its basis being improperly left to speculation
and conjecture. In all events, the court must explicitly state in the text of the decision,
and not only in the decretal portion thereof, the legal reason for the award of attorneys
fees.[51] (Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the
discretion of the court and depends upon the circumstances of each case, the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorneys fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a very regimented process before they
are allowed to go on air. Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP
accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising them. Rimas
accreditation lapsed due to his non-payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons attributable to the KBP Manila
Office. FBNI claims that membership in the KBP is merely voluntary and not required by
any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally
liable for the tort which they commit.[52] Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is done, if done for their
benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles
2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable
to pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, recovery for defamatory statements published by radio or television may be had
from the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements. [54] An employer
and employee are solidarily liable for a defamatory statement by the employee within the
course and scope of his or her employment, at least when the employer authorizes or
ratifies the defamation.[55] In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they aired the broadcasts.
FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence
in the selection and supervision of its employees, particularly Rima and Alegre. FBNI
merely showed that it exercised diligence in the selection of its broadcasters without
introducing any evidence to prove that it observed the same diligence in
the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to
observe truth, fairness and objectivity and to refrain from using libelous and indecent
language is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the broadcasters performance are
but a few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre
as broadcasters, bearing in mind their qualifications. However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs regimented process of
application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their
KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting and supervising Rima and Alegre.
Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151
with the MODIFICATION that the award of moral damages is reduced from P300,000
to P150,000 and the award of attorneys fees is deleted. Costs against petitioner.
SO ORDERED.
 [G.R. No. 125778. June 10, 2003]

INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS

and ASIA INDUSTRIES, INC., respondents.

DECISION
CARPIO-MORALES, J.:

The present petition for review on certiorari assails the Court of Appeals Decision[1] of
January 25, 1996 and Resolution[2] of July 11, 1996.
The material facts of the case are as follows:
On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase
Agreement[3] (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in
consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the
outstanding shares of stock of FARMACOR, INC. (FARMACOR).[4] The Agreement was
signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private
respondent, respectively.[5]
Under paragraph 7 of the Agreement, petitioner as seller made warranties and
representations among which were (iv.) [t]he audited financial statements of FARMACOR
at and for the year ended December 31, 1977... and the audited financial statements of
FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and
Co.]... fairly present or will present the financial position of FARMACOR and the results
of its operations as of said respective dates; said financial statements show or will show all
liabilities and commitments of FARMACOR, direct or contingent, as of said respective
dates . . .; and (v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September
30, 1978 shall be Twelve Million Pesos (P12,000,000.00).[6]
The Agreement was later amended with respect to the Closing Date, originally set up
at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the
mode of payment of the purchase price.[7]
The Agreement, as amended, provided that pending submission by SGV of
FARMACORs audited financial statements as of October 31, 1978, private respondent may
retain the sum of P7,500,000.00 out of the stipulated purchase price of P19,500,000.00;
that from this retained amount of P7,500,000.00, private respondent may deduct any
shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00;[8] and that if the
amount retained is not sufficient to make up for the deficiency in the Minimum
Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of
receipt of the audited financial statements.[9]
Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon
the signing of the Agreement, and P7,000,000.00 on November 2, 1978.[10]
 From the STATEMENT OF INCOME AND DEFICIT attached to the financial
report[11] dated November 28, 1978 submitted by SGV, it appears that FARMACOR had, for
the ten months ended October 31, 1978, a deficit of P11,244,225.00.[12] Since the
stockholders equity amounted to P10,000,000.00, FARMACOR had a net worth deficiency
of P1,244,225.00. The guaranteed net worth shortfall thus amounted to P13,244,225.00
after adding the net worth deficiency of P1,244,225.00 to the Minimum Guaranteed Net
Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00 which is the
difference between the contract price of P19,500,000.00 and the shortfall in the
guaranteed net worth of P13,224,225.00. Private respondent having already paid petitioner
P12,000,000.00, it was entitled to a refund of P5,744,225.00.
Petitioner thereafter proposed, by letter[13] of January 24, 1980, signed by its president,
that private respondents claim for refund be reduced to P4,093,993.00, it promising to
pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the
amount of P759,570.00. To the proposal respondent agreed. Petitioner, however, weiched
on its promise. Petitioners total liability thus stood at P4,853,503.00 (P4,093,993.00 plus
P759,570.00)[14] exclusive of interest.[15]
On April 5, 1983, private respondent filed a complaint[16] against petitioner with the
Regional Trial Court of Makati, one of two causes of action of which was for the recovery
of above-said amount of P4,853,503.00[17] plus interest.
Denying private respondents claim, petitioner countered that private respondent
failed to pay the balance of the purchase price and accordingly set up a counterclaim.
Finding for private respondent, the trial court rendered on November 27, 1991 a
Decision,[18] the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a)

ordering the latter to pay to the former the sum of P4,853,503.00[19] plus interest thereon
at the legal rate from the filing of the complaint until fully paid, the sum of P30,000.00 as
attorneys fees and the costs of suit; and (b) dismissing the counterclaim.

SO ORDERED.

On appeal to the Court of Appeals, petitioner raised the following errors:

THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE
FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.

THE TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES AND IN DISMISSING

THE COUNTERCLAIM.
THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE
PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION NOT
HAVING BEEN SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF.[20]

By Decision of January 25, 1996, the Court of Appeals affirmed the trial courts
decision. Petitioners motion for reconsideration of the decision having been denied by
the Court of Appeals by Resolution of July 11, 1996, the present petition for review on
certiorari was filed, assigning the following errors:
I

THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE
PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER
BEING ULTRA VIRES.

II

THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A

CORPORATION.

III

THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO

BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE
RESPONDENT.

IV

THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY

ATTORNEYS FEES AND IN SUSTAINING THE DISMISSAL OF THE
COUNTERCLAIM.18 (Underscoring in the original)

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of
private respondents claim for refund upon petitioners promise to pay the cost of
NOCOSII superstructures in the amount of P759,570.00) which was signed by its
president has no legal force and effect against it as it was not authorized by its board of
directors, it citing the COrporation Law which provides that unless the act of the
president is authorized by the board of directors, the same is not binding on it.
This Court is not persuaded.
The January 24, 1980 letter signed by petitioners president is valid and binding. The
case of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals19 instructs:

The general rule is that, in the absence of authority from the board of directors,
no person, not even its officers, can validly bind a corporation. A corporation is a
juridical person, separate and distinct from its stockholders and members, having x x x
powers, attributes and properties expressly authorized by law or incident to its existence.

Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management, as provided in Section 23 of the
Corporation Code of the Philippines:

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 x x x.

Under this provision, the power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject
to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a
natural person may authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from
the board, either expressly or impliedly by habit, custom or acquiescence in the
general course of business, viz:

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 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 person dealing with the officer or agent to believe
that it has conferred.

xxx

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority to act
in general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, within or beyond the scope
of his ordinary powers.
It requires presentation of evidence of similar act(s) executed either in its favor or
in favor of other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of
a corporate officer with power to bind the corporation.
x x x (Emphasis and underscoring supplied)

As correctly argued by private respondent, an officer of a corporation who is

authorized to purchase the stock of another corporation has the implied power to
perform all other obligations arising therefrom, such as payment of the shares of stock. By
allowing its president to sign the Agreement on its behalf, petitioner clothed him with
apparent capacity to perform all acts which are expressly, impliedly and inherently stated
therein.[21]
Petitioner further argues that when the Agreement was executed on September 1,
1978, its financial statements were extensively examined and accepted as correct by
private respondent, hence, it cannot later be disproved by resorting to some scheme such
as future financial auditing;[22] and that it should not be bound by the SGV Report
because it is self-serving and biased, SGV having been hired solely by private respondent,
and the alleged shortfall of FARMACOR occurred only after the execution of the
Agreement.
This Court is not persuaded either.
The pertinent provisions of the Agreement read:

7. Warranties and Representations - (a) SELLER warrants and represents as follows:

xxx

(iv) The audited financial statements of FARMACOR as at and for the year ended
December 31, 1977 and
the audited financial statements of FARMACOR as at September 30, 19
78 being prepared bySGV pursuant to paragraph 6(b) fairly present or
will present the financial position of FARMACOR and the results of
its operations as of said respective dates; said financial statements
show or will show all liabilities and commitments of FARMACOR,
direct or contingent, as of said respective dates; and the receivables set
forth in said financial statements are fully due and collectible, free and clear
of any set-offs, defenses, claims and other impediments to their
collectibility.

(v) The Minimum Guaranteed Net Worth of FARMACOR as of September

30, 1978 shall be Twelve Million Pesos (P12,000,000.00), Philippine
Currency.

x x x (Underscoring in the original; emphasis supplied)[23]

True, private respondent accepted as correct the financial statements submitted to it

when the Agreement was executed on September 1, 1978. But
petitioner expressly warranted that the SGV Reports fairly present or will present the
financial position of FARMACOR. By such warranty, petitioner is estopped from claiming
that the SGV Reports are self-serving and biased.
As to the claim that the shortfall occurred after the execution of the Agreement, the
declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head
of the team which conducted the auditing of FARMACOR, that the period covered by the
audit was from January to October 1978 shows that the period before the Agreement was
entered into (on September 1, 1978) was covered.[24]
As to petitioners assigned error on the award of attorneys fees which, it argues, is
bereft of factual, legal and equitable justification, this Court finds the same well-taken.

On the matter of attorneys fees, it is an accepted doctrine that the award thereof as an
item of damages is the exception rather than the rule, and counsels fees are not to be
awarded every time a party wins a suit. The power of the court to award
attorneys fees under Article 2208 of the Civil Code demands
factual, legal and equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left
to speculation and conjecture. In all events, the court must explicitly state in the
text of the decision, and not only in the decretal portion thereof, the legal reason
for the award of attorneys fees.[25]

x x x (Emphasis and underscoring supplied; citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of

the Court of Appeals affirming that of the trial court is modified in that the award of
attorneys fees in favor of private respondent is deleted. The decision is affirmed in other
respects.
SO ORDERED.

[G.R. No. 137592. December 12, 2001]

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS KAY CRISTO JESUS,
HALIGI AT SUHAY NG KATOTOHANAN, respondent.

DECISION
YNARES-SANTIAGO, J.:
 This is a petition for review assailing the Decision dated October 7, 1997[1] and the
Resolution dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933,
which affirmed the Decision of the Securities and Exchange and Commission (SEC) in
SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church
of God in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-stock religious society
or corporation registered in 1936.Sometime in 1976, one Eliseo Soriano and several other
members of respondent corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-stock religious society or
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel
the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name, which petition was docketed as SEC Case No. 1774. On May 4, 1988, the
SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo
Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another name
that is not similar or identical to any name already used by a corporation, partnership or
association registered with the Commission.[5] No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios
Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at
Saligan ng Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed
as SEC Case No. 03-94-4704, praying that petitioner be compelled to change its corporate
name and be barred from using the same or similar name on the ground that the same
causes confusion among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The
motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner was
declared in default and respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner

(respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the
Petitioner, any corporation, association, and/or partnership presently registered with
the Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and
Legal Department [CLD] of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.[7]

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC
No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision,
upon a finding that petitioner's corporate name was identical or confusingly or
deceptively similar to that of respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997,
the Court of Appeals rendered the assailed decision affirming the decision of the SEC En
Banc. Petitioners motion for reconsideration was denied by the Court of Appeals on
February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT

PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON
TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF THE

CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS
INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY

APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE
APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT
CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE

SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM,
THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONERS RIGHTS.[9]
 Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the decision
of the Court of Appeals and the SEC should be set aside because the negligence of its
former counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its
motion to dismiss was denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds
the client. This is based on the rule that any act performed by a lawyer within the scope of
his general or implied authority is regarded as an act of his client.[11] An exception to the
foregoing is where the reckless or gross negligence of the counsel deprives the client of
due process of law.[12] Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause
consisted in filing a motion for extension of time to file answer before the trial
court. When his client was declared in default, the counsel did nothing and allowed the
judgment by default to become final and executory. Upon the insistence of his client, the
counsel filed a petition to annul the judgment with the Court of Appeals, which denied
the petition, and again the counsel allowed the denial to become final and executory. This
Court found the counsel grossly negligent and consequently declared as null and void the
decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before
the SEC a motion to dismiss on the ground of lack of cause of action. When his client was
declared in default for failure to file an answer, Atty. Garaygay moved for reconsideration
and lifting of the order of default.[13] After judgment by default was rendered against
petitioner corporation, Atty. Garaygay filed a motion for extension of time to
appeal/motion for reconsideration, and thereafter a motion to set aside the decision.[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to
file an answer that led to the rendition of a judgment by default against petitioner, his
efforts were palpably real, albeit bereft of zeal.[15]
Likewise, the issue of prescription, which petitioner raised for the first time on appeal
to the Court of Appeals, is untenable. Its failure to raise prescription before the SEC can
only be construed as a waiver of that defense.[16] At any rate, the SEC has the authority to
de-register at all times and under all circumstances corporate names which in its
estimation are likely to spawn confusion. It is the duty of the SEC to prevent confusion in
the use of corporate names not only for the protection of the corporations involved but
more so for the protection of the public.[17]
Section 18 of the Corporation Code provides:

Corporate Name. --- No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that
of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or is contrary to existing laws. When a change in the corporate name
is approved, the Commission shall issue an amended certificate of incorporation under
the amended name.
 Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names
states:

(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit
for injunction against the new corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not
only two but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa
Bansang Pilipinas, Inc., which, petitioner argues, effectively distinguished it from
respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners
name are, as correctly observed by the SEC, merely descriptive of and also referring to the
members, or kaanib, of respondent who are likewise residing in the Philippines. These
words can hardly serve as an effective differentiating medium necessary to avoid
confusion or difficulty in distinguishing petitioner from respondent. This is especially so,
since both petitioner and respondent corporations are using the same acronym ---
H.S.K.;[19] not to mention the fact that both are espousing religious beliefs and operating
in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by
petitioner stands for Haligi at Saligan ng Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to the public,
petitioner highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN,which is strikingly similar to respondent's
corporate name, thus making it even more evident that the additional words Ang Mga
Kaanib and Sa Bansang Pilipinas, Inc., are merely descriptive of and pertaining to the
members of respondent corporation.[21]
Significantly, the only difference between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY. These words are synonymous --- both
mean ground, foundation or support. Hence, this case is on all fours with Universal Mills
Corporation v. Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate
names Universal Mills Corporation and Universal Textile Mills, Inc., are undisputably so
similar that even under the test of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate
name cannot find justification under the generic word rule. We agree with the Court of
Appeals conclusion that a contrary ruling would encourage other corporations to adopt
verbatim and register an existing and protected corporate name, to the detriment of the
public.
The fact that there are other non-stock religious societies or corporations using the
names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the
Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no
consequence. It does not authorize the use by petitioner of the essential and
distinguishing feature of respondent's registered and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering
petitioner to change its corporate name is not a violation of its constitutionally
guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner
to abide by one of the SEC guidelines in the approval of partnership and corporate names,
namely its undertaking to manifest its willingness to change its corporate name in the
event another person, firm, or entity has acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is
DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

[G. R. No. 107789. April 30, 2003]

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD

GOVERNMENT), petitioner, vs. THE HONORABLE SANDIGANBAYAN
(THIRD DIVISION) and VICTOR AFRICA, respondents.
EROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO, CARLOS NIETO,
MANUEL NIETO III, RAMON NIETO, ROSARIO ARELLANO, VICTORIA
LEGARDA, ANGELA LOBREGAT, MA. RITA DE LOS REYES, CARMEN
TUAZON and RAFAEL VALDEZ, intervenors.

[G. R. No. 147214. April 30, 2003]

VICTOR AFRICA, petitioner, vs. THE HONORABLE SANDIGANBAYAN and THE

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, respondents.

RESOLUTION
CARPIO-MORALES, J.:

These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the
second for Review on Certiorari although it is actually one for Certiorari, stem from a
Resolution of November 13, 1992 issued by the Sandiganbayan in Civil Case No. 0130, [1] on
motion of Victor Africa (Africa) who prayed that said court order the calling and holding
of the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders meeting
for 1992 under the [c]ourts control and supervision and prescribed guidelines.
It is gathered that on August 7, 1991, the Presidential Commission on Good
Government (PCGG) conducted an ETPI stockholders meeting during which a PCGG
controlled board of directors was elected. A special stockholders meeting was later
convened by the registered ETPI stockholders wherein another set of board of directors
was elected, as a result of which two sets of such board and officers were elected.
Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988 been
illegally exercising the rights of stockholders of ETPI,[2] especially in the election of the
members of the board of directors, filed the above-said motion before the Sandiganbayan.
The PCGG did not object to Africas motion provided that:

1. An Order be issued upholding the right of PCGG to vote all the Class A shares
of ETPI.

2. In the alternative, in the remote event that PCGGs right to vote the
sequestered shares be not upheld, an Order be issued:

a. Disregarding the Stock and Transfer Book and Booklet of Stock Certificates
of ETPI in determining who can vote the shares in an Annual
Stockholders Meeting of ETPI,

b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of the

total subscription in ETPI, and

c. Directing the amendment of the Articles of Incorporation and By-laws of

ETPI providing for the minimum safeguards for the conservation of
assets x x x prior to the calling of a stockholders meeting.[3]

By the assailed Resolution of November 13, 1992,[4] the Sandiganbayan resolved

Africas motion, the dispositive portion of which reads:

WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern

Telecommunications, Philippines, Inc. (ETPI), for 1992 be held on Friday, November 27,
1992, at 2:00 oclock in the afternoon, at the ETPI Board Room, Telecoms Plaza, 7th Floor,
316 Gil J. Puyat Avenue, Makati, Metro Manila. The Executive Clerk of Court of this
Division shall issue the call and notice of annual stockholders meeting of ETPI addressed
to all the duly registered/recorded stockholders of ETPI. The stockholders meeting shall
be conducted under the supervision and control of this Court, through Mr. Justice Sabino
R. de Leon, Jr. In accordance with the Supreme Court ruling in Cojuangco et al vs.
Azcuna, et al., supra, only the registered owners, their duly authorized representatives or
their proxies may vote their corresponding shares.

The following minimum safeguards must be set in place and carefully maintained until
final judicial resolution of the question of whether or not the sequestered shares of stock
(or in a proper case the underlying assets of the corporation concerned) constitute ill-
gotten wealth:

a. An independent comptroller must be appointed by the Board of Directors

upon nomination of the PCGG as conservator. The comptroller shall not be
removable (nor shall his position be abolished or his compensation
changed) without the consent of the conservator. The comptroller shall, in
addition to his other functions as such, have charge of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate

secretary ceases to be acceptable to the conservator, a new one must be
appointed by the Board of Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be

acceptable to the conservator. The independent external auditors shall not
be changed without the consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the

Executive (or equivalent) and Audit Committees of the corporation
involved and of its majority-owned subsidiaries or affiliates. The
representative of the conservator must be a full director (not merely an
honorary or ex-officio director) with the right to vote and all other rights
and duties of a member of the Board of Directors under the Corporation
Code. The conservators representative shall not be removed from the Board
of Directors (or the mentioned Committees) without the consent of the
conservator. The conservator shall, however, have the right to remove and
change its representative at any time, and the new representative shall be
promptly elected to the Board and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5

million must have the prior approval of the director representing the
conservator, in order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds,

debentures, commercial paper or any other form, in excess of P5 million,
 must have the prior approval of the director representing the conservator,
in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial

meaning in excess of P5 million) shall require the prior approval of the
director representing the conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and
by-laws of the company involved. In other words, the articles of
incorporation and by-laws of the company must be amended so as to
incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that

will modify in any way any of the above safeguards, shall need the prior
approval of the director representing the conservator.

SO ORDERED.[5] (Underscoring supplied)

Assailing the foregoing resolution, the PCGG filed before this Court the herein first
petition, docketed as G. R. No. 107789, anchored upon the following grounds:
I

RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF DISCRETION IN

RULING THAT THE REGISTERED STOCKHOLDERS OF ETPI HAD THE RIGHT TO
VOTE IN SPITE OF (A) THE RULING OF THIS HONORABLE COURT IN PCGG V. SEC
AND AFRICA (G. R. NO. 82188) AND (B) A CLEAR SHOWING THAT ETPIS STOCK AND
TRANSFER BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO
DETERMINE WHO CAN VOTE IN A STOCKHOLDERS MEETING.

II

RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION AND

EXCEEDED ITS JURISDICTION WHEN IT HELD THAT PCGG CANNOT VOTE AT
LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OF ETPI.

III

WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS OF THE

REPUBLIC, RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN
ORDERING THE HOLDING OF A STOCKHOLDERS MEETING IN ETPI WITHOUT
FIRST SETTING IN PLACE BY AMENDING THE ARTICLES AND BY-LAWS OF ETPI TO
INCORPORATE THE SAFEGUARDS PRESCRIBED BY THIS HONORABLE COURT IN
COJUANGCO V. ROXAS.
 IV

THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR WITH

GRAVE ABUSE OF DISCRETION IN APPOINTING (A) ITS OWN DIVISION CLERK OF
COURT TO PERFORM THE DUTIES OF A CORPORATE SECRETARY, AND (B) ITS
OWN JUSTICE SABINO DE LEON, JR. TO CONTROL AND SUPERVISE THE
STOCKHOLDERS MEETING.[6] (Underscoring in the original)

By Resolution of November 26, 1992, this Court enjoined the Sandiganbayan from (a)
implementing its Resolution of November 13, 1992, and (b) holding the stockholders
meeting of ETPI scheduled on November 27, 1992, at 2:00 p.m.
On December 7, 1992, Aerocom Investors and Managers, Inc. (AEROCOM), Benito
Nieto, Carlos Nieto, Manuel Nieto III, Ramon Nieto, Rosario Arellano, Victoria Legarda,
Angela Lobregat, Ma. Rita de los Reyes, Carmen Tuazon and Rafael Valdez, all
stockholders of record of ETPI, filed a motion to intervene in G. R. No. 107789. Their
motion was granted by this Court by Resolution of January 14, 1993.
After the parties submitted their respective memoranda, the PCGG, in early 1995,
filed a VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL
STOCKHOLDERS MEETING FOR [THE] SOLE PURPOSE OF INCREASING [ETPIs]
AUTHORIZED CAPITAL STOCK, it claiming that the increase in authorized capital stock
was necessary in light of the requirements laid down by Executive Order No. 109[7] and
Republic Act No. 7975.[8]
By Resolution of May 7, 1996,[9] this Court resolved to refer the PCGGs very urgent
petition to hold the special stockholders meeting to the Sandiganbayan for reception of
evidence and resolution.
In compliance therewith, the Sandiganbayan issued a Resolution of December 13,
1996,[10] which is being assailed in the herein second petition, granting the PCGG
authority to cause the holding of a special stockholders meeting of ETPI for the sole
purpose of increasing ETPIs authorized capital stock and to vote therein the sequestered
Class A shares of stock. . . . In said Resolution, the Sandiganbayan held that there was an
urgent necessity to increase ETPIs authorized capital stock; there existed a prima
facie factual foundation for the issuance of the writ of sequestration covering the Class A
shares of stock; and the PCGG was entitled to vote the sequestered shares of stock.
The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair and
Corporate Secretary to call the special stockholders meeting. Notices were sent to those
entitled to vote for a meeting on March 17, 1997. The meeting was held as scheduled and
the increase in ETPIs authorized capital stock from P250 Million to P2.6 Billion was
unanimously approved.[11]
On April 1, 1997, Africa filed before this Court a motion to cite the PCGG and its
accomplices in contempt and to nullify the stockholders meeting called/conducted by
PCGG and its accomplices, he contending that only this Court, and not the
Sandiganbayan, has the power to authorize the PCGG to call a stockholders meeting and
vote the sequestered shares. Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of December 13, 1996 authorizing the
PCGG to hold the stockholders meeting had not yet become final because the motions for
reconsideration of said resolution were still pending. Further, Africa alleged that he was
not given notice of the meeting, and the PCGG had no right to vote the sequestered Class
A shares.
A motion for leave to intervene relative to Africas Motion to Cite the PCGG and its
Accomplices in Contempt was filed by ETPI. This Court granted the motion for leave but
ETPI never filed any pleading relative to Africas motion to cite the PCGG in contempt.
By Resolution of February 16, 2001, the Sandiganbayan finally resolved to deny the
motions for reconsideration of its Resolution of December 13, 1996, prompting Africa to
file on April 6, 2001 before this Court the herein second petition,[12] docketed as G. R. No.
147214, challenging the Sandiganbayan Resolutions of December 13, 1996 (authorizing the
holding of a stockholders meeting to increase ETPIs authorized capital stock and to vote
therein the sequestered Class A shares of stock) and February 16, 2001 (denying
reconsideration of the December 13, 1996 Resolution).
In his petition in G. R. No. 147214, Africa alleged that the Sandiganbayan committed
grave abuse of discretion when, by the assailed Resolutions,

a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS OF THE

SHARES [OF SMALL STOCHHOLDERS OF WHICH HE IS ONE AND
AEROCOM AND POLYGON] AND/OR OWNERS THEREOF[;] [AND]

b. IT DID NOT ACCORD TO THE NON-SEQUESTERED SHARES/OWNERS

THE RIGHTS APPURTENANT TO A STOCKHOLDER[.]

He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG
to vote the non-sequestered ETPI Class A shares and nullify the votes the PCGG had cast
in the stockholders meeting held on March 17, 1997.
By Resolution of February 24, 2003,[13] this Court ordered the consolidation of G. R.
No. 147214 with G. R. No. 107789, now the subject of the present Resolution.
I
The first issue to be resolved is whether the PCGG can vote the sequestered ETPI
Class A shares in the stockholders meeting for the election of the board of directors. The
leading case on the matter is Bataan Shipyard & Engineering Co., Inc. v. Presidential
Commission on Good Government[14] where this Court defined the powers of the PCGG as
follows:

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or provisionally taken over. As already earlier
stressed with no little insistence, the act of sequestration[,] freezing or provisional
takeover of property does not import or bring about a divestment of title over said
property; [it] does not make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an
owner. Therefore, it can not perform acts of strict ownership; and this is specially true in
the situations contemplated by the sequestration rules where, unlike cases of
receivership, for example, no court exercises effective supervision or can upon due
application and hearing, grant authority for the performance of acts of dominion.

Equally evident is that resort to the provisional remedies in question should entail the
least possible interference with business operations or activities so that, in the event that
the accusation of the business enterprise being ill-gotten be not proven, it may be
returned to its rightful owner as far as possible in the same condition as it was at the time
of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, such as to
bring and defend actions in its own name; receive rents; collect debts due; pay
outstanding debts due; and generally do such other acts and things as may be necessary
to fulfill its mission as conservator and administrator. In this context, it may in addition
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 its efforts
to carry out its task; punish for direct or indirect contempt in accordance with the Rules
of Court; and seek and secure the assistance of any office, agency or instrumentality of the
government. In the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its essential role, as
already discussed, is that of conservator, caretaker, watchdog or overseer. It is not that of
manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to
him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been
taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos, the PCGG is given power and authority, as already
adverted to, to provisionally take (it) over in the public interest or to prevent * * (its)
disposal or dissipation; and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself. But even in this special
situation, the intrusion into management should be restricted to the minimum degree
necessary to accomplish the legislative will, which is to prevent the disposal or dissipation
of the business enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies, particularly in
respect of viable establishments. In fact, such a replacement or substitution should be
avoided if at all possible, and undertaken only when justified by demonstrably tenable
grounds and in line with the stated objectives of the PCGG. And it goes without saying
that where replacement of management officers may be called for, the greatest prudence,
circumspection, care and attention should accompany that undertaking to the end that
truly competent, experienced and honest managers may be recruited. There should be no
role to be played in this area by rank amateurs, no matter how well meaning. The road to
hell, it has been said, is paved with good intentions. The business is not to be
experimented or played around with, not run into the ground, not driven to bankruptcy,
not fleeced, not ruined. Sight should never be lost x x x of the ultimate objective of the
whole exercise, which is to turn over the business to the Republic, once judicially
established to be ill-gotten. Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business enterprises
provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG
may properly exercise the prerogative to vote sequestered stock of corporations, granted
to it by the President of the Philippines through a Memorandum dated June 26,
1986. That Memorandum authorizes the PCGG, pending the outcome of proceedings to
determine the ownership of * * (sequestered) shares of stock, to vote such shares of stock
as it may have sequestered in corporations at all stockholders meetings called for the
election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc. The Memorandum should be construed in such a manner as to be
consistent with, and not contradictory to the Executive Orders earlier promulgated on
the same matter. There should be no exercise of the right to vote simply because the right
exists, or because the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace directors, or revise the
articles or by-laws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible grounds, and
always in the context of the stated purposes of sequestration or provisional takeover, i.e.,
to prevent the dispersion or undue disposal of the corporate assets. Directors are not to
be voted out simply because the power to do so exists. Substitution of directors is not to
be done without reason or rhyme, should indeed be shunned if at all possible, and
undertaken only when essential to prevent disappearance or wastage of corporate
property, and always under such circumstances as to assure that replacements are truly
possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors out of
office and elect others in their stead because the evidence showed prima facie that the
former were just tools of President Marcos and were no longer owners of any stock in the
firm, if they ever were at all. This is why, in its Resolution of October 28, 1986[,] this
Court declared that

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents calling and holding of a stockholders meeting for the election of directors as
authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding in
said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO
Board in the management of the companys affairs should henceforth be guided and
governed by the norms herein laid down.They should never for a moment allow
themselves to forget they are conservators, not owners of the business; they are
fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required. (Italics in the original)

The PCGG cannot thus vote sequestered shares, except when there are demonstrably
weighty and defensible grounds or when essential to prevent disappearance or wastage of
corporate property.[15]
The principle laid down in Baseco was further enhanced in the subsequent cases
of Cojuungco v. Calpo[16] and Presidential Commission on Good Government v. Cojuangco,
Jr.,[17] where this Court developed a two-tiered test in determining whether the PCGG may
vote sequestered shares:

The issue of whether PCGG may vote the sequestered shares in SMC necessitates a
determination of at least two factual matters:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the state; and

2. whether there is an immediate danger of dissipation thus necessitating their continued

sequestration and voting by the PCGG while the main issue pends with the
Sandiganbayan.[18]

The two-tiered test, however, does not apply in cases involving funds of public
character. In such cases, the government is granted the authority to vote said shares,
namely:
(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands.[19]

This Court, in Republic v. Cocofed,[20] explained:

The [public character] exceptions are based on the common-sense principle that legal
fiction must yield to truth; that public property registered in the names of non-owners is
affected with trust relations; and that the prima facie beneficial owner should be given the
privilege of enjoying the rights flowing from the prima facie fact of ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was
placed under sequestration by the PCGG. Explained the Court:

The facts show that the corporation known as BASECO was owned and controlled by
President Marcos during his administration, through nominees, by taking undue
advantage of his public office and/or using his powers, authority, or influence, and that it
was by and through the same means, that BASECO had taken over the business and/or
assets of the National Shipyard and Engineering Co., Inc., and other government-owned
or controlled entities.

Given this factual background, the Court discussed PCGGs right over BASECO in the
following manner:

Now, in the special instance of a business enterprise shown by evidence to have been
taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos, the PCGG is given power and authority, as already
adverted to, to provisionally take (it) over in the public interest or to prevent * * (its)
disposal or dissipation; and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself.

Citing an earlier Resolution, it ruled further:

Petitioner has failed to make out a case of grave abuse of excess of jurisdiction in
respondents calling and holding of a stockholders meeting for the election of directors as
authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding in
said corporation. (Italics supplied)

The Court granted PCGG the right to vote the sequestered shares because they appeared
to be assets belonging to the government itself. The Concurring Opinion of Justice
Ameurfina A. Melencio-Herrera, in which she was joined by Justice Florentino P.
Feliciano, explained this principle as follows:

I have no objection to according the right to vote sequestered stock in case of a take-over
of business actually belonging to the government or whose capitalization comes from
public funds but which, somehow, landed in the hands of private persons, as in the case
of BASECO. To my mind, however, caution and prudence should be exercised in the case
of sequestered shares of an on-going private business enterprise, specially the sensitive
ones, since the true and real ownership of said shares is yet to be determined and proven
more conclusively by the Courts. (Italics supplied)

The exception was cited again by the Court in Cojuanco-Roxas in this wise:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in
a corporation and elect the members of the board of directors. The only conceivable
exception is in a case of a takeover of a business belonging to the government or whose
capitalization comes from public funds, but which landed in private hands as in
BASECO.(Italics supplied)

The public character test was reiterated in many subsequent cases; most recently,
in Antiporda v. Sandiganbayan. Expressly citing Cojuanco-Roxas, this Court said that in
determining the issue of whether the PCGG should be allowed to vote sequestered shares,
it was crucial to find out first whether this were purchased with public funds, as follows:

It is thus important to determine first if the sequestered corporate shares came from
public funds that landed in private hands.

This Court summed up the rule in the determination of whether the PCGG has the
right to vote sequestered shares as follows:

In short, when sequestered shares registered in the names of private individuals or

entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered test
is applied. However, when the sequestered shares in the name of private individuals or
entities are shown, prima facie, to have been (1) originally government shares, or (2)
purchased with public funds or those affected with public interest, then the two-tiered
test does not apply. Rather, the public character exception in Baseco v.
PCGG and Conjuanco Jr. v. Roxas prevail; that is, the government shall vote the shares.
 The PCGG contends, however, that it is entitled to vote the sequestered shares in the
election of the board of directors, it invoking this Courts alleged finding in PCGG et al. v.
Securities and Exchange Commission, et al.[21] that Africa had dissipated ETPIs assets, thus:

Under a consultancy contract, Polygon Investors and Managers, Inc. with Jose L. Africa as
Chairman and Victor Africa as President, earned from ETPI as of 1987, more than P57
million. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as professional fees
and Manuel Nieto, Jr. another P1,200,000.00 as allowances.[22]

The PCGGs contention is misleading, This Court made no finding in PCGG v. SEC et
al. that Africa dissipated ETPIs assets. Precisely this Court issued a Resolution of July 28,
1988 in the same case to clarify, upon motion of Africa, that the narration of facts found
in the decision therein did not constitute a finding of facts:

The categorical statement in the decision of June 30, 1988 that the relevant background
facts of the case culled from Petitioners Urgent Consolidated Petition was not without a
reason or purpose. Precisely this statement was made to impress upon the parties
that the narration of facts is just that a narration, without necessarily judging its
truth or veracity. Being based on mere allegations, properly controverted, it is not
a finding of facts, but more of a presentation of the complete picture of events
which led to the sequestration of Eastern Telecommunications, Philippines, Inc.
as well as to the instant petition. This Court, it must be remembered, is not a trier of
facts, and particularly so in this case where the facts narrated are precisely the facts in
litigation before the Sandiganbayan. (Emphasis supplied.)

Unfortunately, the Sandiganbayan, in its impugned Resolution of November 13, 1992,

skirted the question of whether there is evidence of dissipation of ETPI assets, holding
instead that:

The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds of ETPI
during its administration of ETPI is a matter which is not in issue herein. Dissipation by
the PCGG Board of Directors is also charged by the BAN group. An investigation of the
anomalies charged by one against the other may be taken up in another case.[23]

And it further held that the PCGG could not vote the sequestered shares as only the
owners of the shares of stock of subject corporation, their duly authorized representatives
or their proxies, may vote the said shares,[24] relying on this Courts ruling in Cojuangco, Jr.
v. Roxas[25] that:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in
a corporation and elect members of the board of directors. The only conceivable
exception is in a case of a takeover of a business belonging to the government or whose
capitalization comes from public funds, but which landed in private hands as in BASECO.
 In short, the Sandiganbayan held that the public character exception does not apply,
in which case it should have proceeded to apply the two-tiered test. This it failed to do.
The questions thus remain if there is prima facie evidence showing that the subject
shares are ill-gotten and if there is imminent danger of dissipation. This Court is not,
however, a trier of facts, hence, it is not in a position to rule on the correctness of the
PCGGs contention. Consequently, this issue must be remanded to the Sandiganbayan for
resolution.
II
On the PCGGs submission that the Stock and Transfer Book should not be used as
the basis for determining the voting rights of the shareholders because some entries
therein were altered by substitution: This Court sees no grave abuse of discretion on the
part of the Sandiganbayan in ruling that:

The charge that there were alterations by substitution in the Stock and Transfer Book is
not a matter which should preclude the Stock and Transfer Book from being the basis or
guide to determine who the true owners of the shares of stock in ETPI are. If there be any
substitution or alterations, the anomaly, if at all, may be explained by the corporate
secretary who made the entries therein. At any rate, the accuracy of the Stock and
Transfer Book may be checked by comparing the entries therein with the issued stock
certificates. The fact is that any transfer of stock or issuance thereof would necessitate an
alteration of the record by substitution. Any anomaly in any entry which may deprive a
person or entity of its right to vote may generate a controversy personal to the
corporation and the stockholder and should not affect the issue as to whether it is the
PCGG or the shareholder who has the right to vote. In other words, should there be a
stockholder who feels aggrieved by any alteration by substitution in the Stock and
Transfer Book, said stockholder may object thereto at the proper time and before the
stockholders meeting.[26]

Whether the ETPI Stock and Transfer Book was falsified and whether such
falsification deprives the true owners of the shares of their right to vote are thus issues
best settled in a different proceeding instituted by the real parties-in-interest.
III
On the PCGGs submission that the Sandiganbayan gravely abused its discretion when
it held that it cannot vote at least 23.9% of the outstanding capital stock of ETPI, which
percentage is broken down as follows:

Shares ceded to the government by virtue

of the Benedicto compromise - 12.8%

Shares represented by some stock

certificates found in Malacanang (at least) - 3.1%
Shares held and admitted by Manuel Nieto
to belong to then President Marcos - 8.0%

The PCGG alleges that the 12.8% indicated above represents 51% of the combined
shareholdings of Roberto S. Benedicto and his controlled corporations amounting to
12.8% of the total equity of ETPI which was ceded to the Republic; the 3.1% represents the
shares covered by the ETPI stock certificates endorsed in blank found in Malacaang, now
in its (PCGGs) possession, which it submits it may, under Section 34 of the Negotiable
Instruments Law,[27] take title thereto and vote the same in the stockholders meeting; and
the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he, in an Affidavit
of May 28, 1986, admitted actually belong to former President Marcos:

5. That in relation to and simultaneously with the board meeting of PHILCOMSAT, on

March 21, 1986, I declared my concurrence in the disclosures made on the participation of
Mr. Ferdinand E. Marcos and associates in the companies covered by the sequestration
order dated March 14, 1986 i.e., 39,926.2% (sic) of the total subscribed capital stock of
Philippine Overseas Telecommunications Corporation and 40% of the individual
shareholdings of Jose L. Africa, Manuel H. Nieto, Jr., & Roberto S. Benedicto in Eastern
Telecommunications Philippines, Inc.[28]

On the question of whether the PCGG can vote all the above shares, the
Sandiganbayan, finding in the affirmative, held in its Resolution of November 13, 1992:

Considering the Compromise Agreement entered into by the PCGG and Roberto S.
Benedicto in Civil Case No. 009 wherein Roberto S. Benedicto assigned and transferred to
the Government 12.8% of the shares of stock of ETPI, which Compromise Agreement was
made the basis of a judgment of this Court, it is only proper that the PCGG may vote
these shares in the stockholders meeting after said judgment shall have become final and
executory. Besides, before the PCGG can vote these shares, the transfer to the State of the
shares of stock must be entered in the Stock and Transfer Book, the entries therein being
the only basis for which the stockholder may vote the said shares.

The same ruling is made in respect to the shares of stock represented by stock certificates
found in Malacaang (3.1%) and the shares of stock allegedly admitted by Manuel H. Nieto
to belong to former President Ferdinand E. Marcos (8.0%).[29] (Underscoring supplied)

The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the
shares representing 12.8% of ETPIs outstanding capital stock, the only requirement it
imposed being that the transfer of the shares be registered in the Stock and Transfer Book
and that, in the case of the Benedicto shares, the Compromise Agreement be final and
executory.
In requiring that the transfer of the Benedicto shares be first recorded in ETPIs Stock
and Transfer Book before the PCGG may vote them, the Sandiganbayan committed no
grave abuse of discretion. For Section 63 of the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock corporations
shall be divided into shares for which the certificates signed by the president or vice
president, countersigned by the secretary or assistant secretary, 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 the delivery of the certificate or
certificates endorsed 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 to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.

x x x.

Explaining why registration is a prerequisite for the voting of shares, this Court,
in Batangas Laguna Tayabas Bus Company, Inc., v. Bitanga,[30] discoursed:

Indeed, until registration is accomplished, the transfer, though valid between the parties,
cannot be effective as against the corporation. Thus, the unrecorded transferee x x x
cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable
the transferee to exercise all the rights of a stockholder, including the right to vote and to
be voted for, and to inform the corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder. Until challenged in a proper proceeding, a stockholder of record has a right
to participate in any meeting; his vote can be properly counted to determine whether a
stockholders resolution was approved, despite the claim of the alleged transferee. On the
other hand, a person who has purchased stock, and who desires to be recognized as a
stockholder for the purpose of voting, must secure such a standing by having the transfer
recorded on the corporate books. Until the transfer is registered, the transferee is not a
stockholder but an outsider.

Whether the PCGG needs to await the finality of the judgment[31] based on the
Republic-Benedicto compromise agreement is now moot since it is not disputed that it
had long become final and executory. Accordingly, the PCGG may vote in its name the
shares ceded to the Republic by Benedicto pursuant to the said agreement once they are
registered in its name.
With respect to the PCGGs submission that under Section 34 of the Negotiable
Instruments Law, it may take title to the shares represented by the blank stock
certificates found in Malacanang and vote the same, the same is untenable. The PCGG
assumes that stock certificates are negotiable. They are not.

x x x [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the

sense that it may be transferred by delivery, it is well settled that the instrument is non-
negotiable, because the holder thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations imposed by the principles governing
estoppel.[32]

That the PCGG found the stock certificates endorsed in blank does not necessarily
make it the owner of the shares represented therein. Their true ownership has to be
ascertained in a proper proceeding. Similarly, the ownership of the Nieto shares has yet to
be adjudicated. That they allegedly belong to former President Marcos does not make the
PCGG its owner. The PCGG must, in an appropriate proceeding, first establish that they
truly belong to the former President and that they were ill- gotten. Pending final
judgment over the ownership of these shares, the PCGG may not register and vote the
Nieto and the Malacaang shares in its name. If the Sandiganbayan finds, however, that
there is evidence of dissipation of these shares, the PCGG may vote the same as
conservator thereof.
IV
On the PCGGs imputation of grave abuse of discretion upon the Sandiganbayan for
ordering the holding of a stockholders meeting to elect the ETPI board of directors
without first setting in place, through the amendment of the articles of incorporation and
the by-laws of ETPI, the safeguards prescribed in Cojuangco, Jr. v. Roxas:[33] This Court
laid down those safeguards because of the obvious need to reconcile the rights of the
stockholder whose shares have been sequestered and the duty of the conservator to
preserve what could be ill-gotten wealth.

It is through the right to vote that the stockholder participates in the management of the
corporation. The right to vote, unlike the rights to receive dividends and liquidating
distributions, is not a passive thing because management or administration is, under the
Corporation Code, vested in the board of directors, with certain reserved powers residing
in the stockholders directly. The board of directors and executive committee (or
management committee) and the corporate officers selected by the board may make it
very difficult if not impossible for the PCGG to carry out its duties as conservator if the
Board or officers do not cooperate, are hostile or antagonistic to the conservators
objectives.

Thus, it is necessary to achieve a balancing of or a reconciliation between the

stockholders right to vote and the conservators statutory duty to recover and in the
process thereof, to conserve assets, thought to be ill-gotten wealth, until final judicial
determination of the character of such assets or until a final compromise agreement
between the parties is reached.

There are, in the main, two (2) types of situations that need to be addressed. The first
situation arises where the sequestered shares of stock constitute a distinct minority of the
voting shares of the corporation involved, such that the registered owners of such
sequestered shares would in any case be able to vote in only a minority of the Board of
Directors of the corporation. The second situation arises where the sequestered shares of
stock constitute a majority of the voting shares of the corporation concerned, such that
the registered owners of such shares of stock would in any case be entitled to elect
a majority of the Board of Directors of the corporation involved.

Turning to the first situation, the Court considers and so holds that in order to enable the
PCGG to perform its functions as conservator of the sequestered shares of stock pending
final determination by the courts as to whether or not the same constitute ill-gotten
wealth or a final compromise agreement between the parties, the PCGG must be
represented in the Board of Directors of the corporation and to its majority-owned
subsidiaries or affiliates and in the Executive Committee (or its equivalent) and the Audit
Committee thereof, in at least an ex officio (i.e., non-voting) capacity. The PCGG
representative must have a right of full access to and inspection of (including the right to
obtain copies of) the books, records and all other papers of the corporation relating to its
business, as well as a right to receive copies of reports to the Board of Directors, its
Executive (or equivalent) and Audit Committees. By such representation and rights of full
access, the PCGG must be able so to observe and monitor the carrying out of the business
of the corporation as to discover in a timely manner any move or effort on the part of the
registered owners of the sequestered stock alone or in concert with other shareholders, to
conceal, waste and dissipate the assets of the corporation, or the sequestered shares
themselves, and seasonably to bring such move or effort to the attention of the
Sandiganbayan for appropriate action.

In the second situation above referred to, the Court considers and so holds that the
following minimum safeguards must be set in place and carefully maintained until final
judicial resolution of the question of whether or not the sequestered shares of stock (or,
in a proper case, the underlying assets of the corporation concerned) constitute ill-gotten
wealth or until a final compromise agreement between the parties is reached:

a. An independent comptroller must be appointed by the Board of Directors upon

nomination of the PCGG as conservator. The comptroller shall not be removable (nor
shall his position be abolished or his compensation changed) without the consent of the
conservator. The comptroller shall, in addition to his other functions as such, have charge
of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate

secretary ceases to be acceptable to the conservator, a new one must be appointed by the
Board of Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be acceptable
to the conservator. The independent external auditors shall not be changed without the
consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the Executive (or
equivalent) and Audit Committees of the corporation involved and of its majority-owned
subsidiaries or affiliates. The representative of the conservator must be a full director (not
merely an honorary or ex officio director) with the right to vote and all other rights and
duties of a member of the Board of Directors under the Corporation Code. The
conservators representative shall not be removed from the Board of Directors (or the
mentioned Committees) without the consent of the conservator. The conservator shall,
however, have the right to remove and change its representative at any time, and the new
representative shall be promptly elected to the Board and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5 million

must have the prior approval of the director representing the conservator, in order to be
valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds, debentures,
commercial paper or any other form, in excess of P5 million, must have the prior approval
of the director representing the conservator, in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial meaning

in excess of P5 million) shall require the prior approval of the director representing the
conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and by-laws of
the company involved. In other words, the articles of incorporation and by-laws of the
company must be amended so as to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will
modify in any way any of the above safeguards, shall need the prior approval of the
director representing the conservator.

The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is intended
merely to be indicative. The precise amount may differ depending upon the size of the
corporation involved and the reasonable operating requirements of its business.

Whether a particular case falls within the first or the second type of situation described
above, the following safeguards are indispensably necessary:

1. The sequestered shares and any stock dividends pertaining to such shares, may not be
sold, transferred, alienated, mortgaged, or otherwise disposed of and no such sale,
transfer or other disposition shall be registered in the books of the corporation, pending
final judicial resolution of the question of ill-gotten wealth or a final compromise
agreement between the parties; and

2. Dividend and liquidating distributions shall not be delivered to the registered

stockholders of the sequestered shares, including stock dividends pertaining to such
shares, but shall instead be deposited in an escrow, interest-bearing, account in a first
class bank or banks, acceptable to the Sandiganbayan, to be held by such banks for the
benefit of whoever is held by final judicial decision or final compromise agreement, to be
entitled to the shares involved. (Italics in the original)

There is nothing in the Cojuangco case that would suggest that the above measures
should be incorporated in the articles and by-laws before a stockholders meeting for the
election of the board of directors is held. The PCGG nonetheless insists that those
measures should be written in the articles and by-laws before such meeting, otherwise,
the [Marcos] cronies will elect themselves or their representatives, control the
corporation, and for an appreciable period of time, have every opportunity to disburse
funds, destroy or alter corporate records, and dissipate assets. That could be a possibility,
but the peculiar circumstances of this case require that the election of the board of
directors first be held before the articles of incorporation are amended. Section 16 of the
Corporation Code requires the majority vote of the board of directors to amend the
articles of incorporation:

Sec. 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code
or by special law, and for legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two thirds (2/3) of the members if it be a non-stock
corporation.

x x x. (Emphasis supplied)

At the time Africa filed his motion for the holding of the annual stockholders
meeting, there were two sets of ETPI directors, one controlled by the PCGG and the other
by the registered stockholders. Which of them is the legitimate board of directors? Which
of them may rightfully vote to amend the articles of incorporation and integrate the
safeguards laid down in Cojuangco? It is essential, therefore, to cure this aberration of
two boards of directors sitting in a single corporation before the articles of incorporation
are amended to set in place the Cojuangco safeguards.
The danger of the so-called Marcos cronies taking control of the corporation and
dissipating its assets is, of course, a legitimate concern of the PCGG, charged as it is with
the duties of a conservator. Nevertheless, such danger may be averted by the substantially
contemporaneous amendment of the articles after the election of the board. This Court
said as much in Cojuangco:

The Court is aware that the implementation of some of the above safeguards may require
agreement between the registered stockholders and the PCGG as well as action on the
part of the Securities and Exchange Commission. The Court, therefore, directs petitioners
and the PCGG to effect the implementation of this decision under the supervision and
control of the Sandiganbayan so that the right to vote the sequestered shares and the
installation and operation of the safeguards above-specified may be exercised and
effected in a substantially contemporaneous manner and with all deliberate dispatch.

V
As for the PCGGs contention that the Sandiganbayan gravely abused its discretion in
ordering the Division Clerk of Court to call the stockholders meeting and in appointing
then Sandiganbayan Associate Justice Sabino de Leon, Jr. to control and supervise the
same, it is impressed with merit.
The Clerk of Court, who is already saddled with judicial responsibilities, need not be
burdened with the additional duties of a corporate secretary. Moreover, the Clerk of
Court may not have the requisite knowledge and expertise to discharge the functions of a
corporate secretary. It is not thus surprising to find the PCGG complaining that:

x x x ETPIs By-laws provide:

Sec. 4. Notice of Meeting. Except as otherwise provided by law, written or printed notice
of all annual and special meetings of stockholders, stating the place and time of the
meeting and the general nature of the business to be considered, shall be transmitted by
personal delivery, registered air-mail, telegraph, or cable to each stockholder of record
entitled to vote thereat at his address last known to the Secretary of the Company, at least
ten (10) days before the date of the meeting, if an annual meeting, or at least five (5) days
before the date of the meeting, if a special meeting.

Here, respondent Victor Africa filed a Motion dated March 30, 1992 asking the
Sandiganbayan to issue the call and Notice of Annual Stockholders Meeting in ETPI
because under ETPIs By-laws such meeting should be held in the month of May. x x x. In
the Resolution dated November 13, 1992, the Sandiganbayan granted the Motion and
authorized its Division Clerk of Court to issue such Notice of Annual Stockholders
Meeting.However, for inexplicable reasons, the Division Clerk of Court issued a Notice
of Special Stockholders Meeting x x x which requires only a prior 5-day notice, instead of
a notice of (Delayed) Annual Stockholders Meeting which requires a prior 10-day notice.

Instead of sending the Notices to each stockholder at his recorded address, the Division
Clerk of Court whimsically sent all the Notices meant for the Class B stockholders to Atty.
Eduardo de los Angeles (who returned the Notices because he was not authorized to
receive such Notices). According to him x x x, he does not know some of the Class B
stockholders for whom notices were sent to him. As a result, at this late stage, no proper
notice has been sent to Class B stockholders. Yet, the Sandiganbayan has scheduled and is
dead set to supervise a stockholders meeting on November 27, 1992. This clearly violates
the substantial rights of the Class B stockholders who own 40% of ETPI. Under the
Articles of Incorporation x x x and By-laws x x x of ETPI, Class B stockholders are entitled
to vote two members of the Board of Directors. Unless properly notified, most of the
Class B stockholders who reside in the United Kingdom (and whose shares are not
sequestered) will not be able to exercise their right to vote.[34] (Underscoring in the
original)

The appointment of a sitting member of the Sandiganbayan is particularly unsound

for, as the PCGG points out:

x x x. What then is the reason for him to attend and supervise the meeting? To observe so
that he can later testify in the court where he himself sits in the court which will
eventually decide any controversy which may arise from the meeting?[35]

Obviously, under such situation, the justice so appointed would be compelled to

inhibit himself from any judicial controversy arising from the stockholders
meeting.[36] Worse, if he were to preside at the meeting and rule upon the objections that
may be raised by some stockholders, the Sandiganbayan would be faced with the
anomaly[37] of eventually reviewing the decisions rendered by a member of its court
during the stockholders meeting.
This Court appreciates the quandary that the Sandiganbayan faced when it ordered
its Division Clerk of Court to call the meeting: ETPI has two sets of officers and,
presumably, two corporate secretaries. And given the stakes involved, the stockholders
meeting would be contentious, to say the least, hence, the need for an impartial referee to
supervise and control the meeting.
Happily, the case of Board of Directors and Election Committee of SMB Workers
Savings and Loan Asso., Inc. v. Tan, etc., et al.[38] provides a solution to the
Sandiganbayans dilemma. There, this Court upheld the creation of a committee
empowered to call, conduct and supervise the election of the board of directors:

As regards the creation of a committee of three vested with the authority to call, conduct
and supervise the election, and the appointment thereto of Cndido C. Viernes as
chairman and representative of the court and one representative each from the parties,
the Court in the exercise of its equity jurisdiction may appoint such committee, it having
been shown that the Election Committee that conducted the election annulled by the
respondent court if allowed to act as such may jeopardize the rights of the respondents.

In a proper proceeding a court of equity may direct the holding of a stockholders meeting
under the control of a special master, and the action taken at such a meeting will not be
set aside because of a wrongful use of the courts interlocutory decree, where not brought
to the attention of the court prior to the meeting. (18 C.J.S. 1270.)

A court of equity may, on showing of good reason, appoint a master to conduct and
supervise an election of directors when it appears that a fair election cannot otherwise be
had. Such a court cannot make directions contrary to statute and public policy with
respect to the conduct of such election. (19 C.J.S. 41)

This Court also approved a similar action by the Securities and Exchange Commission
in Sales v. Securities and Exchange Commission.[39]
Such a committee composed of impartial persons knowledgeable in corporate
proceedings would provide the needed expertise and objectivity in the calling and the
holding of the meeting without compromising the Sandiganbayan or its officers. The
appointment of the committee members and the delineation of the scope of the duties of
the committee may be made pursuant to an agreement by the parties or in accordance
with the provisions of Rule 9 (Management Committee) of the Interim Rules of Procedure
for Intra-Corporate Controversies insofar as they are applicable.
VI
And now, Africas motion to cite the PCGG and its accomplices in contempt for
calling and holding a stockholders meeting to increase ETPIs authorized capital stock
without this Courts authority and despite the pendency of motions for reconsideration of
the Sandiganbayan Resolution of December 13, 1996 granting the PCGG authority to cause
the holding of such meeting. In the same motion, Africa asks this Court to nullify the
March 17, 1997 stockholders meeting which increased ETPIs authorized capital stock on
the grounds that he, an ETPI stockholder, was not notified of the meeting, and the PCGG
voted the sequestered ETPI shares despite the absence of evidence of dissipation of
assets. Intervenor AEROCOM has shared Africas assertions.
As earlier stated, this Court, by Resolution of May 7, 1996, referred the PCGGs VERY
URGENT MOTION FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS
MEETING . . . to the Sandiganbayan for reception of evidence and resolution. The
dispositive portion of said Resolution reads:

Taking account of all the foregoing, the Court Resolved to REFER the VERY URGENT
PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS MEETING FOR
SOLE PURPOSE OF INCREASING EASTERNS AUTHORIZED CAPITAL STOCK to the
Sandiganbayan for reception of evidence and resolution WITH ALL DELIBERATE
DISPATCH but no longer than sixty (60) days from notice hereof of the factual issues
raised by the parties as herein set out, and such others, factual or otherwise as are
relevant, in order to decide the basic question in this proceeding of the necessity and
propriety of the holding of the special stockholders meeting of EASTERN for the sole
purpose of increasing ** (its) authorized capital stock and the exercise by the PCGG of the
right to vote at said meeting.[40] (Emphasis supplied)

Clearly, when the PCGGs VERY URGENT PETITION TO HOLD SPECIAL

STOCKHOLDERS MEETING . . . was referred to the Sandiganbayan, this Court gave the
latter full authority to decide the issue of whether a stockholders meeting should be
held. Implicit in this authority was the power to grant (or deny) the petition. There is
thus no need for the parties to seek this Courts imprimatur to hold the same.
Africas motion must thus be denied.
Even assuming arguendo that the holding of the meeting was contemptuous because
the December 13, 1996 Sandiganbayan Resolution had not yet attained finality, it was the
Sandiganbayan, and not this Court, which was contemned. Consequently, it is the
Sandiganbayan, and not this Court, which has jurisdiction over the motion to declare the
PCGG and its accomplices in contempt.

In whatever context it may arise, contempt of court involves the doing of an act, or the
failure to do an act, in such a manner as to create an affront to the court and the
sovereign dignity with which it is clothed. As a matter of practical judicial administration,
jurisdiction has been felt properly to rest in only one tribunal at a time with respect to a
given controversy. Partly because of administrative considerations, and partly to visit the
full personal effect of the punishment on a contemnor, the rule has been that no other
court than the one contemned will punish a given contempt.

The rationale that is usually advanced for the general rule that the power to punish for
contempt rests with the court contemned is that contempt proceedings are sui
generic and are triable only by the court against whose authority the contempts are
charged; the power to punish for contempt exists for the purpose of enabling a court to
compel due decorum and respect in its presence and due obedience to its judgments,
orders and processes; and in order that a court may compel obedience to its orders, it
must have the right to inquire whether there has been any disobedience thereof, for to
submit the question of disobedience to another tribunal would operate to deprive the
proceeding of half its efficiency.[41]

The above rule is not of course absolute as it admits exception when the entire case
has already been appealed [in which case] jurisdiction to punish for contempt rests with
the appellate court where the appeal completely transfers to proceedings thereto or
where there is a tendency to affect the status quo or otherwise interfere with the
jurisdiction of the appellate court.[42] This exception does not, however, apply to Africas
motion since at the time he filed it on April 1, 1997 before this Court, his petition in G. R.
No. L-147214 assailing the December 17, 1996 Resolution of the Sandiganbayan had not yet
been filed.
The motion to nullify the March 17, 1997 stockholders meeting must likewise be
denied for lack of jurisdiction. Such motion is but an incident to Sandiganbayan Civil
Case No. 0130.[43] As such, jurisdiction over it pertains exclusively and originally to the
Sandiganbayan.

Under Section 2 of the Presidents 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 Sandiganbayans
exclusive and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court.[44]

This is another reason for the denial of the motion to cite the PCGG and its
accomplices in contempt.
VII
FINALLY, the question on the validity of the PCCGs voting the Class A shares to
increase the authorized capital stock of ETPI.
In his petition in G. R. No. 147214, Africa faults the Sandiganbayan for failing to
acknowledge, in its Resolution of February 16, 2001, the Decisions of this Court declaring
that his shares in ETPI[45] and those of AEROCOM[46] and POLYGON (Polygon Investors
& Managers, Inc.)[47] were not sequestered. Hence, so he contends, they, and not the
PCGG, should have been allowed to vote their respective shares during the meeting.
Two matters require clarification at this point. First, that this Court rendered
decisions holding that the shares of Africa, AEROCOM and POLYGON are not or are no
longer sequestered is of little consequence since the decisions were
promulgated after the Sandiganbayan issued its resolution granting the PCGG authority
to call and hold the stockholders meeting to increase the authorized capital stock. At that
time, the shares were presumed to have been regularly sequestered. The more
fundamental question that confronts this Court is: Was the PCGG entitled to vote the
sequestered shares in the stockholders meeting of March 17, 1997?
Second, the PCGG correctly argues that Africa has no cause of action to claim on
behalf of AEROCOM and POLYGON that these two companies are entitled to vote their
respective shares in the stockholders meeting to increase ETPIs authorized capital
stock. The claim is personal to AEROCOM and POLYGON. Nevertheless, this does not
preclude Africa from invoking his own right as a small stockholder of ETPI to vote in the
stockholders meeting for the purpose of increasing ETPIs authorized capital stock. The
PCGG maintains, however, that it is entitled to vote said shares because this Court, by its
claim, recognized in PCGG v. SEC, supra, that ETPIs assets were being dissipated by the
BAN (Benedicto, Africa, Nieto) Group, thus:

Under the Management of Cable and Wireless ETPI grew and prospered. But when its
dividends, which were paid in dollars to the BAN Group, began to run into millions, said
group also started to intervene in the corporations operations and management. Requests
for employment of family relatives and high salaries for them were made. The BAN Group
likewise placed the majority of their individual stockholdings in three separate
companies, namely: Aerocom Investors, Universal Molasses, and Polygon, so that in 1986,
the ownership of the Class A stocks of the corporation was as follows:

Roberto S. Benedicto - 3.3 percent

Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and
Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africa's relatives - .3 percent
Polygon Investors and
Managers Inc. - 17.5 percent

By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and
relatives had grown to the astronomical sum of P784,185,198.00. Cash dividends paid to
them as of 1986 had amounted to P225,845,000.00 even as another P180,000,000.00 is due
them for 1987, for a grand total of P405,845,000.00. In 1984, cash dividends to
the BAN Group, et al. in the amount of $1M were remitted to the United States.

Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as
Chairman and his son, Victor Africa as President, earned from ETPI as of 1987 more
than P57M. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as professional fees
and Manuel H. Nieto, Jr., another P1,200,000.00 as allowances.[48]

As stated early on, however, the foregoing narration does not constitute a finding of fact.
The PCGG further submits that the Sandiganbayan found prima facie evidence for the
issuance of the writ of sequestration covering the Class A shares of ETPI. Such reliance on
the Sandiganbayans ruling is misplaced because the issue is not whether there is prima
facie evidence to warrant sequestration of the shares, but whether there is prima
facie evidence showing that the shares are ill-gotten and whether there is evidence of
dissipation of assets to warrant the voting by the PCGG of sequestered shares. As to the
latter issue, the Sandiganbayan held in the affirmative in this wise:

x x x [T]he propriety and legality of allowing the PCGG to cause the holding of a
stockholders meeting of the ETPI for the purpose of electing a new Board of Directors or
effecting changes in the policy, program and practices of said corporation (except for the
specified purpose of amending the right of first refusal clause in ETPIs Articles of
Incorporation and By Laws) and impliedly to vote the sequestered shares of stocks has
been upheld by the Supreme Court in the case of PCGG vs. SEC, PCGG vs.
Sandiganbayan, et al., G.R. No. 82188, promulgated June 30, 1988 x x x.[49] (Underscoring
supplied)
The Sandiganbayan proceeded to quote the following pronouncement of this Court
in PCGG v. SEC:

But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from
holding the stockholders meeting for the specified purpose of amending the right of first
refusal clause in ETPI's Articles of Incorporation and By-Laws, We find the general
injunction imposed by it on the PCGG to desist and refrain from calling a stockholders
meeting for the purpose of electing a new Board of Directors of effectingsubstantial
changes in the policy, program or practice of the corporation to be too broad as to taint
said order with grave abuse of discretion. Said order completely ties the hands of
the PCGG, rendering it virtually helpless in the exercise of its power of conserving and
preserving the assets of the corporation. Indeed, of what use is the PCGG if it cannot even
do this? x x x.[50] (Underscoring and italics supplied)

The Sandiganbayan, however, misread this Courts ruling in the said SEC case. One of
the issues raised therein was whether the Sandiganbayan committed grave abuse of
discretion in enjoining the PCGG from calling and holding stockholders meetings and
voting the sequestered ETPI shares for the purpose of deleting the right of first
refusal clause in ETPIs articles of incorporation.In its therein assailed Order, the
Sandiganbayan temporarily restrained the PCGG from calling and/or holding
stockholders meetings and voting the sequestered shares thereat for the purpose
of amending the articles or by-laws of ETPI, or otherwise effecting substantial
changes in policy, programs or practices of said corporation.
Clearly, the temporary restraining order was too broad. The Sandiganbayan should
have limited itself to restraining the calling and holding of the stockholders meeting and
voting the shares for the sole purpose of amending the right of first refusal clause. It was
thus necessary for this Court to make the underscored ruling above. No declaration
therein was made that in all instances the PCGG may vote the sequestered shares to effect
substantial changes in ETPI policy, programs or practices. In lifting the injunction on that
aspect, this Court merely recognized that situations may arise wherein only through an
act of strict ownership can the PCGG be able to prevent the dissipation of the assets of
the sequestered corporation or business.[51]
Moreover, if, as the Sandiganbayan assumed, this Court had come to a conclusion in
the SEC case that the BAN Group was guilty of dissipation and that, consequently, the
PCGG was entitled to vote the sequestered shares, this Court would not have bothered, in
its Resolution of May 7, 1996, to direct said court to decide whether the PCGG has the
right to vote in the stockholders meeting for the purpose of increasing ETPIs authorized
capital stock.[52]
This Court notes that, like in Africas motion to hold a stockholders meeting (to elect
a board of directors), the Sandiganbayan, in the PCGGs petition to hold a stockholders
meeting (to amend the articles of incorporation to increase the authorized capital stock),
again failed to apply the two-tiered test. On such determination hinges the validity of the
votes cast by the PCGG in the stockholders meeting of March 17, 1997. This lapse by the
Sandiganbayan leaves this Court with no other choice but to remand these questions to it
for proper determination.
IN SUM, this Court rules that:
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or
to amend the Articles of Incorporation for the purpose of increasing the authorized
capital stock unless there is a prima facie evidence showing that said shares are ill-gotten
and there is an imminent danger of dissipation.
(2) The ETPI Stock and Transfer Book should be the basis for determining which
persons have the right to vote in the stockholders meeting for the election of the ETPI
Board of Directors.
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and
his controlled corporations under the Compromise Agreement, provided that the shares
are first registered in the name of the PCGG. The PCGG may not register the transfer of
the Malacaang and the Nieto shares in the ETPI Stock and Transfer Book; however, it may
vote the same as conservator provided that the PCGG satisfies the two-tiered test devised
by the Court in Cojuangco v. Calpo, supra.
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated
in the ETPI Articles of Incorporation substantially contemporaneous to, but not before,
the election of the ETPI Board of Directors.
(5) Members of the Sandiganbayan shall not participate in the stockholders meeting
for the election of the ETPI Board of Directors. Neither shall a Clerk of Court be
appointed to call such meeting and issue notices thereof. The Sandiganbayan shall
appoint, or the parties may agree to constitute, a committee of competent and impartial
persons to call, send notices and preside at the meeting for the election of the ETPI Board
of Directors; and
(6) This Court has no jurisdiction over the motion to cite the PCGG and its
accomplices in contempt and to nullify the stockholders meeting of March 17, 1997.
WHEREFORE, this Court Resolved to REFER the petitions at bar to the
Sandiganbayan for reception of evidence to determine whether there is a prima
facie evidence showing that the sequestered shares in question are ill-gotten and there is
an imminent danger of dissipation to entitle the PCGG to vote them in a stockholders
meeting to elect the ETPI Board of Directors and to amend the ETPI Articles of
Incorporation for the sole purpose of increasing the authorized capital stock of ETPI.
The Sandiganbayan shall render a decision thereon within sixty (60) days from
receipt of this Resolution and in conformity herewith.
The motion to cite the PCGG and its accomplices and to nullify the ETPI
Stockholders Meeting of March 17, 1997 filed by Victor Africa is DENIED for lack of
jurisdiction.
 SO ORDERED.
Davide, Jr., C.J., Bellosillo, Puno, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-
Martinez, Corona, and Callejo, Sr., JJ., concur.
Vitug, J., in the result.
Panganiban, J., No part, former counsel of a party.
Quisumbing, J., abroad on official business.
Azcuna, J., No part.

[1] Entitled Victor Africa v. Presidential Commission on Good Government, involving a

petition for certiorari, with prayer for a temporary restraining order/preliminary
injunction, filed by Victor Africa. The petition seeks to nullify the Orders of the
PCGG dated August 5, 1991 and August 9, 1991, directing Africa to account for his
sequestered shares in ETPI and to cease and desist from exercising voting rights on
the sequestered shares in the special stockholders meeting to be held on August 12,
1991, from representing himself as a director, officer, employee or agent of ETPI,
and from participating, directly or indirectly in the management of ETPI. (Rollo, G.
R. No. 107789, p. 453).
[2] Id. at 83.
[3] Id. at 104-105.
[4] Id. at 39-47.
[5] Id. at 45-47.
[6] Id. at 11-12.
[7] POLICY TO IMPROVE THE PROVISION OF LOCAL EXCHANGE CARRIER SERVICE.
[8] AN ACT TO PROMOTE AND GOVERN THE DEVELOPMENT OF PHILIPPINE
TELECOMMUNICATIONS AND THE DELIVERY OF PUBLIC
TELECOMMUNICATIONS SERVICES.
[9] Rollo, G. R. No. 107780, pp. 958-963.
[10] Rollo, G. R. No. 107789, pp. 962-963.
[11] Id. at 1124-1125.
[12] Rollo, G.R. No. 147214, pp. 17-32.
[13] Rollo, G. R. No. 147214, p. 319.
[14] 150 SCRA 181 (1987).
[15] Vide San Miguel Corporation v. Kahn, 176 SCRA 447, 464 (1989); Republic v.
Sandiganbayan, 200 SCRA 530 (1991), holding that the PCGGs authority to vote
 sequestered shares must be conceded only where there is evident necessity for
such voting in order to prevent the disposal and dissipation of the sequestered
assets.
[16] G. R. No. 115352, June 10, 1993.
[17] 302 SCRA 217 (1999).
[18] Ibid.
[19] Republic v. Cocofed, G. R. Nos. 147062-64, December 14, 2001.
[20] Ibid.
[21] G. R. No. 82188, June 30, 1988. The decision, penned by then Associate Justice Marcelo
Fernan, was concurred in by thirteen justices (Yap, C .J., Narvasa, Melencio-
Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Grio-
Aquino and Medialdea, JJ.); one justice (Gutierrez, Jr., J.) was on leave. For easy
reference, the decision, which is not found in either the Philippine Reports
or in the Supreme Court Reports Annotated, is reproduced in full below:
Assailed in this consolidated petition for certiorari, mandamus and prohibition with
prayer for preliminary injunction and/or temporary restraining order as having
been issued with grave abuse of discretion and in excess of jurisdiction are two
restraining orders issued by [1] the Securities and Exchange Commission Hearing
Panel on March 3, 1988 in SEC Case No. 3297 entitled Victor Africa and Rafael C.
Valdez, Complainants, versus Eduardo M. Villanueva, et al., Respondents
enjoining the respondents therein as members of the Board of Directors of Eastern
Telecommunications Philippines, Inc. [ETPI] from holding the stockholders
meeting scheduled on March 4, 1988; and [2] the Sandiganbayan on March 4, 1988
in SB Civil Case No. 0009 entitled Republic of the Philippines, Plaintiff, versus Jose
L. Africa, et al., Defendants, enjoining the PCGG, its Commissioners, nominated
Directors and/or Corporate Officers, employees, nominees, agents and/or
representatives x x x from calling and/or holding stockholders meetings and voting
(the) sequestered shares thereat for the purpose of amending the Articles or By-
laws of ETPI, or otherwise effecting substantial changes in policy, programs or
practices of said corporation. (Annex U, Petition, p. 192, Rollo) The temporary
restraining order dated March 4, 1988 was subsequently replaced by a writ of
preliminary injunction on March 25, 1988. (Annex B, Petitioners Urgent
Manifestation and Motion dated March 29, 1988)
The relevant background facts of the case culled from Petitioners URGENT
CONSOLIDATED PETITION are as follows: Until 1974, Eastern
Telecommunications of the Philippines [ETPI] was a wholly-owned subsidiary of
Cable and Wireless, Ltd., operating under the name Eastern Extension Australasia
and China Telegraph Company Ltd. [EEATC] by virtue of a royal decree from
Spain, renewed in 1952 by the Philippine Government. In the late 1966, EEATC
attempted to win a contract for the establishment of a satellite earth station but
 the contract was awarded by then President Ferdinand E. Marcos to a previously
unknown corporation, the Philippine Overseas Telecoms Corporation [POTC],
controlled by Messrs. Ilusorio, Poblador, Nieto, Benedicto and Reyes. Thereafter,
desiring to obtain the franchise for the establishment of a tropospheric scatter
system communications with Taiwan, but aware that it could not possibly do so
without a strong Filipino partner, EEATC entered into a business alliance
with POTC enabling them to obtain a franchise and the needed government
approvals.
Despite this alliance, Cable & Wireless was uneasy about its tenure in the Philippines, in
view of the then forthcoming expiration of the Laurel-Langley Act, which
expiration would require American corporations to reorganize themselves into
60/40 corporations with majority Filipino ownership.
In March 1974, EEATC Philippine representative M.C. Bane was called to a conference at
Camp Crame with the then Secretary of National Defense. Present at the meeting
were representatives of RCA and Globe Mackay, who together with M.C. Bane,
were told that they had until July of 1974 within which to reorganize their
respective corporations into a 60/40 corporation in favor of Filipino ownership and
that failing to do so, the Philippine Government would take the necessary action.
With the deadline fast approaching, EEATC re-opened negotiations with POTC, which at
that time had undergone rapid changes resulting in Nieto, Jr. becoming its
controlling figure and Atty. Jose L. Africa as its negotiating representative. During
the negotiations, Atty. Africa was quick to point out that EEATC was to deal only
with the BAN Group [Benedicto, Africa and Nieto] allegedly at the express wish of
then President Marcos.
The figure eventually arrived at for EEATC's assets was P10M of which P6M was to be the
input of the BAN Group. However, upon Atty. Africa's information that
the BAN Group could put up only P1M a compromise was suggested for the new
corporation to raise a bank loan from which Cable and Wireless could be paid for
the assets to be acquired. After a series of negotiations, it was agreed that a loan
of P7M was to be arranged and BAN would contribute P3M while Cable and
Wireless would contribute P2M, thus establishing a 60/40 relationship in a new
corporation. Despite this agreement, Africa again informed Cable and Wireless
that the BAN Group could raise only P1M and asked whether it would be possible
for Cable and Wireless to lend the group P2M repayable over a period of three [3]
years. Seeing no other alternative, Cable and Wireless agreed to this arrangement.
The loan document was drawn up while Nieto, Jr. secured the signature of then
President Marcos on Presidential Decree No. 489 transferring the franchise
of EEATC to the new corporation, Eastern Telecommunications of the Philippines,
Inc. [ETPI].
Under the Management of Cable and Wireless ETPI grew and prospered. But when its
dividends, which were paid in dollars to the BAN Group, began to run into
 millions, said group also started to intervene in the corporations operations and
management. Requests for employment of family relatives and high salaries for
them were made. The BAN Group likewise placed the majority of their individual
stockholdings in three separate companies, namely: Aerocom Investors, Universal
Molasses, and Polygon, so that in 1986, the ownership of the Class A stocks of the
corporation was as follows:
Roberto S. Benedicto - 3.3 percent
Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africas relatives - .3 percent
Polygon Investors and Managers Inc. - 17.5 percent
By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and
relatives had grown to the astronomical sum of P784,185,198.00. Cash dividends
paid to them as of 1986 had amounted to P225,845,000.00 even as
another P180,000,000.00 is due them for 1987, for a grand total of P405,845,000.00.
In 1984, cash dividends to the BAN Group, et al. in the amount of $1M were
remitted to the United States.
Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as
Chairman and his son, Victor Africa as President, earned from ETPI as of 1987
more than P57M. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as
professional fees and Manuel H. Nieto, Jr., another P1,200,000.00 as allowances.
On a prima facie finding that the three owned corporations, Aerocom, Universal and
Polygon are Marcos-owned firms, the PCGG, on March 14, 1986 sequestered the
company ETPI and on July 22, 1987 PCGG filed with the Sandiganbayan Civil Case
No. 0009 for Reconveyance, Reversion, Accounting, Restitution of the ill-
gotten ETPI shares and damages in connection therewith. The sequestration order
was partially lifted with respect to the Class B shares which belonged to Cable and
Wireless.
The root cause of the present controversy is the PCGG Resolution dated January 28, 1988
which ordered the reconvening and resumption of the annual stockholders
meeting of the Eastern Telecommunications Philippines, Inc. on 29 January 1988 at
2:00 P.M. at the principal office of the corporation. The meeting was originally
scheduled for 4 January 1988, but had to be and was duly adjourned the same day.
A copy of this resolution, contained in a letter addressed to the Chairman and Corporate
Secretary of ETPI was received by respondent Victor Africa as Corporation
Secretary of ETPI at 11:11 A.M. of January 29, 1988. At 2:00 P.M. of the same day, the
reconvened stockholders meeting was held over the objection interposed by said
respondent Victor Africa as corporate secretary and stockholder of ETPI, on the
manner the meeting was called. In said stockholders meeting petitioners Eduardo
M. Villanueva, as PCGG nominee, and Roman Mabanta and Eduardo de los
Angeles as nominees of the foreign investors, Cable and Wireless Ltd. and Jose L.
Africa [who was absent] were elected members of the Board of Directors.
Immediately thereafter, the elected directors present held an organizational
meeting, in turn, electing Eduardo Villanueva as President and General Manager,
petitioners Ramon Desuasido, Almario Velasco and Ranulfo Payos as Acting
Corporate Secretary, Acting Treasurer and Acting Assistant Corporate Secretary,
respectively. The Board of Directors further resolved to hold a Board meeting on
February 8, 1988.
At the February 8, 1988 meeting, the Board of Directors resolved, among others, to
propose amendments to ETPIs Articles of Incorporation to abrogate the right of
first refusal clause embodied in Article 10 thereof and to call for a special
stockholders meeting in February 29, 1988 for the purpose of ratifying the
proposed amendment.
On February 15, 1988, respondents Victor Africa and Rafael C. Valdez, as alleged erstwhile
Corporate Secretary and Director, respectively, of ETPI, filed before the Securities
and Exchange Commission [SEC] a verified complaint with prayer for preliminary
injunction, docketed therein as SEC Case No. 3297, assailing the legality of the
Board of Directors' and Corporate Officers elections at the reconvened
stockholders meeting on January 29, 1988, the Board meetings of January 29 and
February 8, 1988 as well as all the acts done by the Board during said meetings.
During the pendency of the application for preliminary injunction, respondents Victor
Africa and Rafael Valdez filed an urgent motion for a temporary restraining order
to enjoin the Board of Directors from proceeding with the special stockholders
meeting on February 29, 1988. This motion was opposed by therein respondents
Mabanta and delos Angeles.
On February 26, 1988, by way of special appearance, the office of the Solicitor General
filed an omnibus motion for the PCGG to intervene and for the dismissal of the
case in so far as Villanueva, Velasco, Payos and Desuasido were concerned,
claiming that they were PCGG nominees/designees, and therefore beyond the
jurisdiction of the SEC.
At the hearing on February 29, 1988, therein respondent de los Angeles agreed to defer
the February 29 meeting but at the resumption of the hearing on March 1, 1988,
therein petitioners reiterated their urgent motion for a temporary restraining
 order, manifesting that the meeting of February 29, 1988 was merely adjourned to
March 4, 1988.
On March 3, 1988, after marathon hearings on the application for a temporary restraining
order, the hearing panel of the SEC issued the assailed order, effective for twenty
(20) days, on the grounds that the said stockholders meeting on March 4, 1988 x x
x is not really that urgent and to afford the Panel sufficient time to deliberate on
the matter without rendering the act sought to be enjoined academic. (p. 190,
Rollo)
Also on March 3, 1988, respondents Jose Africa and Manuel H. Nieto, Jr. as stockholders
of ETPI filed in Civil Case No. 0009 of the Sandiganbayan a motion for injunction
with prayer for a temporary restraining order to enjoin the PCGG, its
Commissioners, nominated Directors and/or Corporate Officers, employees,
nominees, agents and/or representatives from calling or holding meetings of the
stockholders and the Board of Directors, managing the corporation, controlling its
policies, running its day-to-day business, etc. The following day, March 4, 1988, the
Sandiganbayan issued the second assailed temporary restraining order. Hence, this
petition, PCGG maintaining that both the SECand Sandiganbayan acted with
grave abuse of discretion and in excess of jurisdiction in issuing said temporary
restraining orders, the SEC for having done so without first resolving its motion for
intervention and for dismissal of the case; and the Sandiganbayan for taking
cognizance of the motion, thereby intervening with the PCGG's executive and
administrative jurisdiction.
Without giving due course to the petition, the Court set the case for hearing on March 17,
1988. At said hearing, We required the parties to file their memoranda on the
applicability of the case of Bataan Shipyard & Engineering, Co., Inc. vs. Presidential
Commission on Good Government [150 SCRA 181] to the petition at bar. All parties
complied with this order.
We shall deal first with the SEC case. By its own terms, the temporary restraining order
issued in SEC Case No. 3297 was effective only for twenty (20) days. The same has
therefore already expired, rendering the challenge against it moot and academic.
This, notwithstanding, the Court has decided to delve deeper into the SEC case to
correct a blatant jurisdictional defect and thus save the parties unnecessary waste
of time and effort as well as to avoid multiplicity of suits and promote the orderly
administration of justice.
On the basis of the allegations in the complaint filed by respondent Victor Africa and
Rafael Valdez in SEC Case No. 3297, it would appear that the complaint being
lodged before the SEC pertained primarily to an intra-corporate controversy. The
respondents named therein are the individual members of the Board of Directors
and the Corporate Officers of ETPI and the acts sought to be nullified or enjoined
were the supposedly illegal corporate acts of these individuals. Conveniently
omitted are the information that certain stocks of the corporation are under
 sequestration by the PCGG and that some individually named respondents
are PCGG nominees or designees. The lone reference to PCGG is found in
paragraph 5 of the complaint alleging the receipt by Victor Africa of a letter
from PCGG Chairman Ramon A. Diaz ordering a stockholders meeting on the 29th
of January, 1988 at 2:00 P.M. at the principal office of the Corporation and the
allegation that this notice was in violation of the provision in the corporations By-
laws regarding notice of meetings. By this clever presentation of the antecedent
facts, the SEC was misled into taking cognizance of the complaint, and in view of
the forthcoming special stockholders meeting being sought to be enjoined, the
Hearing Panel was constrained to issue the assailed temporary restraining order if
only to maintain the status quo and thus prevent the case from becoming moot
and academic.
Under these circumstances, the issuance of the temporary restraining order would have
been legal and proper. What, to our mind, taints the same with grave abuse of
discretion was the fact that at the time of the issuance of the assailed temporary
restraining order, there were certain information already within the knowledge of
the Hearing Panel. For it must be remembered that as early as February 26, 1988,
the Office of the Solicitor General had filed a motion for intervention and for
dismissal of the case for lack of jurisdiction. If on the basis of the complaint filed
by respondents Victor Africa and Rafael Valdez, it was not readily discernible that
it was the legality of the PCGGs resolution of January 29, 1988 that has to be
determined as the order which gave rise to the chain of events sought to be
nullified or enjoined, the disclosure in the motion to intervene that some of the
individual respondents in SEC Case No. 3297 are PCGG nominees or designees
should have made it clear to the Hearing Panel that the PCGG was the real party
in interest. The Hearing Panel should have then realized that there exists an
element in the case which effectively removes it from the jurisdiction of the
Commission, i.e., the presence of the PCGG, which as another quasi-judicial body
is a co-equal entity over which actions the SEC has no power of control.
In one of the valedictory decisions of Mr. Chief Justice Claudio Teehankee, this Court
finally laid to rest the question of the proper forum before which actions to
challenge the PCGG's acts or orders in sequestration cases may be instituted.
Thus:
x x x Executive Order No. 14 xxx specifically provides in Section 2 that The Presidential
Commission on Good Government shall file such cases whether civil or criminal,
with the Sandiganbayan which shall have exclusive and original jurisdiction
thereof. Necessarily, those who wish to question or challenge the Commission's
acts or orders in such case must seek recourse in the same court, the
Sandiganbayan, which is vested exclusive and original jurisdiction. The
Sandiganbayans decisions and final orders are in turn subject to review on
certiorari exclusively by this Court. (Presidential Commission on Good
Government v. Hon. Emmanuel Pea, etc., et al., G.R. No. 77663, April 12, 1988)
The root cause of the SEC controversy being undeniably the PCGG's resolution calling for
a stockholders meeting of the partially sequestered ETPI, the challenge thereto is
properly cognizable by the Sandiganbayan. The other respondents in this petition,
Messrs. Jose Africa and Manuel H. Nieto, Jr., were in a sense more perceptive in
filing a motion for injunction in Civil Case No. 0009 pending before the
Sandiganbayan.
In the face of this glaring lack of jurisdiction, it follows that had the temporary restraining
order issued in SEC Case No. 3297 not lost its effectivity functus officio, the same
would have been set aside. But, as earlier intimated, the case does not end
here. SEC Case No. 3297 should further be ordered dismissed for lack of
jurisdiction.
We come now to the second assailed temporary restraining order dated March 4, 1988
issued by the Sandiganbayan in Civil Case No. 0009, which was replaced on March
29, 1988 with a writ of preliminary injunction, and which injunction was reiterated
on May 2, 1988. (Annex A, Third Urgent Motion to Resolve Urgent Consolidated
Petition) The main objection interposed by the PCGG to the issuance of these
orders is that they were in effect an intervention by the Sandiganbayan with
the PCGG's discretionary executive and administrative jurisdiction.
Verily, the PCGG is vested with executive and administrative jurisdiction over
sequestered corporations, business enterprises and properties. The powers granted
to the PCGG, no matter how broad they appear, however, must be exercised
pursuant to its pronounced objective of provisionally taking over in the public
interest or to prevent its disposal or dissipation business enterprises and properties
taken over by the government of the Marcos administration or entities or persons
close to the former President Marcos x x x. (Sec. 3[b], Executive Order No. 1) It is
with this objective in mind that in the leading case of BASECO vs.
PCGG, supra this Court laid down certain guidelines on what acts may or may not
be done by the PCGG with regard to said sequestered properties or businesses. We
tried to cover as wide a range of activities in said case as possible but We realize
that We cannot even attempt to encompass allsituations. Each case must be
decided on the basis of its factual antecedents and merits, but always with
reference to the objectives for which the PCGG was created. In like manner should
the PCGG's acts and orders be measured. Acts or orders transgressing this
parameter are certainly tainted with abuse of discretion which the Sandiganbayan,
the court vested with exclusive and original jurisdiction over case involving
the PCGG, may correct. Otherwise, PCGG would be above the law.
In the case at bar, the stockholders meeting enjoined by the SEC and the Sandiganbayan
was called specifically for the purpose of ratifying the proposed amendment to
delete from ETPIs Articles of Incorporation and By-Laws the right of first refusal
clause. The question that must now be resolved is whether the PCGG may be
permitted to vote the sequestered shares to effect this change.
The right of first refusal is primarily an attribute of ownership. Conversely, a waiver
thereof is an act of ownership. To allow the PCGG to vote the sequestered shares
for this purpose would be sanctioning its exercise of an act of strict ownership. To
our mind, though, it is not so much the nature of the act proposed to be done by
the PCGG that is essential, but rather, the purpose for doing so. The prime
consideration should be: is the act proposed to be done by the PCGG merely an
act of administration or an act of strict ownership essential to the pursuit of its
objectives? For it cannot be totally discounted that situations may arise wherein
only through an act of strict ownership can the PCGG be able to prevent the
dissipation of the assets of the sequestered corporation or business. Fortunately,
this is not one of them. For while We commend the purported objective of
the PCGG for trying to amend the right of first refusal clause to enable it to sell the
sequestered shares to the public, We cannot see our way clear as to how this move
could help prevent the dissipation of the corporations assets, particularly when it
has its own representatives in the Board of Directors, who can effectively provide
such measures and safeguards to prevent such dissipation. Moreover, to sell the
sequestered shares at this time when the issue of ownership is still pending before
the Sandiganbayan and the exact equity proportion thereof is still uncertain,
would not only be premature, but would also expose the would-be buyers to great
risks.
But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from
holding the stockholders meeting for the specified purpose of amending the right
of first refusal clause in ETPI's Articles of Incorporation and By-Laws, We find the
general injunction imposed by it on the PCGG to desist and refrain from calling a
stockholders meeting for the purpose of electing a new Board of Directors of
effecting substantial changes in the policy, program or practice of the corporation
to be too broad as to taint said order with grave abuse of discretion. Said order
completely ties the hands of the PCGG, rendering it virtually helpless in the
exercise of its power of conserving and preserving the assets of the
corporation. Indeed, of what use is the PCGG if it cannot even do this? The
injunction issued by the Sandiganbayan must be lifted with qualifications as it was
lifted in our resolution dated May 24, 1988.
As to the charge of forum-shopping imputed to private respondents, We give the latter
the benefit of the doubt considering that there are two separate sets of petitioners
in the SEC and Sandiganbayan cases and the lack of a definite ruling, at the time of
the filing of the petitions in SEC and Sandiganbayan, as to which is the proper
forum in cases of this nature.
WHEREFORE. the temporary restraining order issued in SEC Case No. 3297 is hereby
declared a nullity and SEC Case No. 3297 is ordered dismissed for lack of
jurisdiction. The writs of preliminary injunction dated March 25 and May 2, 1988
issued by the Sandiganbayan in Civil Case No. 0009 are lifted except in so far as
they enjoin petitioners from holding a stockholders meeting for the purpose of
 deleting from ETPI's Articles of Incorporation and By-Laws the right of first refusal
clause. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S.
TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN
YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and
the SECURITIES AND EXCHANGE COMMISSION, respondents.

[G.R. No. 144629. April 8, 2003]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG,
ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG
ALONZO, respondents.

RESOLUTION
CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner
movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong
and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15,
2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision,[1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the
decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11, 1998; and (3)
motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our
February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
 In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots where the mall was being
built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William
T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value
of P100.00 each while the Tius were to subscribe to an additional 549,800 shares
at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-
President and the Treasurer plus five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000
shares of stock while the Tius committed to contribute to FLADC a four-storey building
and two parcels of land respectively valued at P20 million (for 200,000 shares), P30
million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their
additional 549,800 stock subscription therein. The Ongs paid in another P70 million[3] to
FLADC and P20 million to the Tius over and above their P100 million investment, the
total sum of which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares
covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu
from assuming the positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume
the positions and perform the duties of Vice-President and Treasurer, respectively, but
the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them
the space for their executive offices as Vice-President and Treasurer. Finally, and most
serious of all, the Ongs refused to give them the shares corresponding to their property
contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-meter
lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed
the positions of Vice-President and Treasurer of FLADC but that it was they who refused
to comply with the corporate duties assigned to them. It was the contention of the Ongs
that they wanted the Tius to sign the checks of the corporation and undertake their
management duties but that the Tius shied away from helping them manage the
corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact
already have existing executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which were anyway
subsequently provided to them. On the most important issue of their alleged failure to
credit the Tius with the FLADC shares commensurate to the Tius property contributions,
the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius property contribution (as opposed to cash
contribution). This, in turn, would make it impossible to secure a new Transfer Certificate
of Title (TCT) over the property in FLADCs name. In any event, it was easy for the Tius to
simply pay the said transfer taxes and, after the new TCT was issued in FLADCs name,
they could then be given the corresponding shares of stocks. On the 151 square-meter
property, the Tius never executed a deed of assignment in favor of FLADC. The Tius
initially claimed that they could not as yet surrender the TCT because it was still being
reconstituted by the Lichaucos from whom the Tius bought it. The Ongs later on
discovered that FLADC had in reality owned the property all along, even before their Pre-
Subscription Agreement was executed in 1994. This meant that the 151 square-meter
property was at that time already the corporate property of FLADC for which the Tius
were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced[4] by the Tius
on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-

Subscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual

defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants
representing the return of their contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission
amended articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066
(formerly 15587), 135325 and 134204 and any other title or deed in the name of
FLADC, failing in which said titles are declared void;
 (e) The Register of Deeds to issue new certificates of titles in favor of the
plaintiffs and to cancel the annotation of the Pre-Subscription Agreement
dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and
representatives, to desist from exercising or performing any and all acts
pertaining to stockholder, director or officer of FLADC or in any manner
intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest
payment in the amount of P8,866,669.00 and all interest payments as well as
any payments on principal received from the P70,000,000.00 inexistent loan,
plus the legal rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus legal interest
from the date of receipt of such amount.

SO ORDERED.[5]

On motion of both parties, the above decision was partially reconsidered but only
insofar as the Ongs P70 million was declared not as a premium on capital stock but an
advance (loan) by the Ongs to FLADC and that the imposition of interest on it was
correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision on September
11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en
banc confirmed the rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange
Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the
Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the
following MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.

(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares
in First Landlink Asia Development Corporation at a par value of
P100.00 per share;
 (b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in First

Landlink Asia Development Corporation at a par value of P100.00
per share;

2) A four-storey building described in Transfer Certificate of Title No.

15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00
per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer

Certificate of Title No. 15587 in the name of Masagana Telamart, Inc.
valued at P30,000,000.00 for 300,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share.

2) Whatever remains of the assets of the First Landlink Asia Development

Corporation and the management thereof is (sic) hereby ordered
transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay the

amount of P70,000,000.00 that was advanced to it by the Ong Group upon
the finality of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon pursuant to Article
2209 of the New Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned
them by the Ongs upon the finality of this decision. Should the former
incur in delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.

SO ORDERED.[9]

An interesting sidelight of the CA decision was its description of the rescission made
by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA
moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.[10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion
for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA concluded that both
the Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, for practical considerations, that is, their inability to work together, it was
best to separate the two groups by rescinding the Pre-Subscription Agreement, returning
the original investment of the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate
petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued
that the Tius may not properly avail of rescission under Article 1191 of the Civil Code
considering that the Pre-Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the rescission (capital assets and
properties) had been acquired by a third party (FLADC); that they did not commit a
substantial and fundamental breach of their agreement since they did not prevent the
Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the
failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the
required transfer taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADCs name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate court even for so called
practical considerations or even to prevent further squabbles and numerous litigations,
since the same are not valid grounds under the Corporation Code. Moreover, the Ongs
bewailed the failure of the CA to grant interest on their P70 million and P20 million
advances to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the
other hand, contended that the rescission should have been limited to the restitution of
the parties respective investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited the Ongs to
invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius who executed the
deed of assignment over the 151 square-meter property commensurate to 49,800 shares in
FLADC thereby failing to pay the price for the said shares; that they did not turn over to
the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease
contracts due to FLADC to their own MATTERCO account; that the P70 million paid by
the Ongs was an advance and not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the management of the mall and
prevent the Ongs from enjoying the profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant
motions), affirming the assailed decision of the Court of Appeals but with the following
modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at
twelve percent (12%) per annum to be computed from the time of judicial
demand which is from April 23, 1996;
 2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten
percent (10%) per annum to be computed from the date of the FLADC Board
Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property
contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective
obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
assuming the positions of Vice-President and Treasurer of the corporation. On the other
hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs
and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and sound either and
would only lead to further squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of
Execution on the grounds that: (a) the SEC order had become executory as early as
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the case had been pending
for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under
RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that
the Decision dated February 1, 2002 was not yet final and executory; that no good reason
existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the
SEC retained jurisdiction over pending cases involving intra-corporate disputes already
submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the
Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification
(of the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy under the premises; and
(b) that, assuming rescission to be proper, the subject decision of this Court should be
modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy),
movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at
most, casual which did not justify the rescission of the contract. They stress that
providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and
Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription
Agreement since the said obligation (to provide executive offices) pertained to FLADC
itself. Such obligation arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs. Likewise, the alleged
failure of the Ongs to credit shares of stock in favor of the Tius for their property
contributions also pertained to the corporation and not to the Ongs. Just the same, it
could not be done in view of the Tius refusal to pay the necessary transfer taxes which in
turn resulted in the inability to secure SEC approval for the property contributions and
the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into
the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for
the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure to provide
office space for the two corporate officers was no more than an inconsequential
infringement. For rescission to be justified, the law requires that the breach of contract
should be so substantial or fundamental as to defeat the primary objective of the parties
in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty
of fundamental violations in failing to remit funds due to FLADC and diverting the same
to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were
guilty of violating the Pre-Subscription Agreement, neither of them could resort to
rescission under the principle of pari delicto. In addition, since the cash and other
contributions now sought to be returned already belong to FLADC, an innocent third
party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given
their proportionate share of the mall), movants Ong vehemently take exception to the
second item in the dispositive portion of the questioned Decision insofar as it decreed
that whatever remains of the assets of FLADC and the management thereof (after
liquidation) shall be transferred to the Tius. They point out that the mall itself, which
would have been foreclosed by PNB if not for their timely investment of P190 million in
1994 and which is now worth about P1 billion mainly because of their efforts, should be
included in any partition and distribution. They (the Ongs) should not merely be given
interest on their capital investments. The said portion of our Decision, according to them,
amounted to the unjust enrichment of the Tius and ran contrary to our own
pronouncement that the act of the Tius in unilaterally rescinding the agreement was the
height of ingratitude and an attempt to pull a fast one as it would prevent the Ongs from
enjoying the fruits of their P190 million investment in FLADC. It also contravenes this
Courts assurance in the questioned Decision that the Ongs and Tius will have a bountiful
return of their respective investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002,
pointing out that there was no violation of the Pre-Subscription Agreement on the part of
the Ongs; that, after more than seven years since the mall began its operations, rescission
had become not only impractical but would also adversely affect the rights of innocent
parties; and that it would be highly inequitable and unfair to simply return the P100 million
investment of the Ongs and give the remaining assets now amounting to about P1 billion to
the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that
the arguments therein are a mere re-hash of the contentions in the Ongs petition for
review and previous motion for reconsideration of the Court of Appeals decision. The
Tius compare the arguments in said pleadings to prove that the Ongs do not raise new
issues, and, based on well-settled jurisprudence,[12]the Ongs present motion is
therefore pro-forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments
on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the
rest of the movants Ong filed their respective memoranda. On February 28, 2003, the Tius
submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission,[13] this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study of the
facts and the law, illuminated by a mutual exchange of views.[14] After a thorough re-
examination of the case, we find that our Decision of February 1, 2002 overlooked certain
aspects which, if not corrected, will cause extreme and irreparable damage and prejudice
to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same
adequately raises a valid ground[15](i.e., the decision or final order is contrary to law), this
Court has to evaluate the merits of the arguments to prevent an unjust decision from
attaining finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a
motion for reconsideration is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate court. We explained there
that a movant may raise the same arguments, if only to convince this Court that its ruling
was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the
arguments in the previous pleadings) will not apply if said arguments were not squarely
passed upon and answered in the decision sought to be reconsidered. In the case at bar,
no ruling was made on some of the petitioner Ongs arguments. For instance, no clear
ruling was made on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate dissolution or
decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain
the subject motion for reconsideration since some important issues therein, although
mere repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius
invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital
stock became necessary to give each group equal (50-50) shareholdings as agreed upon in
the Pre-Subscription Agreement.The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was
the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were
unissued shares, the parties Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the Corporation Code:

Any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other
contract (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation
its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of
stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between
the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own shares to them. It
was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
embodied in the Pre-Subscription Agreement: a shareholders agreement between the
Tius and the Ongs defining and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription of the parties to the
corporation. They point out that these two component parts form one whole agreement
and that their terms and conditions are intrinsically related and dependent on each other.
Thus, the breach of the shareholders agreement, which was allegedly the consideration
for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find this
argument too strained for comfort. It is obviously intended to remedy and cover up the
Tius lack of legal personality to rescind an agreement in which they were personally not
parties-in-interest. Assuming arguendo that there were two sub-agreements embodied in
the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement
between the Ongs and Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the Ongs. There was
nothing in the Pre-Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the proper
parties to raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say
that. Though FLADC was represented by the Tius in the subscription contract, FLADC
had a separate juridical personality from the Tius. The case before us does not warrant
piercing the veil of corporate fiction since there is no proof that the corporation is being
used as a cloak or cover for fraud or illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its management, breach
by the Ongs is breach by FLADC. This must also fail because such an argument disregards
the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of
the corporation. There is evidence that the Ongs did prevent the rightfully elected
Treasurer, Cely Tiu, from exercising her function as such. The records show that the
President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the bank;[20] and that he held on
to the cash and properties of the corporation.[21] Section 25 of the Corporation Code
prohibits the President from acting concurrently as Treasurer of the corporation. The
rationale behind the provision is to ensure the effective monitoring of each officers
separate functions.
However, although the Tius were adversely affected by the Ongs unwillingness to let
them assume their positions, rescission due to breach of contract is definitely the wrong
remedy for their personal grievances. The Corporation Code, SEC rules and even the
Rules of Court provide for appropriate and adequate intra-corporate remedies,
other than rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the requirements of
the law therefor have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or
imagined offense, to demand rescission of his subscription and call for the distribution of
some part of the corporate assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less than
substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available and
effective remedies under the law.
 All this notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for rescission based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims.[23] This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock,[24] (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings,[25] and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares[26] and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.[27]
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by
the court will remain nothing but a dream because this time, it will be the creditors turn
to engage in squabbles and litigations should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code. [28] The Tius
maintain that rescinding the subscription contract is not synonymous to corporate
liquidation because all rescission will entail would be the simple restoration of the status
quo ante and a return to the two groups of their cash and property contributions. We
wish it were that simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation. The Tius merely
refer in cavalier fashion to the end-result of rescission (which incidentally is 100%
favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on
the corporation, its creditors and the Ongs.
 In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
agreement will not result in an unauthorized liquidation of the corporation because their
case is actually a petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital
stock, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. The Tius claim that their case
for rescission, being a petition to decrease capital stock, does not violate the liquidation
procedures under our laws. All that needs to be done, according to them, is for this Court
to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of
capital stock and (2) the SEC to approve said decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital
stock because such action never complied with the formal requirements for decrease of
capital stock under Section 33 of the Corporation Code. No majority vote of the board of
directors was ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurers affidavit and no proof that said decrease will not
prejudice the creditors rights. On the contrary, all their pleadings contained were alleged
acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate
of decrease of stock. Decreasing a corporations authorized capital stock is an amendment
of the Articles of Incorporation. It is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties thereto. In this case,
the Tius are actually not just asking for a review of the legality and fairness of a corporate
decision. They want this Court to make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not voluntarily agreed upon by its
stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs
directors and stockholders is a violation of the business judgment rule which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such contracts are so unconscionable
and oppressive as to amount to wanton destruction to the rights of the minority, as when
plaintiffs aver that the defendants (members of the board), have concluded a transaction
among themselves as will result in serious injury to the plaintiffs stockholders.[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule or the
free enterprise system prevailing in our social and economic set-up dictates that it is
better for the State and its organs to leave business to the businessmen; especially so,
when courts are ill-equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the corporate business has been
vested in the board and not with courts.[30]

Apparently, the Tius do not realize the illegal consequences of seeking rescission and
control of the corporation to the exclusion of the Ongs. Such an act infringes on the law
on reduction of capital stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its authorized capital stock
is not only against the law but is also prejudicial to corporate creditors who enjoy
absolute priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to
understand. If rescission is denied, will injustice be inflicted on any of the parties? The
answer is no because the financial interests of both the Tius and the Ongs will remain
intact and safe within FLADC. On the other hand, if rescission is granted, will any of the
parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the
streets with nothing but the money they had in 1994 while the Tius will not only enjoy a
windfall estimated to be anywhere from P450 million to P900 million[31] but will also take
over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our
Decision dated February 1, 2002, stated that both groups were in pari delicto, meaning,
that both the Tius and the Ongs committed breaches of the Pre-Subscription
Agreement. This may be true to a certain extent but, judging from the comparative
gravity of the acts separately committed by each group, we find that the Ongs acts were
relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to
the corporation and diverting corporate income to their own MATTERCO account. The
Ongs were right in not issuing to the Tius the shares corresponding to the four-story
building and the 1,902.30 square-meter lot because no title for it could be issued in
FLADCs name, owing to the Tius refusal to pay the transfer taxes. And as far as the 151
square-meter lot was concerned, why should FLADC issue additional shares to the Tius
for property already owned by the corporation and which, in the final analysis, was
already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to
pull a fast one on the Ongs because that was where the problem precisely started. It is
clear that, when the finances of FLADC improved considerably after the equity infusion of
the Ongs, the Tius started planning to take over the corporation again and exclude the
Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really
been at all unintentional because, by failing to pay that relatively small amount which
they could easily afford, the Tius should have expected that they were not going to be
given the corresponding shares. It was, from every angle, the perfect excuse for
blackballing the Ongs. In other words, the Tius created a problem then used that same
problem as their pretext for showing their partners the door. In the process, they stood to
be rewarded with a bonanza of anywhere between P450 million to P900 million in assets
(from an investment of only P45 million which was nearly foreclosed by PNB), to the
extreme and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely infusion of P190
million by the Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in
said mall. If only for this and the fact that this Resolution can truly pave the way for both
groups to enjoy the fruits of their investments assuming good faith and honest intentions
we cannot allow the rescission of the subject subscription agreement. The Ongs
shortcomings were far from serious and certainly less than substantial; they were in fact
remediable and correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners
Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie
Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of
petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the
Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is
hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject
Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John
Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en
banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.

VALLEY GOLF & COUNTRY G.R. No. 158805

CLUB, INC.,

Petitioner, Present:

QUISUMBING, J.,

Chairperson,
CARPIO MORALES,

- versus - TINGA,

VELASCO, JR., and

BRION, JJ.

ROSA O. VDA. DE CARAM,

Respondent. Promulgated:

April 16, 2009

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

DECISION

TINGA, J.:

May a non-stock corporation seize and dispose of the membership share of a fully-paid
member on account of its unpaid debts to the corporation when it is authorized to do so
under the corporate by-laws but not by the Articles of Incorporation? Such is the central
issue raised in this petition, which arose after petitioner Valley Golf & Country Club
(Valley Golf) sold the membership share of a member who had been delinquent in the
payment of his monthly dues.

I.
The facts that preceded this petition are simple. Valley Golf & Country Club (Valley Golf)
is a duly constituted non-stock, non-profit corporation which operates a golf course. The
members and their guests are entitled to play golf on the said course and otherwise avail
of the facilities and privileges provided by Valley Golf.[1] The shareholders are likewise
assessed monthly membership dues.

In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram),[2] the husband of the present
respondent, subscribed to purchased and paid for in full one share (Golf Share) in the
capital stock of Valley Golf. He was issued Stock Certificate No. 389 dated 26 January
1961 for the Golf Share.[3] The Stock Certificate likewise indicates a par value of P9,000.00.

Valley Golf would subsequently allege that beginning 25 January 1980, Caram stopped
paying his monthly dues, which were continually assessed until 31 June 1987. Valley Golf
claims to have sent five (5) letters to Caram concerning his delinquent account within
the period from 27 January 1986 until 3 May 1987, all forwarded to

P.O. Box No. 1566, Makati Commercial Center Post Office, the mailing address which
Caram allegedly furnished Valley Golf.[4] The first letter informed Caram that his account
as of 31 December 1985 was delinquent and that his club privileges were suspended
pursuant to Section 3, Article VII of the by-laws of Valley Golf.[5] Despite such notice of
delinquency, the second letter, dated 26 August 1986, stated that should Carams account
remain unpaid for 45 days, his name would be included in the delinquent list to be posted
on the clubs bulletin board.[6] The third letter, dated 25 January 1987, again informed
Caram of his delinquent account and the suspension of his club privileges.[7] The fourth
letter, dated 7 March 1987, informed Caram that should he fail to settle his delinquencies,
then totaling P7,525.45, within ten (10) days from receipt thereof Valley Golf would
exercise its right to sell the Golf Share to satisfy the outstanding amount, again pursuant
to the provisions of the by-laws.[8] The final letter, dated 3 May 1987, issued a final
deadline until 31 May 1987 for Caram to settle his account, or otherwise face the sale of
the Golf Share to satisfy the claims of Valley Golf.[9]

The Golf Share was sold at public auction on 11 June 1987 for P25,000.00 after the
Board of Directors had authorized the sale in a meeting on 11 April 1987, and the Notice of
Auction Sale was published in the 6 June 1987 edition of the Philippine Daily Inquirer.[10]

As it turned out, Caram had died on 6 October 1986. Respondent initiated intestate
proceedings before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle her
husbands estate.[11] Unaware of the pending controversy over the Golf Share, the Caram
family and the RTC included the same as part of Carams estate. The RTC approved a
project of partition of Carams estate on 29 August 1989. The Golf Share was adjudicated
to respondent, who paid the corresponding estate tax due, including that on the Golf
Share.

It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the sale
of the Golf Share following their inquiry with Valley Golf about the share. After a series of
correspondence, the Caram heirs were subsequently informed, in a letter dated 15
October 1990, that they were entitled to the refund of P11,066.52 out of the proceeds of
the sale of the Golf Share, which amount had been in the custody of Valley Golf since 11
June 1987.[12]

Respondent filed an action for reconveyance of the share with damages before the
Securities and Exchange Commission (SEC) against Valley Golf.[13] On 15 November 1996,
SEC Hearing Officer Elpidio S. Salgado rendered a decision in favor of respondent,
ordering Valley Golf to convey ownership of the Golf Share or in the alternative to issue
one fully paid share of stock of Valley Golf the same class as the Golf Share to respondent.
Damages totaling P90,000.00 were also awarded to respondent.[14]

The SEC hearing officer noted that under Section 67, paragraph 2 of the Corporation
Code, a share stock could only be deemed delinquent and sold in an extrajudicial sale at
public auction only upon the failure of the stockholder to pay the unpaid subscription or
balance for the share. The section could not have applied in Carams case since he had
fully paid for the Golf Share and he had been assessed not for the share itself but for his
delinquent club dues. Proceeding from the foregoing premises, the SEC hearing officer
concluded that the auction sale had no basis in law and was thus a nullity.

The SEC hearing officer did entertain Valley Golfs argument that the sale of the Golf
Share was authorized under the by-laws. However, it was ruled that pursuant to Section 6
of the Corporation Code, a provision creating a lien upon shares of stock for unpaid
debts, liabilities, or assessments of stockholders to the corporation, should be embodied
in the Articles of Incorporation, and not merely in the by-laws, because Section 6 (par.1)
prescribes that the shares of stock of a corporation may have such rights, privileges and
restrictions as may be stated in the articles of incorporation.[15] It was observed that the
Articles of Incorporation of Valley Golf did not impose any lien, liability or restriction on
the Golf Share or, for that matter, even any conditionality that the Golf Share would be
subject to assessment of monthly dues or a lien on the share for non-payment of such
dues.[16] In the same vein, it was opined that since Section 98 of the Corporation Code
provides that restrictions on transfer of shares should appear in the articles of
incorporation, by-laws and the certificate of stock to be valid and binding on any
purchaser in good faith, there was more reason to apply the said rule to club
delinquencies to constitute a lien on golf shares.[17]

The SEC hearing officer further held that the delinquency in monthly club dues was
merely an ordinary debt enforceable by judicial action in a civil case. The decision
generally affirmed respondents assertion that Caram was not properly notified of the
delinquencies, citing Carams letter dated 7 July 1978 to Valley Golf about the change in
his mailing address. He also noted that Valley Golf had sent most of the letters after
Carams death. In all, the decision concluded that the sale of the Golf Share was effectively
a deprivation of property without due process of law.

On appeal to the SEC en banc,[18] said body promulgated a decision[19] on 9 May 2000,
affirming the hearing officers decision in toto. Again, the SEC found that Section 67 of the
Corporation Code could not justify the sale of the Golf Share since it applies only to
unpaid subscriptions and not to delinquent membership dues. The SEC also cited a
general rule, formulated in American jurisprudence, that a corporation has no right to
dispose of shares of stock for delinquent assessments, dues, service fees and other
unliquidated charges unless there is an express grant to do so, either by the statute itself
or by the charter of a corporation.[20] Said rule, taken in conjunction with Section 6 of the
Corporation Code, militated against the validity of the sale of the Golf Share, the SEC
stressed. In view of these premises, which according to the SEC entailed the nullity of the
sale, the body found it unnecessary to rule on whether there was valid notice of the sale at
public auction.

Valley Golf elevated the SECs decision to the Court of Appeals by way of a petition for
review.[21] On 4 April 2003, the appellate court rendered a decision[22] affirming the
decisions of the SEC and the hearing officer, with modification consisting of the deletion
of the award of attorneys fees. This time, Valley Golfs central argument was that its by-
laws, rather than Section 67 of the Corporation Code, authorized the auction sale of the
Golf Share. Nonetheless, the Court of Appeals found that the by-law provisions cited by
Valley Golf are of doubtful validity, as they purportedly conflict with Section 6 of the
Code, which mandates that rights privileges or restrictions attached to a share of stock
should be stated in the articles of incorporation.[23] It noted that what or who had become
delinquent was was Mr. Caram himself and not his golf share, and such being the case,
the unpaid account should have been filed as a money claim in the proceedings for the
settlement of his estate, instead of the petitioner selling his golf share to satisfy the
account.[24]

The Court of Appeals also adopted the findings of the hearing officer that the notices had
not been properly served on Caram or his heirs, thus effectively depriving respondent of
property without due process of law. While it upheld the award of damages, the appellate
court struck down the award of attorneys fees since there was no discussion on the basis
of such award in the body of the decisions of both the hearing officer and the SEC.[25]
There is one other fact of note, mentioned in passing by the SEC hearing officer[26] but
ignored by the SEC en banc and the Court of Appeals. Valley Golfs third and fourth
demand letters dated 25 January 1987 and 7 March 1987, respectively, were both addressed
to Est. of Fermin Z. Caram, Jr. The abbreviation Est. can only be taken to refer to
Estate. Unlike the first two demand letters, the third and fourth letters were sent after
Caram had died on 6 October 1986. However, the fifth and final demand letter, dated 3
May 1987 or twenty-eight (28) days before the sale, was again addressed to Fermin Caram
himself and not to his estate, as if he were still alive. The foregoing particular facts are
especially significant to our disposition of this case.

II.

In its petition before this Court, Valley Golf concedes that Section 67 of the
Corporation Code, which authorizes the auction sale of shares with delinquent
subscriptions, is not applicable in this case. Nonetheless, it argues that the by-laws of
Valley Golf authorizes the sale of delinquent shares and that the by-laws constitute a valid
law or contractual agreement between the corporation and its stockholders or their
respective successors. Caram, by becoming a member of Valley Golf, bound himself to
observe its by-laws which constitutes the rules and regulations or private laws enacted by
the corporation to regulate, govern and control its own actions, affairs and concerns and
its stockholders or members and directors and officers with relation thereto and among
themselves in their relation to it.[27] It also points out that the by-laws itself had duly
passed the SECs scrutiny and approval.

Valley Golf further argues that it was error on the part of the Court of Appeals to rely, as it
did, upon Section 6 of the Corporation Code to nullify the subject provisions of the By-
Laws.[28] Section 6 referrs to restrictions on the shares of stock which should be stated in
the articles of incorporation, as differentiated from liens which under the by-laws would
serve as basis for the auction sale of the share. Since Section 6 refers to restrictions and
not to liens, Valley Golf submits that liens are excluded from the ambit of the provision. It
further proffers that assuming that liens and restrictions are synonymous, Section 6 itself
utilizes the permissive word may, thus evincing the non-mandatory character of the
requirement that restrictions or liens be stated in the articles of incorporation.

Valley Golf also argues that the Court of Appeals erred in relying on the factual findings
of the hearing officer, which are allegedly replete with errors and contradictions. Finally,
it assails the award of moral and exemplary damages.

III.

As found by the SEC and the Court of Appeals, the Articles of Incorporation of Valley Golf
does not contain any provision authorizing the corporation to create any lien on a
members Golf Share as a consequence of the members unpaid assessments or dues to
Valley Golf. Before this Court, Valley Golf asserts that such a provision is contained in its
by-laws. We required the parties to submit a certified copy of the by-laws of Valley Golf in
effect as of 11 June 1987.[29] In compliance, Valley Golf submitted a copy of its by-laws,
originally adopted on 6 June 1958[30] and amended on 26 November 1986.[31] The
amendments bear no relevance to the issue of delinquent membership dues. The relevant
provisions, found in Article VIII entitled Club Accounts, are reproduced below:

Section 1. Lien.The Club has the first lien on the share of the stockholder
who has, in his/her/its name, or in the name of an assignee, outstanding
accounts and liabilities in favor of the Club to secure the payment thereof.
 xxx

Section 3. The account of any member shall be presented to such member

every month. If any statement of accounts remains unpaid for a period
forty-five (45) days after cut-off date, said member maybe (sic) posted as
deliqnuent (sic). No delinquent member shall be entitled to enjoy the
privileges of such membership for the duration of the deliquency (sic). After
the member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the club; after which the
member loses his/her/its rights and privileges permanently. No member
can be indebted to the Club at any time any amount in excess of the credit
limit set by the Board of Directors from time to time. The unpaid account
referred to here includes non-payment of dues, charges and other
assessments and non-payment for subscriptions.[32]

To bolster its cause, Valley Golf proffers the proposition that by virtue of the by-law
provisions a lien is created on the shares of its members to ensure payment of dues,
charges and other assessments on the members. Both the SEC and the Court of Appeals
debunked the tenability or applicability of the proposition through two common thrusts.

Firstly, they correctly noted that the procedure under Section 67 of the Corporation Code
for the stock corporations recourse on unpaid subscriptions is inapt to a non-stock
corporation vis--vis a members outstanding dues. The basic factual backdrops in the two
situations are disperate. In the latter, the member has fully paid for his membership
share, while in the former, the stockholder has not yet fully paid for the share or shares of
stock he subscribed to, thereby authorizing the stock corporation to call on the unpaid
subscription, declare the shares delinquent and subject the delinquent shares to a sale at
public auction.[33]
Secondly, the two bodies below concluded that following Section 6 of the Corporation
Code, which provides:

The shares of stock of stock corporation may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of
incorporation x x x [34]

the lien on the Golf Share in favor of Valley Golf is not valid, as the power to constitute
such a lien should be provided in the articles of incorporation, and not merely in the by-
laws.

However, there is a specific provision under the Title XI, on Non-Stock Corporations of
the Corporation Code dealing with termination of membership. Section 91 of the
Corporation Code provides:

SEC. 91. Termination of membership.Membership shall be terminated in the

manner and for the causes provided in the articles of
incorporation or the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the corporation or in its
property, unless otherwise provided in the articles of incorporation or the
by-laws. (Emphasis supplied)

Clearly, the right of a non-stock corporation such as Valley Golf to expel a member
through the forfeiture of the Golf Share may be established in the by-laws alone, as is the
situation in this case. Thus, both the SEC and the appellate court are wrong in holding
that the establishment of a lien and the loss of the Golf Share consequent to the
enforcement of the lien should have been provided for in the articles of incorporation.

IV.

Given that the cause for termination of membership in a non-stock corporation may be
established through the by-laws alone and need not be set forth in the articles of
incorporation, is there any cause to invalidate the lien and the subsequent sale of the Golf
Share by Valley Golf?

Former SEC Chairperson, Rosario Lopez, in her commentaries on the Corporation

Code, explains the import of Section 91 in a manner relevant to this case:

The prevailing rule is that the provisions of the articles of incorporation or

by-laws of termination of membership must be strictly complied with and
applied to the letter. Thus, an association whose member fails to pay his
membership due and annual due as required in the by-laws, and which
provides for the termination or suspension of erring members as well as
prohibits the latter from intervening in any manner in the operational
activities of the association, must be observed because by-laws are self-
imposed private laws binding on all members, directors and officers of the
corporation.[35]
Examining closely the relevant by-law provisions of Valley Golf,[36] it appears that
termination of membership may occur when the following successive conditions are
met: (1) presentation of the account of the member; (2) failure of the member to settle the
account within forty-five days after the cut-off date; (3) posting of the member as
delinquent; and (4) issuance of an order by the board of directors that the share of the
delinquent member be sold to satisfy the claims of Valley Golf. These conditions found in
by-laws duly approved by the SEC warrant due respect and we are disinclined to rule
against the validity of the by-law provisions.

At the same time, two points warrant special attention.

A.

Valley Golf has sought to accomplish the termination of Carams membership through the
sale of the Golf Share, justifying the sale through the constitution of a lien on the Golf
Share under Section 1, Article VIII of its by-laws. Generally in theory, a non-stock
corporation has the power to effect the termination of a member without having to
constitute a lien on the membership share or to undertake the elaborate process of selling
the same at public auction. The articles of incorporation or the by-laws can very well
simply provide that the failure of a member to pay the dues on time is cause for the board
of directors to terminate membership. Yet Valley Golf was organized in such a way that
membership is adjunct to ownership of a share in the club; hence the necessity to dispose
of the share to terminate membership.

Share ownership introduces another dimension to the casethe reality that termination of
membership may also lead to the infringement of property rights. Even though Valley
Golf is a non-stock corporation, as evinced by the fact that it is not authorized to
distribute to the holder of its shares dividends or allotments of the surplus profits on the
basis of shares held,[37] the Golf Share has an assigned value reflected on the certificate of
membership itself.[38] Termination of membership in Valley Golf does not merely lead to
the withdrawal of the rights and privileges of the member to club properties and facilities
but also to the loss of the Golf Share itself for which the member had fully paid.

The claim of Valley Golf is limited to the amount of unpaid dues plus incremental
costs. On the other hand, Carams loss may encompass not only the amount he had paid
for the share but also the price it would have fetched in the market at the time his
membership was terminated.

There is an easy way to remedy what is obviously an unfair situation. Taking the same
example, Valley Golf seizes the share, sells it to itself or a third person for P100.000.00,
then refunds P99,000.00 back to the delinquent member. On its face, such a mechanism
obviates the inequity of the first example, and assures that the loss sustained by the
delinquent member is commensurate to the actual debt owed to Valley Golf. After all,
applying civil law concepts, the pecuniary injury sustained by Valley Golf attributable to
the delinquent member is only to the extent of the unpaid debt, and it would be difficult
to foresee what right under law Valley Golf would have to the remainder of the sales
proceeds.

A refund mechanism may disquiet concerns of undue loss of property rights

corresponding to termination of membership. Yet noticeably, the by-laws of Valley Golf
does not require the Club to refund to the discharged member the remainder of the
proceeds of the sale after the outstanding obligation is extinguished. After petitioner had
filed her complaint though, Valley Golf did inform her that the heirs of Caram are entitled
to such refund.
 B.

Let us now turn to the other significant concern.

The by-laws does not provide for a mode of notice to the member before the board of
directors puts up the Golf Share for sale, yet the sale marks the termination of
membership. Whatever semblance of a notice that is afforded is bare at best, ambiguous
at most. The member is entitled to receive a statement of account every month; however,
the mode by which the member is to receive such notice is not elaborated upon. If the
member fails to pay within 45 days from the due date, Valley Golf is immediately entitled
to have the member posted as delinquent.While the assignation of delinquent status is
evident enough, it is not as clear what the word posted entails. Connotatively, the word
could imply the physical posting of the notice of delinquency within the club premises,
such as a bulletin board, which we recognize is often the case. Still, the actual posting
modality is uncertain from the language of the by-laws.

The moment the member is posted as delinquent, Valley Golf is immediately enabled to
seize the share and sell the same, thereby terminating membership in the club. The by-
laws does not require any notice to the member from the time delinquency is posted to
the day the sale of the share is actually held. The setup is to the extreme detriment to the
member, who upon being notified that the lien on his share is due for execution would be
duly motivated to settle his accounts to foreclose such possibility.

Does the Corporation Code permit the termination of membership without due notice to
the member? The Code itself is silent on that matter, and the argument can be made that
if no notice is provided for in the articles of incorporation or in the by-laws, then
termination may be effected without any notice at all. Support for such an argument can
be drawn from our ruling in Long v. Basa,[39] which pertains to a religious corporation that
is also a non-stock corporation.[40] Therein, the Court upheld the expulsion of church
members despite the absence of any provision on prior notice in the by-laws, stating that
the members had waived such notice by adhering to those by-laws[,] became members of
the church voluntarily[,] entered into its covenant and subscribed to its rules [and by]
doing so, they are bound by their consent.[41]

However, a distinction should be made between membership in a religious corporation,

which ordinarily does not involve the purchase of ownership shares, and membership in a
non-stock corporation such as Valley Golf, where the purchase of an ownership share is a
condition sine qua non. Membership in Valley Golf entails the acquisition of a property
right. In turn, the loss of such property right could also involve the application of aspects
of civil law, in addition to the provisions of the Corporation Code. To put it simply, when
the loss of membership in a non-stock corporation also entails the loss of property rights,
the manner of deprivation of such property right should also be in accordance with the
provisions of the Civil Code.

It has been held that a by-law providing that if a member fails to pay dues for a year, he
shall be deemed to have relinquished his membership and may be excluded from the
rooms of the association and his certificate of membership shall be sold at auction, and
any surplus of the proceeds be paid over him, does not ipso facto terminate the
membership of one whose dues are a year in arrears; the remedy given for non-payment
of dues is not exclusive because the corporation, so long as he remains a member, may
sue on his agreement and collect them.[42]

V.

With these foregoing concerns in mind, were the actions of Valley Golf concerning the
Golf Share and membership of Caram warranted? We believe not.

It may be conceded that the actions of Valley Golf were, technically speaking, in accord
with the provisions of its by-laws on termination of membership, vaguely defined as these
are. Yet especially since the termination of membership in Valley Golf is inextricably
linked to the deprivation of property rights over the Golf Share, the emergence of such
adverse consequences make legal and equitable standards come to fore.

The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987 which we
can cite with approval. Lopez cites:

[I]n order that the action of a corporation in expelling a member for cause
may be valid, it is essential, in the absence of a waiver, that there shall be a
hearing or trial of the charge against him, with reasonable notice to him
and a fair opportunity to be heard in his defense. (Fletcher Cyc. Corp.,
 supra) If the method of trial is not regulated by the by-laws of the
association, it should at least permit substantial justice. The hearing
must be conducted fairly and openly and the body of persons before whom
it is heard or who are to decide the case must be unprejudiced. (SEC
opinion dated September 29, 1987, Bacalaran-Sucat Drivers Association)

It is unmistakably wise public policy to require that the termination of membership in a

non-stock corporation be done in accordance with substantial justice. No matter how one
may precisely define such term, it is evident in this case that the termination of Carams
membership betrayed the dictates of substantial justice.

Valley Golf alleges in its present petition that it was notified of the death of Caram
only in March of 1990,[43] a claim which is reiterated in its Reply to respondents
Comment.[44]Yet this claim is belied by the very demand letters sent by Valley Golf to
Carams mailing address. The letters dated 25 January 1987 and 7 March 1987, both of
which were sent within a few months after Carams death are both addressed to Est. of
Fermin Z. Caram, Jr.; and the abbreviation [e]st. can only be taken to refer to estate. This
is to be distinguished from the two earlier letters, both sent prior to Carams death on 6
October 1986, which were addressed to Caram himself. Inexplicably, the final letter dated
3 May 1987 was again addressed to Caram himself, although the fact that the two previous
letters were directed at the estate of Caram stands as incontrovertible proof that Valley
Golf had known of Carams death even prior to the auction sale.
Interestingly, Valley Golf did not claim before the Court of Appeals that they had learned
of Carams death only after the auction sale. It also appears that Valley Golf had conceded
before the SEC that some of the notices it had sent were addressed to the estate of Caram,
and not the decedent himself.[45]

What do these facts reveal? Valley Golf acted in clear bad faith when it sent the final
notice to Caram under the pretense they believed him to be still alive, when in fact they
had very well known that he had already died. That it was in the final notice that Valley
Golf had perpetrated the duplicity is especially blameworthy, since it was that notice that
carried the final threat that his Golf Share would be sold at public auction should he fail
to settle his account on or before 31 May 1987.

Valley Golf could have very well addressed that notice to the estate of Caram, as it
had done with the third and fourth notices. That it did not do so signifies that Valley Golf
was bent on selling the Golf Share, impervious to potential complications that would
impede its intentions, such as the need to pursue the claim before the estate proceedings
of Caram. By pretending to assume that Caram was then still alive, Valley Golf would
have been able to capitalize on his previous unresponsiveness to their notices and
proceed in feigned good faith with the sale. Whatever the reason Caram was unable to
respond to the earlier notices, the fact remains that at the time of the final
notice, Valley Golf knew that Caram, having died and gone, would not be able to
settle the obligation himself, yet they persisted in sending him notice to provide a
color of regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the
Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the Court
of Appeals.
Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into
operation Articles Articles 19, 20 and 21 under the Chapter on Human Relations of the
Civil Code.[46] These provisions enunciate a general obligation under law for every person
to act fairly and in good faith towards one another. Non-stock corporations and its
officers are not exempt from that obligation.

VI.

Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to provide
any formal notice and hearing procedure before a members share may be seized and sold.
The Court would have been satisfied had the by-laws or the articles of incorporation
established a procedure which assures that the member would in reality be actually
notified of the pending accounts and provide the opportunity for such member to settle
such accounts before the membership share could be seized then sold to answer for the
debt. As we have emphasized, membership in Valley Golf and many other like-situated
non-stock corporations actually involves the purchase of a membership share, which is a
substantially expensive property. As a result, termination of membership does not only
lead to loss of bragging rights, but the actual deprivation of property.

The Court has no intention to interfere with how non-stock corporations should run their
daily affairs. The Court also respects the fact that membership is non-stock corporations
is a voluntary arrangement, and that the member who signs up is bound to adhere to
what the articles of incorporation or the by-laws provide, even if provisions are
detrimental to the interest of the member. At the same time, in the absence of a
satisfactory procedure under the articles of incorporation or the by-laws that affords a
member the opportunity to defend against the deprivation of significant property rights
in accordance with substantial justice, the terms of the by-laws or articles of
incorporation will not suffice. There will be need in such case to refer to substantive law.
Such a flaw attends the articles of incorporation and by-laws of Valley Golf. The Court
deems it judicious to refer to the protections afforded by the Civil Code, with respect to
the preservation, maintenance, and defense from loss of property rights.

The arrangement provided for in the afore-quoted by-laws of Valley Golf whereby a lien is
constituted on the membership share to answer for subsequent obligations to the
corporation finds applicable parallels under the Civil Code. Membership shares are
considered as movable or personal property,[47] and they can be constituted as security to
secure a principal obligation, such as the dues and fees. There are at least two contractual
modes under the Civil Code by which personal property can be used to secure a principal
obligation. The first is through a contract of pledge,[48] while the second is through a
chattel mortgage.[49] A pledge would require the pledgor to surrender possession of the
thing pledged, i.e., the membership share, to the pledge in order that the contract of
pledge may be constituted.[50]

Is delivery of the share cannot be effected, the suitable security transaction is the chattel
mortgage. Under Article 2124 of the Civil Code, movables may be the object of a chattel
mortgage. The Chattel mortgage is governed by Act No. 1508, otherwise known The
Chattel Mortgage Law,[51] and the Civil Code.
 In this case, Caram had not signed any document that manifests his agreement to
constitute his Golf Share as security in favor of Valley Golf to answer for his obligations to
the club. There is no document we can assess that it is substantially compliant with the
form of chattel mortgages under Section 5 of Act No. 1508. The by-laws could not suffice
for that purpose since it is not designed as a bilateral contract between Caram and Valley
Golf, or a vehicle by which Caram expressed his consent to constitute his Golf Share as
security for his account with Valley Golf.

VII.

We finally turn to the matter of damages. The award of damages sustained by the Court
of Appeals was for moral damages in the sum of P50,000.00 and exemplary damages in
the sum of P10,000.00. Both awards should be sustained. In pretending to give actual
notice to Caram despite full knowledge that he was in fact dead, Valley Golf exhibited
utter bad faith.

The award of moral damages was based on a finding by the hearing officer that
Valley Golf had considerably besmirched the reputation and good credit standing of the
plaintiff and her family, such justification having foundation under Article 2217 of the
Civil Code. No cause has been submitted to detract from such award. In addition,
exemplary damages were awarded to [Valley Golf] defendant from repeating similar acts
in the future and to protect the interest of its stockholders and by way of example or
correction for the public good. Such conclusion is in accordance with Article 2229 of the
Civil Code, which establishes liability for exemplary damages.

WHEREFORE, the petition is DENIED. Costs against petitioners.

SO ORDERED.

[Read it!]

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN
P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN
ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR
OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3)
Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission
(SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a
Consolidated Comment on behalf of the State,6declaring expressly that it agrees with the
Court's definition of the term "capital" in Section 11, Article XII of the Constitution.
During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent
with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching implications to the
national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second-class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the Philippine national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation,
and to future generations of Filipinos, it is the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution
undoubtedly demand an immediate adjudication of this issue. Simply put, the far-
reaching implications of this issue justify the treatment of the petition as one for
mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and
expedient to resolve the case although the petition for declaratory relief could be
outrightly dismissed for being procedurally defective. There, appellant admittedly had
already committed a breach of the Public Service Act in relation to the Anti-Dummy Law
since it had been employing non- American aliens long before the decision in a prior
similar case. However, the main issue in Luzon Stevedoring was of transcendental
importance, involving the exercise or enjoyment of rights, franchises, privileges,
properties and businesses which only Filipinos and qualified corporations could exercise
or enjoy under the Constitution and the statutes. Moreover, the same issue could be
raised by appellant in an appropriate action. Thus, in Luzon Stevedoring the Court
deemed it necessary to finally dispose of the case for the guidance of all concerned,
despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect
of the petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to
the Constitution, we opted to resolve this case for the guidance of the public and all
concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has
long been settled and defined to refer to the total outstanding shares of stock, whether
voting or non-voting. In fact, movants claim that the SEC, which is the administrative
agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in
the Constitution and various statutes, has consistently adopted this particular definition
in its numerous opinions. Movants point out that with the 28 June 2011 Decision, the
Court in effect introduced a "new" definition or "midstream redefinition"9 of the term
"capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973 and 1987
Constitutions. There has never been a judicial precedent interpreting the term "capital" in
the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly
baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision
modified, reversed, or set aside the purported long-standing definition of the term
"capital," which supposedly refers to the total outstanding shares of stock, whether voting
or non-voting. To repeat, until the present case there has never been a Court ruling
categorically defining the term "capital" found in the various economic provisions of the
1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition
of the term "capital" as referring to both voting and non-voting shares (combined total of
common and preferred shares) are, in the first place, conflicting and inconsistent. There
is no basis whatsoever to the claim that the SEC and the DOJ have consistently and
uniformly adopted a definition of the term "capital" contrary to the definition that this
Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in
Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term
"capital" includes "both preferred and common stocks." The issue was raised in relation to
a stock-swap transaction between a Filipino and a Japanese corporation, both
stockholders of a domestic corporation that owned lands in the Philippines. Then
Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the
corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although
when the non-voting stock is added, Filipinos would own 60% of the combined voting
and non-voting stock. This ownership structure is remarkably similar to the current
ownership structure of PLDT. Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
(common and preferred) while the Japanese investors control sixty percent (60%) of the
common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses
the word "capital," which is construed "to include both preferred and common
shares" and "that where the law does not distinguish, the courts shall not
distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap

transaction in question may not be constitutionally upheld. While it may be
ordinary corporate practice to classify corporate shares into common voting shares and
preferred non-voting shares, any arrangement which attempts to defeat the constitutional
purpose should be eschewed. Thus, the resultant equity arrangement which would
place ownership of 60%11 of the common (voting) shares in the Japanese group,
while retaining 60% of the total percentage of common and preferred shares in
Filipino hands would amount to circumvention of the principle of control by
Philippine stockholders that is implicit in the 60% Philippine nationality
requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in
Section 9, Article XIV of the 1973 Constitution includes "both preferred and common
stocks" treated as the same class of shares regardless of differences in voting rights and
privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution is not complied with unless the corporation
"satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo
Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco
applied the Voting Control Test, that is, using only the voting stock to determine
whether a corporation is a Philippine national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine
national because: (1) sixty percent (60%) of its outstanding capital stock entitled to
vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of
the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control
Test, MLRC’s investment in 60% of BFDC’s outstanding capital stock entitled to
vote shall be deemed as of Philippine nationality, thereby qualifying BFDC to own
private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
nationals, considering that: (1) sixty percent (60%) of their respective outstanding
capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in
the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their
respective board of directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the
60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution
for certain economic activities. At the same time, these opinions highlight the conflicting,
contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition
of the term "capital" found in the economic provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly
provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to
any of its individual Commissioner or staff the power to adopt any rule or regulation.
Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and
not any of its legal officers, that is empowered to issue opinions and approve rules
and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of
the Commission except its review or appellate authority and its power to adopt, alter
and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner, or staff
member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential
Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have,
among others, the following powers and functions:

xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing
opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6
and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and
effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from
delegating to any individual Commissioner or staff the power to adopt rules or
regulations. In short, any opinion of individual Commissioners or SEC legal officers
does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its
individual commissioners or legal staff, is empowered to issue opinions which have the
same binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc

to a commissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend

rules and regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power,
can issue an opinion but that opinion does not constitute a rule or
regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and
regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular
situation and will not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue
rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule in
determining compliance with the 60-40 ownership requirement in favor of Filipino
citizens mandated by the Constitution for certain economic activities. This prevailing SEC
ruling, which the SEC correctly adopted to thwart any circumvention of the required
Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling
in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal
fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the
command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities

must be determined by ascertaining if 60% of the investing corporation’s outstanding
capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by another
investing corporation, the same process must be observed. One must not stop until the
citizenships of the individual or natural stockholders of layer after layer of investing
corporations have been established, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in another corporation
which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.

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

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain
economic activities applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:

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

Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various
opinions which respondents relied upon, is merely preliminary and an opinion only of
such officers. To repeat, any such opinion does not constitute an SEC rule or regulation.
In fact, many of these opinions contain a disclaimer which expressly states: "x x x the
foregoing opinion is based solely on facts disclosed in your query and relevant only to
the particular issue raised therein and shall not be used in the nature of a standing
rule binding upon the Commission in other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute
binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are
neither conclusive nor controlling and thus, do not bind the Court. It is hornbook
doctrine that any interpretation of the law that administrative or quasi-judicial agencies
make is only preliminary, never conclusive on the Court. The power to make a final
interpretation of the law, in this case the term "capital" in Section 11, Article XII of the
1987 Constitution, lies with this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission18 in arguing that the
Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications v.
Court of Appeals20 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission,21 the Court did not define the term "capital" as found in
Section 11, Article XII of the 1987 Constitution. In fact, these two cases never
mentioned, discussed or cited Section 11, Article XII of the Constitution or any of
its economic provisions, and thus cannot serve as precedent in the interpretation
of Section 11, Article XII of the Constitution. These two cases dealt solely with the
determination of the correct regulatory fees under Section 40(e) and (f) of the Public
Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the regulation or fixing of their rates,
twenty centavos for each one hundred pesos or fraction thereof, of the capital stock
subscribed or paid, or if no shares have been issued, of the capital invested, or of the
property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos
or fraction thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or
paid," "capital stock" and "capital" does not pertain to, and cannot control, the definition
of the term "capital" as used in Section 11, Article XII of the Constitution, or any of the
economic provisions of the Constitution where the term "capital" is found. The definition
of the term "capital" found in the Constitution must not be taken out of context. A careful
reading of these two cases reveals that the terms "capital stock subscribed or paid,"
"capital stock" and "capital" were defined solely to determine the basis for computing the
supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land,
embodies the ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a
just and humane society, and establish a Government that shall embody our ideals and
aspirations, promote the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence and democracy
under the rule of law and a regime of truth, justice, freedom, love, equality, and peace, do
ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as
State policy the development of a national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation and
operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens
of the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress may prescribe,
certain areas of investments." Thus, in numerous laws Congress has reserved certain areas
of investments to Filipino citizens or to corporations at least sixty percent of the "capital"
of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of
Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A.
No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4)
Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate
share in its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires that any
form of authorization for the operation of public utilities shall be granted only to "citizens
of the Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens." "The
provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively
to (1) Filipino citizens, or (2) corporations or associations at least 60 percent of whose
"capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino
citizens can validly own and operate a public utility. In the case of corporations or
associations, at least 60 percent of their "capital" must be owned by Filipino citizens. In
other words, under Section 11, Article XII of the 1987 Constitution, to own and
operate a public utility a corporation’s capital must at least be 60 percent owned
by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as
amended, which defined a "Philippine national" as follows:

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

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

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as
provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments
Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this
Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty per cent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a

written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."27 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public
utility. This means, of course, that only a "Philippine national" can own and operate a
public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus

Investments Code of 1987 was a reiteration of the meaning of such term as provided in
Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty per cent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x
without first securing a written certificate from the Board of Investments to the effect
that such business or economic activity x x x would not conflict with the Constitution or
laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and operate a
reserved economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a
"Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or

association wholly owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine National and at least sixty per cent of the fund
will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and
its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent of
the capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent of the members of
the Board of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine National. (Boldfacing, italicization
and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which
took effect on 30 September 1968, if the investment in a domestic enterprise by non-
Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must
obtain prior approval from the Board of Investments before accepting such investment.
Such approval shall not be granted if the investment "would conflict with existing
constitutional provisions and laws regulating the degree of required ownership by
Philippine nationals in the enterprise."31 A "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital
stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic
corporation is a "Philippine national" only if at least 60% of its voting stock is owned by
Filipino citizens. This definition of a "Philippine national" is crucial in the present case
because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution,
which limits the ownership and operation of public utilities to Filipino citizens or to
corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of
the nature of business and area of investment. The FIA spells out the procedures by which
non-Philippine nationals can invest in the Philippines. Among the key features of this law
is the concept of a negative list or the Foreign Investments Negative List.32 Section 8 of
the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign

Investment Negative List]. - The Foreign Investment Negative List shall have
two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by

mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from
the Department of National Defense [DND] to engage in such activity, such as the
manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons,
military ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a substantial export
component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring
and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine

nationals." Foreign Investment Negative List A consists of "areas of activities
reserved to Philippine nationals by mandate of the Constitution and specific laws,"
where foreign equity participation in any enterprise shall be limited to the
maximum percentage expressly prescribed by the Constitution and other specific
laws. In short, to own and operate a public utility in the Philippines one must be a
"Philippine national" as defined in the FIA. The FIA is abundant notice to foreign
investors to what extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment Negative
List A is the ownership and operation of public utilities, which the Constitution expressly
reserves to Filipino citizens and to corporations at least 60% owned by Filipino
citizens. In other words, Negative List A of the FIA reserves the ownership and
operation of public utilities only to "Philippine nationals," defined in Section 3(a)
of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized
under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or (4) a corporation organized abroad and registered as doing business in
the Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of
the Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments
Code of 1987, and to the passage of the present Foreign Investments Act of 1991, or for
more than four decades, the statutory definition of the term "Philippine national"
has been uniform and consistent: it means a Filipino citizen, or a domestic
corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these
same statutes have uniformly and consistently required that only "Philippine
nationals" could own and operate public utilities in the Philippines. The following
exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments
Act of 1991, x x x? And the FIA of 1991 took effect in 1991, correct? That’s
over twenty (20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only
Philippine nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine

national" either as a citizen of the Philippines, or if it is a corporation at
least sixty percent (60%) of the voting stock is owned by citizens of the
Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign
Investments Act of 1991, the Omnibus Investments Act of 1987, the same
provisions apply: x x x only Philippine nationals can own and operate a
public utility and the Philippine national, if it is a corporation, x x x sixty
percent (60%) of the capital stock of that corporation must be owned by
citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the
Omnibus Investments Act of 1981, the same rules apply: x x x only a
Philippine national can own and operate a public utility and a Philippine
national, if it is a corporation, sixty percent (60%) of its x x x voting stock,
must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the
Foreign Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very
consistent – only a Philippine national can own and operate a public
utility, and a Philippine national, if it is a corporation, x x x at least
sixty percent (60%) of the voting stock must be owned by citizens of
the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA
which categorically prescribe that certain economic activities, like the ownership and
operation of public utilities, are reserved to corporations "at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines." Foreign Investment Negative List A refers to "activities reserved to
Philippine nationals by mandate of the Constitution and specific laws." The FIA is the
basic statute regulating foreign investments in the Philippines. Government
agencies tasked with regulating or monitoring foreign investments, as well as counsels of
foreign investors, should start with the FIA in determining to what extent a particular
foreign investment is allowed in the Philippines. Foreign investors and their counsels who
ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on
opinions of SEC legal officers that obviously contradict the FIA do so also at their own
peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal officers
that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining
whether a particular corporation is qualified to own and operate a nationalized or
partially nationalized business in the Philippines. This shows that SEC legal officers are
not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining
the eligibility of a corporation to engage in partially nationalized industries. The following
are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the

Philippine Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and

Renato S. Calma;
 4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &
Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc &
De Los Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard
S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in
resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be
limited and interpreted to refer to corporations seeking to avail of tax and fiscal
incentives under investment incentives laws and cannot be equated with the term
"capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends
that the FIA and its predecessor statutes do not apply to "companies which have not
registered and obtained special incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to
any enterprise. Tax and fiscal incentives to investments are granted separately under the
Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed
Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles
previously regulated foreign investments in nationalized or partially nationalized
industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments
Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or
its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives
under the Code. The FIA and its predecessor statutes apply to investments in all domestic
enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The reason is quite
obvious – mere non-availment of tax and fiscal incentives by a non-Philippine
national cannot exempt it from Section 11, Article XII of the Constitution
regulating foreign investments in public utilities. In fact, the Board of
Investments’ Primer on Investment Policies in the Philippines,34 which is given out
to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least
70% of their production) may go ahead and make the investments without seeking
incentives. They only have to be guided by the Foreign Investments Negative List
(FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All
other areas outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of
the corporation, but also to the beneficial ownership of the corporation. To repeat,
we held:

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

This is consistent with Section 3 of the FIA which provides that where 100% of the capital
stock is held by "a trustee of funds for pension or other employee retirement or
separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the
Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not
only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and across
the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation. Under the Corporation Code, capital stock35 consists of all
classes of shares issued to stockholders, that is, common shares as well as preferred
shares, which may have different rights, privileges or restrictions as stated in the articles
of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,
common shares have the right to vote in the election of directors, while preferred shares
may be denied such right. Nonetheless, preferred shares, even if denied the right to vote
in the election of directors, are entitled to vote on the following corporate matters: (1)
amendment of articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other
disposition of substantially all corporate assets; (5) investment of funds in another
business or corporation or for a purpose other than the primary purpose for which the
corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger
and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from
the rest of the shares in a corporation, the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares
with voting rights but also to shares without voting rights. Preferred shares, denied the
right to vote in the election of directors, are anyway still entitled to vote on the eight
specific corporate matters mentioned above. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of common and preferred non-
voting shares, at least 60 percent of the common shares and at least 60 percent of
the preferred non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of such shares must
necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in
favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares. This
uniform application of the 60-40 ownership requirement in favor of Filipino citizens
clearly breathes life to the constitutional command that the ownership and operation of
public utilities shall be reserved exclusively to corporations at least 60 percent of whose
capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor
of Filipino citizens to each class of shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling
interest" in public utilities always lies in the hands of Filipino citizens. This addresses and
extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares,
will exercise greater control over fundamental corporate matters requiring two-thirds or
majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of
the Constitutional Commission to support his claim that the term "capital" refers to the
total outstanding shares of stock, whether voting or non-voting, the following excerpts of
the deliberations reveal otherwise. It is clear from the following exchange that the term
"capital" refers to controlling interest of a corporation, thus:

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

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

MR. VILLEGAS. Yes.39

xxxx

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

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
"voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

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

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

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

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and

underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in
the corporation.

The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40
ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII of
the Constitution. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the "controlling interest" in
public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry
of the nationalists in the Convention."41 The same battle-cry resulted in the
nationalization of the public utilities.42 This is also the same intent of the framers of the
1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that
the deletion of the phrase "controlling interest" and replacement of the word "stock" with
the term "capital" were intended specifically to extend the scope of the entities qualified
to operate public utilities to include associations without stocks. The framers’ omission of
the phrase "controlling interest" did not mean the inclusion of all shares of stock, whether
voting or non-voting. The OSG reiterated essentially the Court’s declaration that the
Constitution reserved exclusively to Philippine nationals the ownership and operation of
public utilities consistent with the State’s policy to "develop a self-reliant and
independent national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of
shares, grossly contravenes the intent and letter of the Constitution that the "State shall
develop a self-reliant and independent national economy effectively controlled by
Filipinos." We illustrated the glaring anomaly which would result in defining the term
"capital" as the total outstanding capital stock of a corporation, treated as a single class of
shares regardless of the actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the term
"capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.

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

Further, even if foreigners who own more than forty percent of the voting shares elect an
all-Filipino board of directors, this situation does not guarantee Filipino control and does
not in any way cure the violation of the Constitution. The independence of the Filipino
board members so elected by such foreign shareholders is highly doubtful. As the OSG
pointed out, quoting Justice George Sutherland’s words in Humphrey’s Executor v. US,44 "x
x x it is quite evident that one who holds his office only during the pleasure of another
cannot be depended upon to maintain an attitude of independence against the latter’s
will." Allowing foreign shareholders to elect a controlling majority of the board, even if all
the directors are Filipinos, grossly circumvents the letter and intent of the Constitution
and defeats the very purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citizens of the
Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the
intent of the framers of the Constitution to limit foreign ownership, and assure majority
Filipino ownership and control of public utilities. The OSG argued, "while the delegates
disagreed as to the percentage threshold to adopt, x x x the records show they clearly
understood that Filipino control of the public utility corporation can only be and is
obtained only through the election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete

the phrase "two thirds of whose voting stock or controlling interest," and instead
substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will
read: "No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least SIXTY PERCENT OF
WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40 percent
for foreigners. It is only in this Section 15 with respect to public utilities that the
committee proposal was increased to two-thirds. I think it would be better to harmonize
this provision by providing that even in the case of public utilities, the minimum equity
for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I
have had with representatives of the Filipino majority owners of the international record
carriers, and the subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a
corporation is vested in the board of directors, not in the officers but in the board of
directors. The officers are only agents of the board. And they believe that with 60 percent
of the equity, the Filipino majority stockholders undeniably control the board. Only on
important corporate acts can the 40-percent foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on why
they would like to maintain the present equity, I am referring to the 66 2/3. They would
prefer to have a 75-25 ratio but would settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal
of two-thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of
Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is
clear that the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the inclusion
of the last sentence of Section 11, Article XII of the Constitution commanding that "[t]he
participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines."
In other words, the last sentence of Section 11, Article XII of the Constitution mandates
that (1) the participation of foreign investors in the governing body of the corporation or
association shall be limited to their proportionate share in the capital of such entity; and
(2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing
officers of the corporation or association to be Filipino citizens specifically to prevent
management contracts, which were designed primarily to circumvent the Filipinization of
public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by
adding a phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION
OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines,
which Commissioner Romulo mentioned – Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign
multinational companies and 60-percent owned by their respective Filipino partners. All
three, however, also have management contracts with these foreign companies – Philcom
with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to the present
time, the general managers of these carriers are foreigners. While the foreigners in these
common carriers are only minority owners, the foreign multinationals are the ones
managing and controlling their operations by virtue of their management contracts and
by virtue of their strength in the governing bodies of these carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to
propose an amendment with respect to the operating management of public utilities, and
in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino

citizens. Will the committee assure us that this amendment will insure that past
activities such as management contracts will no longer be possible under this
amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution
which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING
BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING

BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the
copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is
that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We
accept the amendment. Is that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is
approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or
any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such
citizens." May I request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE

GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO
THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE
EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION

BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE
YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
provision on the limited participation of foreign investors in the governing body of public
utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public
utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own
64.27% of the common shares of PLDT, which class of shares exercises the sole right to
vote in the election of directors, and thus foreigners control PLDT; (2) Filipinos own only
35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus
Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares
earn;50 (5) preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on
the question of whether PLDT violated the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question
indisputably calls for a presentation and determination of evidence through a hearing,
which is generally outside the province of the Court’s jurisdiction, but well within the
SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on the
purely legal and threshold issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a public utility and that
any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared unconstitutional and a violation of the intent and spirit of
the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to
perform its statutory duty to investigate whether "the required percentage of ownership
of the capital stock to be owned by citizens of the Philippines has been complied with [by
PLDT] as required by x x x the Constitution."51 Such plea clearly negates SEC’s argument
that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample
powers to order the SEC’s compliance with its directive contained in the 28 June 2011
Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the
Court dispensed with the amendment of the pleadings to implead the Bureau of Customs
considering (1) the unique backdrop of the case; (2) the utmost need to avoid further
delays; and (3) the issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner.
The petition should not be dismissed because the second action would only be a
repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held that this Court
has full powers, apart from that power and authority which is inherent, to amend the
processes, pleadings, proceedings and decisions by substituting as party-plaintiff the real
party-in-interest. The Court has the power to avoid delay in the disposition of this
case, to order its amendment as to implead the BOC as party-respondent. Indeed,
it may no longer be necessary to do so taking into account the unique backdrop in
this case, involving as it does an issue of public interest. After all, the Office of the
Solicitor General has represented the petitioner in the instant proceedings, as well as in
the appellate court, and maintained the validity of the deportation order and of the BOC’s
Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not
afforded its day in court, simply because only the petitioner, the Chairperson of the BOC,
was the respondent in the CA, and the petitioner in the instant recourse. In Alonso v.
Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents.

Their sole purpose is to facilitate the application of justice to the rival claims of
contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which
courts are always striving to secure to litigants. They are designed as the means best
adapted to obtain that thing. In other words, they are a means to an end. When they lose
the character of the one and become the other, the administration of justice is at fault
and courts are correspondingly remiss in the performance of their obvious
duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s
decision and defer to the Court’s definition of the term "capital" in Section 11,
Article XII of the Constitution. Further, the SEC entered its special appearance in
this case and argued during the Oral Arguments, indicating its submission to the
Court’s jurisdiction. It is clear, therefore, that there exists no legal impediment
against the proper and immediate implementation of the Court’s directive to the
SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual
questions, are concerned. In other words, PLDT must be impleaded in order to fully
resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of PLDT; (2) whether the sale of common
shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3)
whether the total percentage of the PLDT common shares with voting rights complies
with the 60-40 ownership requirement in favor of Filipino citizens under the Constitution
for the ownership and operation of PLDT. These issues indisputably call for an
examination of the parties’ respective evidence, and thus are clearly within the
jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be
heard, in the proceedings before the SEC where the factual issues will be thoroughly
threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not
rule on the factual issues raised by Gamboa, except the single and purely legal issue on
the definition of the term "capital" in Section 11, Article XII of the Constitution. The Court
confined the resolution of the instant case to this threshold legal issue in deference to the
fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental
legal issue in this case even without the participation of PLDT since defining the term
"capital" in Section 11, Article XII of the Constitution does not, in any way, depend on
whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete
resolution of the purely legal question in this case.55 In fact, the Court, by treating the
petition as one for mandamus,56 merely directed the SEC to apply the Court’s definition of
the term "capital" in Section 11, Article XII of the Constitution in determining whether
PLDT committed any violation of the said constitutional provision. The dispositive
portion of the Court’s ruling is addressed not to PLDT but solely to the SEC, which
is the administrative agency tasked to enforce the 60-40 ownership requirement
in favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC to
investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino
citizens under the Constitution,57 there is no deprivation of PLDT’s property or denial of
PLDT’s right to due process, contrary to Pangilinan and Nazareno’s misimpression. Due
process will be afforded to PLDT when it presents proof to the SEC that it complies, as it
claims here, with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may
result in a sudden flight of existing foreign investors to "friendlier" countries and
simultaneously deterring new foreign investors to our country. In particular, the PSE
claims that the 28 June 2011 Decision may result in the following: (1) loss of more than ₱
630 billion in foreign investments in PSE-listed shares; (2) massive decrease in foreign
trading transactions; (3) lower PSE Composite Index; and (4) local investors not investing
in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’
apprehension. Without providing specific details, he pointed out the depressing state of
the Philippine economy compared to our neighboring countries which boast of growing
economies. Further, Dr. Villegas explained that the solution to our economic woes is for
the government to "take-over" strategic industries, such as the public utilities sector,
thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on
whether this high FDI59 countries in East Asia have allowed foreigners x x x control [of]
their public utilities, so that we can compare apples with apples.

DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry
strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their
solution is to make sure that those industries are in the hands of state
enterprises. So, in these countries, nationalization means the government takes
over. And because their governments are competent and honest enough to the
public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in

our public utilities serve no purpose. Obviously, there can never be foreign investments in
public utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries
are in the hands of state enterprises." Dr. Villegas’s argument that foreign investments in
telecommunication companies like PLDT are badly needed to save our ailing economy
contradicts his own theory that the solution is for government to take over these
companies. Dr. Villegas is barking up the wrong tree since State ownership of public
utilities and foreign investments in such industries are diametrically opposed concepts,
which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to
decide the present case differently for two reasons. First, the governments of our
neighboring countries have, as claimed by Dr. Villegas, taken over ownership and control
of their strategic public utilities like the telecommunications industry. Second, our
Constitution has specific provisions limiting foreign ownership in public utilities which
the Court is sworn to uphold regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of
whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears
to be more liberal in allowing foreign investors to own 40 percent of public utilities,
unlike in other Asian countries whose governments own and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period
of the application and imposition of appropriate sanctions against PLDT if found
violating Section 11, Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT
violated Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only
after the SEC has determined PLDT’s violation, if any exists at the time of the
commencement of the administrative case or investigation, that the SEC may impose the
statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes
final, the SEC shall impose the appropriate sanctions only if it finds after due hearing
that, at the start of the administrative case or investigation, there is an existing violation
of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public
utilities that fail to comply with the nationality requirement under Section 11, Article XII
and the FIA can cure their deficiencies prior to the start of the administrative case or
investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy

"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals,
who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60 percent of whose capital with voting
rights belongs to Filipinos. The FIA’s implementing rules explain that "[f]or stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential." In effect, the FIA
clarifies, reiterates and confirms the interpretation that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers to shares with voting rights, as well as with
full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control
of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term
"capital" openly invites alien domination of economic activities reserved exclusively to
Philippine nationals. Therefore, respondents’ interpretation will ultimately result in
handing over effective control of our national economy to foreigners in patent violation of
the Constitution, making Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the
Parity Amendment, which gave Americans the same rights as Filipinos in the exploitation
of natural resources, and in the ownership and control of public utilities, in the
Philippines. To do this the 1935 Constitution, which contained the same 60 percent
Filipino ownership and control requirement as the present 1987 Constitution, had to be
amended to give Americans parity rights with Filipinos. There was bitter opposition to
the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968,
PLDT was one of the American-controlled public utilities that became Filipino-controlled
when the controlling American stockholders divested in anticipation of the expiration of
the Parity Amendment on 3 July 1974.63 No economic suicide happened when control of
public utilities and mining corporations passed to Filipinos’ hands upon expiration of the
Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present Constitution.
Worse, movants’ interpretation opens up our national economy to effective control not
only by Americans but also by all foreigners, be they Indonesians, Malaysians or
Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved
Filipinos theoretical parity – the same rights as Americans to exploit natural resources,
and to own and control public utilities, in the United States of America. Here, movants’
interpretation would effectively mean a unilateral opening up of our national economy
to all foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and
control requirement for public utilities like PLOT. Any deviation from this requirement
necessitates an amendment to the Constitution as exemplified by the Parity Amendment.
This Court has no power to amend the Constitution for its power and duty is only to
faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further

pleadings shall be entertained.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

TERESITA J. LEONARDO-DE
PRESBITERO J. VELASCO, JR.
CASTRO
Associate Justice
Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA

Associate Justice Associate Justice

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

Associate Justice Associate Justice
 ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.
Associate Justice Associate Justice

JOSE PORTUGAL PEREZ JOSE C. MENDOZA

Associate Justice Associate Justice

BIENVENIDO L. REYES ESTELA M. PERLAS-BERNABE

Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above Resolution had been reached in consultation before the case was assigned to
the writer of the opinion of the Court.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

* The Heirs of Wilson P. Gamboa substituted petitioner Wilson P. Gamboa per

Resolution dated 17 April 2012 which noted the Manifestation of Lauro Gamboa
dated 12 April 2012.

1 Rol/o(Vol.lll),pp.l431-1451. Dated II July2011.

2 Id. at 1563-1613. Dated 14 July 2011.

3 Id. at 1454-1537. Dated 15 July 2011.

4 Id.at 1669-1680. Through its Office of the General Counsel and Commissioner
Manuel llubeiio B. Gaite. In its Manifestation and Omnibus Motion dated 29 July
20 II, the SEC manifested that the position of the OSG on the meaning of the term
"capital" does not reflect the view of the SEC.

The SEC sought a partial re~onsideration praying that the statement on

SEC's unlawful neglect of its statutory duty be expunged and for
clarification on the reckoning period of the imposition of any sanctions
against PLOT.
5 Id.
at 1614-1627. Dated 13 July 2011. On behalfofthe SEC, by special appearance.
The OSG prayed that the Court's decision "be cured of its procedural defect which
however should not prevail over the substantive aspect of the Decision."

6I d. at 2102-2124. Filed on 15 December 20 II.

7 Salvacion v. Central Bank of the Philippines, 343 Phil. 539 (1997).

8 150-B Phil. 380 (1972).

9 Rollo (Vol. III), p. 1583.

10 Addressed to Gov. Lilia Bautista of the Board of Investments.

11 A typographical error in DOJ Opinion No. 130 where it states 80%.

12 Republic Act No. 8799.

13 General
Counsel and Commissioner Manuel Huberto B. Gaite of the Securities
and Exchange Commission.

14 TSN (Oral Arguments), 26 June 2012, pp. 81-83. Emphasis supplied.

15 SEC En Banc Case No. 09-09-177, 25 March 2010.

16 SECOpinion No. 49-04, Re: Corporations considered as Philippine Nationals,

dated 22 December 2004, addressed to Romulo Mabanta Buenaventura Sayoc & De
Los Angeles and signed by General Counsel Vernette G. Umali-Paco; SEC-OGC
Opinion No. 03-08, dated 15 January 2008, addressed to Attys. Ruby Rose J. Yusi
and Rudyard S. Arbolado and signed by General Counsel Vernette G. Umali-Paco;
SEC-OGC Opinion No. 09-09, dated 28 April 2009, addressed to Villaraza Cruz
Marcelo Angangco and signed by General Counsel Vernette G. Umali-Paco;
SECOGC Opinion No. 08-10, dated 8 February 2010, addressed to Mr. Teodoro B.
Quijano and signed by General Counsel Vernette G. Umali-Paco; SEC-OGC
Opinion No. 23-10, dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon and San Jose and signed by General Counsel Vernette G. Umali-Paco;
SEC-OGC Opinion No. 18-07, dated 28 November 2007, addressed to Mr. Rafael C.
Bueno, Jr. and signed by General Counsel Vernette G. Umali-Paco.

In SEC Opinion No. 32-03, dated 2 June 2003, addressed to National

Telecommunications Commissioner Armi Jane R. Borje, SEC General
Counsel Vernette G. Umali-Paco stated:
 In this light, it is imperative that we reiterate the policy of this Commission
(SEC) in refraining from rendering opinions that might prejudice or affect
the outcome of a case, which is subject to present litigation before the
courts, or any other forum for that matter. The opinion, which may be
rendered thereon, would not be binding upon any party who would in all
probability, if the opinion happens to be adverse to his or its interest, take
issue therewith and contest it before the proper venue. The Commission,
therefore, has to refrain from giving categorical answers to your query.

17 370 Phil. 538 (1999).

18 G.R. No. 152685, 4 December 2007, 539 SCRA 365.

19 Rollo (Vol. III), pp. 1392-1393.

20 Supra.

21 Supra.

22 DeLeon, Hector S., TEXTBOOK ON THE PHILIPPINE CONSTITUTION, 2005

Edition, pp. 32, 33.

23 Section 10, Article XII of the 1987 Constitution.

24 Bernas,Joaquin G., S.J., THE 1987 CONSTITUTION OF THE REPUBLIC OF THE

PHILIPPINES: A COMMENTARY, 1996 Edition, p. 1044, citing Smith, Bell and Co.
v. Natividad, 40 Phil. 136, 148 (1919); Luzon Stevedoring Corporation v. Anti-Dummy
Board, 150-B Phil. 380, 403-404 (1972).

25 Issued on 17 July 1987.

26 Articles
44 to 56 of the Omnibus Investments Code of 1987 were later repealed
by the Foreign Investments Act of 1991. See infra, p. 26.

27 Article48. Authority to Do Business. No alien, and no firm association,

partnership, corporation or any other form of business organization formed,
organized, chartered or existing under any laws other than those of the
Philippines, or which is not a Philippine national, or more than forty percent
(40%) of the outstanding capital of which is owned or controlled by aliens shall do
business or engage in any economic activity in the Philippines or be registered,
licensed, or permitted by the Securities and Exchange Commission or by any other
bureau, office, agency, political subdivision or instrumentality of the government,
to do business, or engage in any economic activity in the Philippines without first
securing a written certificate from the Board of Investments to the effect:
 xxxx

(3) That such business or economic activity by the applicant would not
conflict with the Constitution or laws of the Philippines;

xxxx

28 Presidential Decree No. 1789.

29 Article69. Authority to Do Business. No alien, and no firm, association,

partnership, corporation or any other form of business organization formed,
organized, chartered or existing under any laws other than those of the
Philippines, or which is not a Philippine national, or more than thirty (30%) per
cent of the outstanding capital of which is owned or controlled by aliens shall do
business or engage in any economic activity in the Philippines, or be registered,
licensed, or permitted by the Securities and Exchange Commission or by any other
bureau, office, agency, political subdivision or instrumentality of the government,
to do business, or engage in any economic activity in the Philippines, without first
securing a written certificate from the Board of Investments to the effect:

xxxx

(3) That such business or economic activity by the applicant would not
conflict with the Constitution or laws of the Philippines;

xxxx

30 An Act Prescribing Incentives And Guarantees To Investments In The

Philippines, Creating A Board Of Investments, Appropriating The Necessary Funds
Therefor And For Other Purposes.

31 Section 3 of RA No. 5455 states:

Section 3. Permissible Investments. If an investment by a non-Philippine

national in an enterprise not registered under the Investment Incentives
Act is such that the total participation by non-Philippine nationals in the
outstanding capital thereof shall exceed thirty per cent, the enterprise must
obtain prior authority from the Board of Investments, which authority shall
be granted unless the proposed investment

(a) Would conflict with existing constitutional provisions and laws

regulating the degree of required ownership by Philippine nationals
in the enterprise; or
 (b) Would pose a clear and present danger of promoting monopolies
or combinations in restraint of trade; or

(c) Would be made in an enterprise engaged in an area adequately

being exploited by Philippine nationals; or

(d) Would conflict or be inconsistent with the Investments Priorities

Plan in force at the time the investment is sought to be made; or

(e) Would not contribute to the sound and balanced development of

the national economy on a self-sustaining basis.

xxxx

32 ExecutiveOrder No. 858, Promulgating the Eighth Regular Foreign Investment

Negative List, signed on 5 February 2010,
http://www.boi.gov.ph/pdf/laws/eo/EO%20858.pdf (accessed 17 August 2011).

33 TSN (Oral Arguments), 26 June 2012, pp. 71-74.

34 Published by the Board of Investments. For on-line copy, see

http://www.fdi.net/documents/WorldBank/databases/philippines/primer.htm
(accessed 3 September 2012)

35 In his book, Fletcher explains:

The term "stock" has been used in the same sense as "capital stock" or
"capital," and it has been said that "tis primary meaning is capital, in
whatever form it may be invested. More commonly, it is now being used to
designate shares of the stock in the hands of the individual shareholders, or
the certificates issued by the corporation to them. (Fletcher Cyclopedia of
the Law of Private Corporations, 1995 Revised Volume, Vol. 11, § 5079, p. 13;
citations omitted).

36 SECTION 137. Outstanding capital stock defined. - The term "outstanding capital
stock" as used in this Code, means the total shares of stock issued to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares.

SEC. 6. Classification of shares. - The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
 further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have
a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference

in the distribution of the assets of the corporation in case of liquidation and
in the distribution of dividends, or such other preferences as may be stated
in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with
a stated par value. The board of directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions shall
be effective upon the filing of a certificate thereof with the Securities and
Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares
without par value may not be issued for a consideration less than the value
of five (₱ 5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of

insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in

the certificate of stock, each share shall be equal in all respects to every
other share.

xxxx

37 Under Section 6 of the Corporation Code.

38 Dissenting Opinion to the 28 June 2011 Decision.

39 Record of the Constitutional Commission, Vol. III, pp. 255-256.

40 Id. at 360.
41 Aruego, Jose M., THE FRAMING OF THE PHILIPPINE CONSTITUTION, Vol. II,
1936, p. 658.

42 Id.

43 The OSG stated, "It must be stressed that when the OSG stated its concurrence
with the Honorable Court’s ruling on the proper definition of capital, it did so, not
on behalf of the SEC, its individual client in this case. Rather, the OSG did so in the
exercise of its discretion not only in its capacity as statutory counsel of the SEC but
as counsel for no less than the State itself."

44 295 U.S. 602, 55 S.Ct. 869, U.S. 1935 (27 May 1935).

45 Record of the Constitutional Commission, Vol. 3, pp. 650-651 (23 August 1986).

46 Record of the Constitutional Commission, Vol. 3, pp. 652-653 (23 August 1986).

47 Record of the Constitutional Commission, Vol. 3, p. 652 (23 August 1986).

48 Record of the Constitutional Commission, Vol. 3, pp. 665-667 (23 August 1986).

49 Section 5, Article XIV of the 1973 Constitution provides:

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

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

50 For the year 2009.

51 SEC.17. Grounds when articles of incorporation or amendment may be rejected or

disapproved. – The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, That the Commission
shall give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:

xxxx

(4) That the percentage of ownership of the capital stock to be owned

by citizens of the Philippines has not been complied with as required
by existing laws or the Constitution. (Emphasis supplied)

Section 5 of R.A. No. 8799 provides:

Section 5. Powers and Functions of the Commission.– 5.1. The Commission

shall act with transparency and shall have the powers and functions
provided by this Code, Presidential Decree No. 902-A, the Corporation
Code, the Investment Houses Law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others,
the following powers and functions:

(a) Have jurisdiction and supervision over all corporations, partnerships or

associations who are the grantees of primary franchises and/or a license or a
permit issued by the Government;

xxxx

(c) Approve, reject, suspend, revoke or require amendments to registration

statements, and registration and licensing applications;

xxxx

(f) Impose sanctions for the violation of laws and the rules, regulations and
orders, issued pursuant thereto;

xxxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing
public;

xxxx

(m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnership or associations, upon
any of the grounds provided by law; and
 (n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws.

52 466 Phil. 235 (2004).

53 Id. at 266-267.

54 Inits Manifestation and Omnibus Motion dated 29 July 2011, the SEC stated:
"The Commission respectfully manifests that the position of the Office of the
Solicitor General (‘OSG’) on the meaning of the term "capital" does not reflect the
view of the Commission. The Commission’s position has been laid down in
countless opinions that needs no reiteration. The Commission, however, would
submit to whatever would be the final decision of this Honorable Court on
the meaning of the term "capital." (Emphasis supplied; citations omitted)

In its Memorandum, the SEC stated: "In the event that this Honorable
Court rules with finality on the meaning of "capital", the SEC will yield to
the Court and follow its interpretation."

55 InLucman v. Malawi, 540 Phil. 289 (2006), the Court defined indispensable
parties as parties ininterest without whom there can be no final determination of
an action.

56 Section 3, Rule 65 of the Rules of Court states:

SEC. 3. Petition for mandamus. – When any tribunal, corporation, board,

officer or person unlawfully neglects the performance of an act which the
law specifically enjoins as a duty resulting from an office, trust, or station,
or unlawfully excludes another from the use and enjoyment of a right or
office to which such other is entitled, and there is no other plain, speedy
and adequate remedy in the ordinary course of law, the person aggrieved
thereby may file a verified petition in the proper court, alleging the facts
with certainty and praying that judgment be rendered commanding the
respondent, immediately or at some other time to be specified by the court,
to do the act required to be done to protect the rights of the petitioner and
to pay the damages sustained by the petitioner by reason of the wrongful
acts of the respondent.

xxxx

57 SeeLucman v. Malawi, supra, where the Court referred to the Department of

Interior and Local Government (though not impleaded) for investigation and
 appropriate action the matter regarding the withdrawals of deposits representing
the concerned barangays’ Internal Revenue Allotments.

58 Rollo (Vol. III), pp. 1444-1445.

59 Foreign Direct Investments.

60 TSN (Oral Arguments), 26 June 2012, p. 117.

61 See
Halili v. Court of Appeals, 350 Phil. 906 (1998); United Church Board for
World Ministries v. Sebastian, 242 Phil. 848 (1988).

62 Urbano A. Zafra, The Laurel-Langley Agreement and the Philippine Economy, p.

43 (1973). See also Mabanag v. Lopez Vito, 78 Phil. 1 (1947).

63 SeeHadi Salehi Esfahani, The Political Economy of the Philippines’

Telecommunications Sector, World Bank Policy Research Department (1994).

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION

VELASCO, JR., J.:

Before Us are separate motions for recon~ideration of the Court's June 28, 2011
Decision, 1 which partially granted the petition for prohibition, injunction and declaratory
relief interposed by Wilson P. Gamboa (petitioner or Gamboa). Very simply, the Court
held that the term "capital" appearing in Section 11, Article XII of the 1987 Constitution
refers only to common shares or shares of stock entitled to vote in the election of the
members of the board of directors of a public utility, and not to the total outstanding
capital stock.

Respondents Manuel V. Pangilinan (Pangilinan) and Napoleon L.Nazare no (Nazareno)

separately moved for reconsideration on procedural and substantive grounds, but
reserved their main arguments against the majority's holding on the meaning of "capital."
The Office of the Solicitor General (OSG), which initially representL:d the Securities and
Exchange Commission (SEC), also requested recon~itkratiun even as it manifested
agreement with the majority's construal ct' the \Vord "capital." Unable to join the OSG's
stand on the determinative issue of capital, the SEC sought leave to join the fray on its
mvn. fn its Jtdotion to Admit A1anifestation and Omnibus Motion, the SEC stated that the
OSG’s position on said issue does not reflect its own and in fact diverges from what the
Commission has consistently adopted prior to this case. And because the decision in
question has a penalty component which it is tasked to impose, SEC requested
clarification as to when the reckoning period of application of the appropriate
sanctions may be imposed on Philippine Long Distance Telephone Company
(PLDT) in case the SEC determines that it has violated Sec. 11, Art. XII of the
Constitution.

To the foregoing motions, the main petitioner, now deceased, filed his Comment and/or
Opposition to Motions for Reconsideration.

Acting on the various motions and comment, the Court conducted and heard the parties
in oral arguments on April 17 and June 26, 2012.

After considering the parties’ positions as articulated during the oral arguments and in
their pleadings and respective memoranda, I vote to grant reconsideration. This
disposition is consistent with my dissent, on procedural and substantive grounds, to the
June 28, 2011 majority Decision.

Conspectus

The core issue is the meaning of the word "capital" in the opening sentence of Sec. 11, Art.
XII of the 1987 Constitution which reads:

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

For an easier comprehension of the two contrasting positions on the contentious

meaning of the word "capital," as found in the first sentence of the aforequoted provision,
allow me to present a brief comparative analysis showing the dissimilarities.

The majority, in the June 28, 2011 Decision, as reiterated in the draft resolution, is of the
view that the word "capital" in the first sentence of Sec. 11, Art. XII refers to common
shares or voting shares only; thus limiting foreign ownership of such shares to 40%. The
rationale, as stated in the basic ponencia, is that this interpretation ensures that control of
the Board of Directors stays in the hands of Filipinos, since foreigners can only own a
maximum of 40% of said shares and, accordingly, can only elect the equivalent
percentage of directors. As a necessary corollary, Filipino stockholders can always elect
60% of the Board of Directors which, to the majority, translates to control over the
corporation.

The opposite view is that the word "capital" in the first sentence refers to the entire
capital stock of the corporation or both voting and non-voting shares and NOT solely to
common shares. From this standpoint, 60% control over the capital stock or the
stockholders owning both voting and non-voting shares is assured to Filipinos and, as a
consequence, over corporate matters voted upon and decisions reached during
stockholders’ meetings. On the other hand, the last sentence of Sec. 11, Art. XII, with the
word "capital" embedded in it, is the provision that ensures Filipino control over the
Board of Directors and its decisions.

To resolve the conflicting interpretations of the word "capital," the first sentence of Sec.
11, Art. XII must be read and considered in conjunction with the last sentence of said Sec.
11 which prescribes that "the participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its capital."
After all, it is an established principle in constitutional construction that provisions in the
Constitution must be harmonized.

It has been made very clear during the oral arguments and even by the parties’ written
submissions that control by Filipinos over the public utility enterprise exists on three (3)
levels, namely:

1. Sixty percent (60%) control of Filipinos over the capital stock which covers both voting
and non-voting shares and inevitably over the stockholders. This level of control is
embodied in the first sentence of Sec. 11, Art. XII which reads:

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens x x x.

The word "capital" in the above provision refers to capital stock or both voting and non-
voting shares. Sixty percent (60%) control over the capital stock translates to control by
Filipinos over almost all decisions by the stockholders during stockholders’ meetings
including ratification of the decisions and acts of the Board of Directors. During said
meetings, voting and even non-voting shares are entitled to vote. The exercise by non-
voting shares of voting rights over major corporate decisions is expressly provided in Sec.
6 of the Corporation Code which reads:
Sec. 6. x x x x

Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or

other corporations;

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and

8. Dissolution of the corporation.

Construing the word "capital" in the first sentence of Sec. 11, Art. XII of the Constitution
as capital stock would ensure Filipino control over the public utility with respect to major
corporate decisions. If we adopt the view espoused by Justice Carpio that the word
"capital" means only common shares or voting shares, then foreigners can own even up to
100% of the non-voting shares. In such a situation, foreigners may very well exercise
control over all major corporate decisions as their ownership of the nonvoting shares
remains unfettered by the 40% cap laid down in the first sentence of Sec. 11, Art. XII. This
will spawn an even greater anomaly because it would give the foreigners the opportunity
to acquire ownership of the net assets of the corporation upon its dissolution to include
what the Constitution enjoins––land ownership possibly through dummy corporations.
With the view of Justice Carpio, Filipinos will definitely lose control over major corporate
decisions which are decided by stockholders owning the majority of the non-voting
shares.

2. Sixty percent (60%) control by Filipinos over the common shares or voting shares and
necessarily over the Board of Directors of the public utility. Control on this level is
guaranteed by the last sentence of Sec. 11, Art. XII which reads:
The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its "capital" x x x.

In its ordinary signification, "participation" connotes "the action or state of taking part
with others in an activity."2 This participation in its decision-making function can only be
the right to elect board directors. Hence, the last sentence of Sec. 11, Art. XII of the
Constitution effectively restricts the right of foreigners to elect directors to the
board in proportion to the limit on their total shareholdings. Since the first part of
Sec. 11, Art. XII of the Constitution specifies a 40% limit of foreign ownership in the total
capital of the public utility corporation, then the rights of foreigners to be elected to the
board of directors, is likewise limited to 40 percent. If the foreign ownership of common
shares is lower than 40%, the participation of foreigners is limited to their proportionate
share in the capital stock.

In the highly hypothetical public utility corporation with 100 common shares and
1,000,000 preferred non-voting shares, or a total of 1,000,100 shares cited in the June 28,
2011 Decision, foreigners can thus only own up to 400,040 shares of the corporation,
consisting of the maximum 40 (out of the 100) voting shares and 400,000 non-voting
shares. And, assuming a 10- member board, the foreigners can elect only 4 members of
the board using the 40 voting shares they are allowed to own.

Following, in fine, the dictates of Sec. 11, Art. XII, as couched, the foreign
shareholders’ right to elect members of the governing board of a given public
utility corporation is proportional only to their right to hold a part of the total
shareholdings of that entity. Since foreigners can only own, in the maximum, up to
40% of the total shareholdings of the company, then their voting entitlement as to the
numerical composition of the board would depend on the level of their
shareholding in relation to the capital stock, but in no case shall it exceed the 40%
threshold.

Contrary to the view of Justice Carpio that the objective behind the first sentence of Sec.
11, Art. XII is to ensure control of Filipinos over the Board of Directors by limiting foreign
ownership of the common shares or voting shares up to 40%, it is actually the first part
of the aforequoted last sentence of Sec. 11, Art. XII that limits the rights of
foreigners to elect not more than 40% of the board seats thus ensuring a clear
majority in the Board of Directors to Filipinos. If we follow the line of reasoning of Justice
Carpio on the meaning of the word "capital" in the first sentence, then there is no need
for the framers of the Constitution to incorporate the last sentence in Sec. 11, Art. XII on
the 40% maximum participation of the foreigners in the Board of Directors. The last
sentence would be a useless redundancy, a situation doubtless unintended by the framers
of the Constitution. A construction that renders a part of the law or Constitution being
construed superfluous is an aberration,3 for it is at all times presumed that each word
used in the law is intentional and has a particular and special role in the approximation of
the policy sought to be attained, ut magis valeat quam pereat.
3. The third level of control proceeds from the requirement tucked in the second part of
the ultimate sentence that "all the executive and managing officers of the
corporation must be citizens of the Philippines." This assures full Filipino control, at
all times, over the management of the public utility.

To summarize, the Constitution, as enacted, establishes not just one but a three-tiered
control-enhancing-and-locking mechanism in Sec. 11, Article XII to ensure that Filipinos
will always have full beneficial ownership and control of public utility corporations:

1. 40% ceiling on foreign ownership in the capital stock that ensures sixty percent (60%)
Filipino control over the capital stock which covers both voting and non-voting shares. As
a consequence, Filipino control over the stockholders is assured. (First sentence of Sec. 11,
Art. XII). Thus, foreigners can own only up to 40% of the capital stock.

2. 40% ceiling on the right of foreigners to elect board directors that guarantees sixty
percent (60%) Filipino control over the Board of Directors. (First part of last sentence of
Sec. 11, Art. XII).

3. Reservation to Filipino citizens of the executive and managing officers, regardless of the
level of alien equity ownership to secure total Filipino control over the management of
the public utility enterprise (Second part of last sentence of Sec. 11, Art. XII). Thus, all
executive and managing officers must be Filipinos.

Discussion

Undoubtedly there is a clash of conflicting opinions as to what "capital" in the first

sentence of Sec. 11, Art. XII means. The majority says it refers only to common or voting
shares. The minority says it includes both voting and non-voting shares. A resort to
constitutional construction is unavoidable.

It is settled though that the "primary source from which to ascertain constitutional intent
or purpose is the language of the constitution itself."4 To this end, the words used by
the Constitution should as much as possible be understood in their ordinary
meaning as the Constitution is not a lawyer’s document.5 This approach, otherwise
known as the verba legis rule, should be applied save where technical terms are
employed.6

The plain meaning of "capital" in the first

sentence of Sec. 11, Art. XII of the Constitution
includes both voting and non-voting shares

J.M. Tuason & Co., Inc. v. Land Tenure Administration illustrates the verba legis rule.
There, the Court cautions against departing from the commonly understood meaning of
ordinary words used in the Constitution, viz.:
We look to the language of the document itself in our search for its meaning. We do not
of course stop there, but that is where we begin. It is to be assumed that the words in
which constitutional provisions are couched express the objective sought to be
attained. They are to be given their ordinary meaning except where technical terms are
employed in which case the significance thus attached to them prevails. As the
Constitution is not primarily a lawyer's document, it being essential for the rule of law to
obtain that it should ever be present in the people's consciousness, its language as
much as possible should be understood in the sense they have in common use.
What it says according to the text of the provision to be construed compels acceptance
and negates the power of the courts to alter it, based on the postulate that the framers
and the people mean what they say. Thus, there are cases where the need for construction
is reduced to a minimum.7 (Emphasis supplied.)

The primary reason for the verba legis approach, as pointed out by Fr. Joaquin Bernas
during the June 26, 2012 arguments, is that the people who ratified the Constitution voted
on their understanding of the word capital in its everyday meaning. Fr. Bernas elucidated
thus:

x x x Over the years, from the 1935 to the 1973 and finally even under the 1987
Constitution, the prevailing practice has been to base the 60-40 proportion on total
outstanding capital stock, that is, the combined total of common and non-voting
preferred shares. This is what occasioned the case under consideration.

What is the constitutional relevance of this continuing practice? I suggest that it is

relevant for determining what the people in the street voted for when they ratified the
Constitution. When the draft of a Constitution is presented to the people for
ratification, what the people vote on is not the debates in the constituent body
but the text of the draft. Concretely, what the electorate voted on was their
understanding of the word capital in its everyday meaning they encounter in daily
life. We cannot attribute to the voters a jurist’s sophisticated meaning of capital and its
breakdown into common and preferred. What they vote on is what they see. Nor do they
vote on what the drafters saw as assumed meaning, to use Bengzon’s explanation. In the
language of the sophisticates, what voters in a plebiscite vote on is verba legis and
not anima legis about which trained jurists debate.

What then does it make of the contemporary understanding by SEC etc. Is the
contemporary understanding unconstitutional or constitutional? I hesitate to
characterize it as constitutional or unconstitutional. I would merely characterize it as
popular. What I mean is it reflects the common understanding of the ordinary populi,
common but incomplete.8 (Emphasis supplied.)

"Capital" in the first sentence of Sec. 11, Art. XII must then be accorded a meaning
accepted, understood, and used by an ordinary person not versed in the technicalities of
law. As defined in a non-legal dictionary, capital stock or capital is ordinarily taken to
mean "the outstanding shares of a joint stock company considered as an aggregate"9or
"the ownership element of a corporation divided into shares and represented by
certificates."10

The term "capital" includes all the outstanding shares of a company that represent "the
proprietary claim in a business."11 It does not distinguish based on the voting feature
of the stocks but refers to all shares, be they voting or non-voting. Neither is the
term limited to the management aspect of the corporation but clearly refers to the
separate aspect of ownership of the corporate shares thereby encompassing all shares
representing the equity of the corporation.

This plain meaning, as understood, accepted, and used in ordinary parlance, hews with
the definition given by Black who equates capital to capital stock12 and defines it as "the
total number of shares of stock that a corporation may issue under its charter or articles
of incorporation, including both common stock and preferred stock."13 This meaning
is also reflected in legal commentaries on the Corporation Code. The respected
commentator Ruben E. Agpalo defines "capital" as the "money, property or means
contributed by stockholders for the business or enterprise for which the corporation was
formed and generally implies that such money or property or means have been
contributed in payment for stock issued to the contributors."14 Meanwhile, "capital stock"
is "the aggregate of the shares actually subscribed [or] the amount subscribed and
paid-in and upon which the corporation is to conduct its operations, or the amount paid-
in by its stockholders in money, property or services with which it is to conduct its
business."15

This definition has been echoed by numerous other experts in the field of corporation
law. Dean Villanueva wrote, thus:

In defining the relationship between the corporation and its stockholders, the capital
stock represents the proportional standing of the stockholders with respect to the
corporation and corporate matters, such as their rights to vote and to receive dividends.

In financial terms, the capital stock of the corporation as reflected in the financial
statement of the corporation represents the financial or proprietary claims of the
stockholders to the net assets of the corporation upon dissolution. In addition, the
capital stock represents the totality of the portion of the corporation’s assets and
receivables which are covered by the trust fund doctrine and provide for the amount of
assets and receivables of the corporation which are deemed protected for the benefit of
the corporate creditors and from which the corporation cannot declare any
dividends. 16(Emphasis supplied.)

Similarly, renowned author Hector S. de Leon defines "capital" and "capital stock" in the
following manner:
Capital is used broadly to indicate the entire property or assets of the corporation. It
includes the amount invested by the stockholders plus the undistributed earnings less
losses and expenses. In the strict sense, the term refers to that portion of the net assets
paid by the stockholders as consideration for the shares issued to them, which is utilized
for the prosecution of the business of the corporation. It includes all balances or
instalments due the corporation for shares of stock sold by it and all unpaid subscription
for shares.

xxxx

The term is also used synonymously with the words "capital stock," as meaning the
amount subscribed and paid-in and upon which the corporation is to conduct its
operation (11 Fletcher Cyc. Corp., p. 15 [1986 ed.]) and it is immaterial how the stock is
classified, whether as common or preferred.17(Emphasis and underscoring supplied.)

Hence, following the verba legis approach, I see no reason to stray away from what
appears to be a common and settled acceptation of the word "capital," given that, as used
in the constitutional provision in question, it stands unqualified by any restrictive or
expansive word as to reasonably justify a distinction or a delimitation of the meaning of
the word. Ubi lex non distinguit nos distinguere debemus, when the law does not
distinguish, we must not distinguish.18 Using this plain meaning of "capital" within the
context of Sec. 11, Art. XII, foreigners are entitled to own not more than 40% of the
outstanding capital stock, which would include both voting and non-voting shares.

Extraneous aids to ferret out constitutional intent

When the seeming ambiguity on the meaning of "capital" cannot be threshed out by
looking at the language of the Constitution, then resort to extraneous aids has become
imperative. The Court can utilize the following extraneous aids, to wit: (1) proceedings of
the convention; (2) changes in phraseology; (3) history or realities existing at the time of
the adoption of the Constitution; (4) prior laws and judicial decisions; (5)
contemporaneous construction; and (6) consequences of alternative interpretations.19 I
submit that all these aids of constitutional construction affirm that the only acceptable
construction of "capital" in the first sentence of Sec. 11, Art. XII of the 1987 Constitution is
that it refers to all shares of a corporation, both voting and non-voting.

Deliberations of the Constitutional Commission

of 1986 demonstrate that capital means both
voting and non-voting shares (1st extrinsic aid)

The proceedings of the 1986 Constitutional Commission that drafted the 1987
Constitution were accurately recorded in the Records of the Constitutional Commission.
To bring to light the true meaning of the word "capital" in the first line of Sec. 11, Art. XII,
one must peruse, dissect and analyze the entire deliberations of the Constitutional
Commission pertinent to the article on national economy and patrimony, as quoted
below:

August 13, 1986, Wednesday

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON

NATIONAL ECONOMY AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session

assembled, To incorporate the National Economy and Patrimony of the new Constitution,
the following provisions:

ARTICLE____
NATIONAL ECONOMY AND PATRIMONY

SECTION 1. The State shall develop a self-reliant and independent national economy. x x
x

xxxx

SEC. 3. x x x The exploration, development, and utilization of natural resources shall be

under the full control and supervision of the State. Such activities may be directly
undertaken by the State, or it may enter into co-production, joint venture, production-
sharing agreements with Filipino citizens or corporations or associations at least sixty
percent of whose voting stock or controlling interest is owned by such citizens. x x
x

xxxx

SEC. 9. The Congress shall reserve to citizens of the Philippines or to corporations or

associations at least sixty per cent of whose voting stock or controlling interest is
owned by such citizens or such higher percentage as Congress may prescribe, certain
areas of investments when the national interest so dictates.

xxxx

SEC. 15. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least two-thirds of whose
voting stock or controlling interest is owned by such citizens. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. (Origin
of Sec. 11, Article XII)

xxxx

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

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

MR. VILLEGAS. Yes.20

August 14, 1986, Thursday

MR. FOZ. Mr. Vice-President, in Sections 3 and 9, the provision on equity is both 60
percent, but I notice that this is now different from the provision in the 1973 Constitution
in that the basis for the equity provision is voting stock or controlling interest instead of
the usual capital percentage as provided for in the 1973 Constitution. We would like to
know what the difference would be between the previous and the proposed provisions
regarding equity interest.

MR. VILLEGAS. Commissioner Suarez will answer that.

MR. SUAREZ. Thank you.

As a matter of fact, this particular portion is still being reviewed by this Committee. In
Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage should
be based on the capital which is owned by such citizens. In the proposed draft, this
phrase was proposed: "voting stock or controlling interest." This was a plan submitted by
the UP Law Center.

Three days ago, we had an early morning breakfast conference with the members of the
UP Law Center and precisely, we were seeking clarification regarding the difference. We
would have three criteria to go by: One would be based on capital, which is capital stock
of the corporation, authorized, subscribed or paid up, as employed under the 1935 and the
1973 Constitution. The idea behind the introduction of the phrase "voting stock or
controlling interest" was precisely to avoid the perpetration of dummies, Filipino
dummies of multinationals. It is theoretically possible that a situation may develop where
these multinational interests would not really be only 40 percent but will extend beyond
that in the matter of voting because they could enter into what is known as a voting trust
or voting agreement with the rest of the stockholders and, therefore, notwithstanding the
fact that on record their capital extent is only up to 40-percent interest in the
corporation, actually, they would be managing and controlling the entire company. That
is why the UP Law Center members suggested that we utilize the words "voting interest"
which would preclude multinational control in the matter of voting, independent of the
capital structure of the corporation. And then they also added the phrase "controlling
interest" which up to now they have not been able to successfully define the exact
meaning of. But they mentioned the situation where theoretically the board would be
controlled by these multinationals, such that instead of, say, three Filipino directors out
of five, there would be three foreign directors and, therefore, they would be controlling
the management of the company with foreign interest. That is why they volunteered to
flesh out this particular portion which was submitted by them, but up to now, they have
not come up with a constructive rephrasing of this portion. And as far as I am concerned,
I am not speaking in behalf of the Committee, I would feel more comfortable if we go
back to the wording of the 1935 and the 1973 Constitution, that is to say, the 60-40
percentage could be based on the capital stock of the corporation.

MR. FOZ. I understand that that was the same view of Dean Carale who does not agree
with the others on this panel at the UP Law Center regarding the percentage of the ratio.

MR. SUAREZ. That is right. Dean Carale shares my sentiment about this matter.
MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So
there are already two in the Committee who want to go back to the wording of the 1935
and the 1973 Constitution.21

August 15, 1986, Friday

MR. MAAMBONG. I ask that Commissioner Treñas be recognized for an amendment on

line 14.

THE PRESIDENT. Commissioner Treñas is recognized.

MR. TREÑAS. Madam President, may I propose an amendment on line 14 of Section 3 by

deleting therefrom "whose voting stock and controlling interest." And in lieu thereof,
insert the CAPITAL so the line should read: "associations at least sixty percent of
the CAPITAL is owned by such citizens.

MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been

accepted by the Committee.

Is there any objection? (Silence) The Chair hears none; the amendment is
approved.

xxxx

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.

Two points actually are being raised by Commissioner Davide’s proposed amendment.
One has reference to the percentage of holdings and the other one is the basis for that
percentage. Would the body have any objection if we split it into two portions because
there may be several Commissioners who would be willing to accept the Commissioner’s
proposal on capital stock in contradistinction to a voting stock for controlling interest?

MR. VILLEGAS. The proposal has been accepted already.

MR. DAVIDE. Yes, but it was 60 percent.

MR. VILLEGAS. That is right.

MR. SUAREZ. So, it is now 60 percent as against wholly owned?

MR. DAVIDE. Yes.

MR. SUAREZ. Is the Commissioner not insisting on the voting capital stock because that
was already accepted by the Committee?

MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the
Committee? How shall it read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY
owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with

Filipino citizens or corporations or associations at least 60 percent of whose
CAPITAL is owned by such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not
really be the guiding principle. It is the ownership of the corporation. It may be
voting or not voting, but that is not the guiding principle.

MR. SUAREZ. So, the Commissioner is insisting on the use of the term "CAPITAL
STOCK"?

MR. DAVIDE. Yes, to be followed by the phrase "WHOLLY owned."

MR. SUAREZ. Yes, but we are only concentrating on the first point – "CAPITAL
STOCK" or merely "CAPITAL."

MR. DAVIDE. CAPITAL STOCK?

MR. SUAREZ. Yes, it is "CAPITAL STOCK."

SUSPENSION OF SESSION

At 4:42 p.m., the session was resumed.

THE PRESIDENT. The session is resumed.

Commissioner Davide is to clarify his point.

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in
place of "voting stock or controlling interest." This is an amendment already
accepted by the Committee.

We would like to call for a vote on 100-percent Filipino versus 60- percent Filipino.

MR. ALONTO. Is it 60 percent?

MR. VILLEGAS. Sixty percent, yes.

MR. GASCON. Madam President, shall we vote on the proposed amendment of

Commissioner Davide of "ONE HUNDRED PERCENT?"

MR. VILLEGAS. Yes.

MR. GASCON. Assuming that it is lost, that does not prejudice any other Commissioner
to make any recommendations on other percentages?

MR. VILLEGAS. I would suggest that we vote on "sixty," which is indicated in the
committee report.

MR. GASCON. It is the amendment of Commissioner Davide that we should vote on, not
the committee report.

MR. VILLEGAS. Yes, it is all right.

MR. AZCUNA. Madam President.

THE PRESIDENT. Commissioner Azcuna is recognized.

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

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

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

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

MR. VILLEGAS. That is right.

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

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

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

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

MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.

MR. BENGZON. Yes, that is understood.

MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the
Filipinos," the capital may be voting or nonvoting.

MR. BENGZON. That is correct.

MR. AZCUNA. My concern is the situation where there is a voting stock. It is a stock
corporation. What the Committee requires is that 60 percent of the capital should be
owned by Filipinos. But that would not assure control because that 60 percent may be
non-voting.

MS. AQUINO. Madam President.

MR. ROMULO. May we vote on the percentage first?

THE PRESIDENT. Before we vote on this, we want to be clarified first.

MS. AQUINO. Madam President.

THE PRESIDENT. Commissioner Aquino is recognized.

MS. AQUINO. I would suggest that we vote on the Davide amendment which is 100-
percent capital, and if it is voted down, then we refer to the original draft which is "capital
stock" not just "capital."

MR. AZCUNA. The phrase "controlling interest" is an important consideration.

THE PRESIDENT. Let us proceed to vote then.

MR. PADILLA. Madam President.

THE PRESIDENT. The Vice-President, Commissioner Padilla, is recognized.

MR. PADILLA. The Treñas amendment has already been approved. The only one
left is the Davide amendment which is substituting the "sixty percent" to
"WHOLLY owned by Filipinos." (The Treñas amendment deleted the phrase "whose
voting stocks and controlling interest" and inserted the word "capital." It approved the
phrase "associations at least sixty percent of the CAPITAL is owned by such citizens.)(see
page 16)

Madam President, I am against the proposed amendment of Commissioner Davide

because that is an ideal situation where domestic capital is available for the exploration,
development and utilization of these natural resources, especially minerals, petroleum
and other mineral oils. These are not only risky business but they also involve substantial
capital. Obviously, it is an ideal situation but it is not practical. And if we adopt the 100-
percent capital of Filipino citizens, I am afraid that these natural resources, particularly
these minerals and oil, et cetera, may remain hidden in our lands, or in other offshore
places without anyone being able to explore, develop or utilize them. If it were possible to
have a 100-percent Filipino capital, I would prefer that rather than the 60 percent, but if
we adopt the 100 percent, my fear is that we will never be able to explore, develop and
utilize our natural resources because we do not have the domestic resources for that.

MR. DAVIDE. Madam President, may I be allowed to react?

THE PRESIDENT. Commissioner Davide is recognized.

MR. DAVIDE. I am very glad that Commissioner Padilla emphasized minerals, petroleum
and mineral oils. The Commission has just approved the possible foreign entry into the
development, exploration and utilization of these minerals, petroleum and other mineral
oils by virtue of the Jamir amendment. I voted in favour of the Jamir amendment because
it will eventually give way to vesting in exclusively Filipino citizens and corporations
wholly owned by Filipino citizens the right to utilize the other natural resources. This
means that as a matter of policy, natural resources should be utilized and exploited only
by Filipino citizens or corporations wholly owned by such citizens. But by virtue of the
Jamir amendment, since we feel that Filipino capital may not be enough for the
development and utilization of minerals, petroleum and other mineral oils, the President
can enter into service contracts with foreign corporations precisely for the development
and utilization of such resources. And so, there is nothing to fear that we will stagnate in
the development of minerals, petroleum, and mineral oils because we now allow service
contracts. It is, therefore, with more reason that at this time we must provide for a 100-
percent Filipinization generally to all natural resources.

MR. VILLEGAS. I think we are ready to vote, Madam President.

THE PRESIDENT. The Acting Floor Leader is recognized.

MR. MAAMBONG. Madam President, we ask that the matter be put to a vote.

THE PRESIDENT. Will Commissioner Davide please read lines 14 and 15 with his
amendment.

MR. DAVIDE. Lines 14 and 15, Section 3, as amended, will read: "associations whose
CAPITAL stock is WHOLLY owned by such citizens."

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment of

Commissioner Davide on lines 14 and 15 of Section 3, please raise their hand. (Few
Members raised their hand.)

As many as are against the amendment, please raise their hand. (Several Members raised
their hand.)

The results show 16 votes in favour and 22 against; the amendment is lost.

MR. MAAMBONG. Madam President, I ask that Commissioner Davide be recognized

once more for further amendments.

THE PRESIDENT. Commissioner Davide is recognized.

MR. DAVIDE. Thank you, Madam President.

This is just an insertion of a new paragraph between lines 24 and 25 of Section 3 of the
same page. It will read as follows: THE GOVERNING AND MANAGING BOARDS OF
SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE
PHILIPPINES.

MR. VILLEGAS. Which corporations is the Commissioner referring to?

MR. DAVIDE. This refers to corporations 60 percent of whose capital is owned by such
citizens.

MR. VILLEGAS. Again the amendment will read…

MR. DAVIDE. "THE GOVERNING AND MANAGING BODIES OF SUCH

CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE
PHILIPPINES."

REV. RIGOS. Madam President.

THE PRESIDENT. Commissioner Rigos is recognized.

REV. RIGOS. I wonder if Commissioner Davide would agree to put that sentence
immediately after "citizens" on line 15.

MR. ROMULO. May I ask a question. Presumably, it is 60-40?

MR. DAVIDE. Yes.

MR. ROMULO. What about the 40 percent? Would they not be entitled to a
proportionate seat in the board?

MR. DAVIDE. Under my proposal, they should not be allowed to sit in the board.

MR. ROMULO. Then the Commissioner is really proposing 100 percent which is the
opposite way?

MR. DAVIDE. Not necessarily, because if 40 percent of the capital stock will be owned by
aliens who may sit in the board, they can still exercise their right as ordinary stockholders
and can submit the necessary proposal for, say, a policy to be undertaken by the board.

MR. ROMULO. But that is part of the stockholder’s right – to sit in the board of directors.

MR. DAVIDE. That may be allowed but this is a very unusual and abnormal situation so
the Constitution itself can prohibit them to sit in the board.

MR. ROMULO. But it would be pointless to allow them 40 percent when they cannot sit
in the board nor have a say in the management of the company. Likewise, that would be
extraordinary because both the 1935 and the 1973 Constitutions allowed not only the 40
percent but commensurately they were represented in the board and management only
to the extent of their equity interest, which is 40 percent. The management of a company
is lodged in the board; so if the 60 percent, which is composed of Filipinos, controls the
board, then the Filipino part has control of the company.
I think it is rather unfair to say: "You may have 40 percent of the company, but that is all.
You cannot manage, you cannot sit in the board." That would discourage investments.
Then it is like having a one hundredpercent ownership; I mean, either we allow a 60-40
with full rights to the 40 percent, limited as it is as to a minority, or we do not allow them
at all. This means if it is allowed; we cannot have it both ways.

MR. DAVIDE. The aliens cannot also have everything. While they may be given entry into
subscriptions of the capital stock of the corporation, it does not necessarily follow that
they cannot be deprived of the right of membership in the managing or in the governing
board of a particular corporation. But it will not totally deprive them of a say because they
can still exercise the ordinary rights of stockholders. They can submit their proposal and
they can be heard.

MR. ROMULO. Yes, but they have no vote. That is like being represented in the Congress
but not being allowed to vote like our old resident Commissioners in the United States.
They can be heard; they can be seen but they cannot vote.

MR. DAVIDE. If that was allowed under that situation, why can we not do it now in
respect to our natural resources? This is a very critical and delicate issue.

MR. ROMULO. Precisely, we used to complain how unfair that was. One can be seen and
heard but he cannot vote.

MR. DAVIDE. We know that under the corporation law, we have the rights of the
minority stockholders. They can be heard. As a matter of fact, they can probably allow a
proxy to vote for them and, therefore, they still retain that specific prerogative to
participate just like what we did in the Article on Social Justice.

MR. ROMULO. That would encourage dummies if we give them proxies.

MR. DAVIDE. As a matter of fact, when it comes to encouraging dummies, by allowing

40-percent ownership to come in we will expect the proliferation of corporations actually
owned by aliens using dummies.

MR. ROMULO. No, because 40 percent is a substantial and fair share and, therefore, the
bona fide foreign investor is satisfied with that proportion. He does not have to look for
dummies. In fact, that is what assures a genuine investment if we give a foreign investor
the 40 percent and all the rights that go with it. Otherwise, we are either discouraging the
investment altogether or we are encouraging circumvention. Let us be fair. If it is 60-40,
then we give him the right, limited as to his minority position.

MR. MAAMBONG. Madam President, the body would like to know the position of the
Committee so that we can put the matter to a vote.
MR. VILLEGAS. The Committee does not accept the amendment.

THE PRESIDENT. The Committee does not accept.

Will Commissioner Davide insist on his amendment?

MR. DAVIDE. We request a vote.

THE PRESIDENT. Will Commissioner Davide state his proposed amendment again?

MR. DAVIDE. The proposed amendment would be the insertion of a new paragraph to
Section 3, between lines 24 and 25, page 2, which reads: "THE GOVERNING AND
MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN
CITIZENS OF THE PHILIPPINES."

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. Madam President, may I just say that this Section 3 speaks of "co-
production, joint venture, production sharing agreements with Filipino citizens." If the
foreign share of, say, 40 percent will not be represented in the board or in management, I
wonder if there would be any foreign investor who will accept putting capital but without
any voice in management. I think that might make the provision on "coproduction, joint
venture and production sharing" illusory.

VOTING

THE PRESIDENT. If the Chair is not mistaken, that was the same point expressed by
Commissioner Romulo, a member of the Committee.

As many as are in favour of the Davide amendment, please raise their hand. (Few
Members raised their hand.)

As many as are against, please raise their hand. (Several Members raised their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

xxxx

THE PRESIDENT. Commissioner Garcia is recognized.

MR. GARCIA. My amendment is on Section 3, the same item which Commissioner

Davide tried to amend. It is basically on the share of 60 percent. I would like to
propose that we raise the 60 percent to SEVENTY-FIVE PERCENT so the line would
read: "SEVENTY-FIVE PERCENT of whose CAPITAL is owned by such citizens."

THE PRESIDENT. What does the Committee say?

SUSPENSION OF SESSION

MR. VILLEGAS. The Committee insists on staying with the 60 percent – 60-40.

Madam President, may we ask for a suspension of the session.

THE PRESIDENT. The session is suspended.

It was 5:07 p.m.

RESUMPTION OF SESSION

At 5:31 p.m., the session was resumed.

THE PRESIDENT. The session is resumed.

MR. SARMIENTO. Madam President.

THE PRESIDENT. The Acting Floor Leader, Commissioner Sarmiento, is recognized.

MR. SARMIENTO: Commissioner Garcia still has the floor. May I ask that he be
recognized.

THE PRESIDENT. Commissioner Garcia is recognized.

MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I

propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may
enter into co-production, joint venture, production sharing agreements with
Filipino citizens or corporations or associations at least SEVENTY-FIVE percent of
whose CAPITAL stock or controlling interest is owned by such citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not

insisting on the retention of the phrase "controlling interest," so we will retain
"CAPITAL" to go back really to the 1935 and 1973 formulations.

MR. BENNAGEN. May I suggest that we retain the phrase "controlling interest"?
MR. VILLEGAS. Yes, we will retain it. (The statement of Commissioner Villegas is possibly
erroneous considering his consistent statement, especially during the oral arguments,
that the Constitutional Commission rejected the UP Proposal to use the phrase
"controlling interest.")

THE PRESIDENT. Are we now ready to vote?

MR. SARMIENTO. Yes, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of the proposed amendment of Commissioner

Garcia for "SEVENTY-FIVE" percent, please raise their hand. (Few Members raised their
hand.)

As many as are against the amendment, please raise their hand. (Several Members raised
their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

The results show 16 votes in favour, 18 against and 1 abstention; the Garcia
amendment is lost.

MR. SARMIENTO. Madam President, may I ask that Commissioner Foz be recognized.

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. After losing by only two votes, I suppose that this next proposal will finally get
the vote of the majority. The amendment is to provide for at least TWO-THIRDS.

MR. SUAREZ. It is equivalent to 66 2/3.

THE PRESIDENT. Will the Commissioner repeat?

MR. FOZ. I propose "TWO-THIRDS of whose CAPITAL is owned by such citizens."

Madam President, we are referring to the same provision to which the previous
amendments have been suggested. First, we called for a 100-percent ownership;
and then, second, we called for a 75-percent ownership by Filipino citizens.

So my proposal is to provide for at least TWO-THIRDS of the capital to be owned by

Filipino citizens. I would like to call the attention of the body that the same ratio or
equity requirement is provided in the case of public utilities. And if we are willing to
provide such equity requirements in the case of public utilities, we should at least
likewise provide the same equity ratio in the case of natural resources.
MR. VILLEGAS. Commissioner Romulo will respond.

MR. ROMULO. I just want to point out that there is an amendment here filed to also
reduce the ratio in Section 15 to 60-40.

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. The 60 percent which appears in the committee report has been
repeatedly upheld in various votings. One proposal was whole – 100 percent; another one
was 75 percent and now it is 66 2/3 percent. Is not the decision of this Commission in
voting to uphold the percentage in the committee report already a decision on this issue?

MR. FOZ. Our amendment has been previously brought to the attention of the body.

MR. VILLEGAS. The Committee does not accept the Commissioner’s amendment. This
has been discussed fully and, with only one-third of the vote, it is like having nothing at
all in decision-making. It can be completely vetoed.

MR. RODRIGO. Madam President.

THE PRESIDENT. Commissioner Rodrigo is recognized.

MR. RODRIGO. This is an extraordinary suggestion. But considering the circumstances

that the proposals from the 100 percent to 75 percent lost, and now it went down to 66
2/3 percent, we might go down to 65 percent next time. So I suggest that we vote between
66 2/3 and 60 percent. Which does the body want? Then that should be the end of it;
otherwise, this is ridiculous. After this, if the 66 2/3 percent will lose, then somebody can
say: "Well, how about 65 percent?"

THE PRESIDENT. The Chair was made to understand that Commissioner Foz’ proposal is
the last proposal on this particular line. Will Commissioner Foz restate his proposal?

MR. FOZ. My proposal is "TWO-THIRDS of whose CAPITAL or controlling interest is

owned by such citizens."

VOTING

THE PRESIDENT. We now put Commissioner Foz’ amendment to a vote.

As many as are in favour of the amendment of Commissioner Foz, please raise their hand.
(Few Members raised their hand.)
As many as are against, please raise their hand. (Several Members raised their hand.)

The results show 17 votes in favour, 20 against, and not abstention; the
amendment is lost.22

xxxx

August 22, 1986, Friday

THE PRESIDENT. Commissioner Nolledo is recognized.

MR. NOLLEDO. Thank you, Madam President.

I would like to propound some questions to the chairman and members of the
committee. I have here a copy of the approved provisions on Article on the
National Economy and Patrimony. On page 2, the first two lines are with respect
to the Filipino and foreign equity and I said: "At least sixty percent of whose
capital or controlling interest is owned by such citizens."

I notice that this provision was amended by Commissioner Davide by changing

"voting stocks" to "CAPITAL," but I still notice that there appears the term
"controlling interest" which seems to refer to assocaitions other than corporations
and it is merely 50 percent plus one percent which is less than 60 percent. Besides,
the wordings may indicate that the 60 percent may be based not only on capital
but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation
to Section 15 since they are related to each other. I notice that in Section 15, there
still appears the phrase "voting stock or controlling interest." The term "voting
stocks" as the basis of the Filipino equity means that if 60 percent of the voting
stocks belong to Filipinos, foreigners may now own more than 40 percent of the
capital as long as the 40 percent or the excess thereof will cover nonvoting stock.
This is aside from the fact that under the Corporation Code, even nonvoting
shares can vote on certain instances. Control over investments may cover aspects
of management and participation in the fruits of production or exploitation.

So, I hope the committee will consider favorably my recommendation that instead
of using "controlling interests," we just use "CAPITAL" uniformly in cases where
foreign equity is permitted by law, because the purpose is really to help the
Filipinos in the exploitation of natural resources and in the operation of public
utilities. I know the committee, at its own instance, can make the amendment.

What does the committee say?

MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it
was really an oversight. We did decide on the word "CAPITAL." I think it was the
opinion of the majority that the phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or

controlling interest" in all the provisions that talk about foreign participation.

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.

Thank you very much.

MR. MAAMBONG. Madam President.

THE PRESIDENT. Commissioner Maambong is recognized.

MR. MAAMBONG. In view of the manifestation of the committee, I would like to be

clarified on the use of the word "CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL". In the

Corporation Law, if I remember correctly, we have three types of capital: the
authorized capital stock, the subscribed capital stock and the paid-up capital
stock.

The authorized capital stock could be interpreted as the capital of the corporation
itself because that is the totality of the investment of the corporation as stated in
the articles of incorporation. When we refer to 60 percent, are we referring to the
authorized capital stock or the paid-up capital stock since the determinant as to
who owns the corporation, as far as equity is concerned, is the subscription of the
person?

I think we should delimit ourselves also to what we mean by 60 percent. Are we

referring to the authorized capital stock or to the subscribed capital stock,
because the determination, as I said, on the controlling interest of a corporation
is based on the subscribed capital stock? I would like a reply on that.

MR. VILLEGAS. Commissioner Suarez, a member of the committee, would like to answer
that.

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.

We stated this because there might be a misunderstanding regarding the interpretation
of the term "CAPITAL" as now used as the basis for the percentage of foreign investments
in appropriate instances and the interpretation attributed to the word is that it should be
based on the paidup capital. We eliminated the use the phrase "voting stock or
controlling interest" because that is only used in connection with the matter of voting. As
a matter of fact, in the declaration of dividends for private corporations, it is usually
based on the paid-up capitalization.

So, what is really the dominant factor to be considered in matters of determining the 60-
40 percentage should really be the paid-up capital of the corporation.

MR. MAAMBONG. I would like to get clarification on this. If I remember my corporation

law correctly, we usually use a determinant in order to find out what the ratio of
ownership is, not really on the paid-up capital stock but on the subscribed capital stock.

For example, if the whole authorized capital stock of the corporation is ₱ 1 million, if the
subscription is 60 percent of ₱ 1 million which is ₱ 600,000, then that is supposed to be
the determinant whether there is a sharing of 60 percent of Filipinos or not. It is not
really on the paid-up capital because once a person subscribes to a capital stock then
whether that capital stock is paid up or not, does not really matter, as far as the books of
the corporation are concerned. The subscribed capital stock is supposed to be owned by
the person who makes the subscription. There are so many laws on how to collect the
delinquency and so on.

I view of the Commissioner’s answer, I would like to know whether he is determined to

put on the record that in order to determine the 60-40 percent sharing, we have to
determine whether we will use a determinant which is the subscribed capital stock or the
paid-up capital stock.

MR SUAREZ. We are principally concerned about the interpretation which would be

attached to it; that is, it should be limited to authorized capital stock, not to subscribed
capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

MR. MAAMBONG. Yes, thank you.

MR. SUAREZ. Let us say the authorized capital stock is ₱ 1 million. Under the present
rules in the Securities and Exchange Commission, at least 25 percent of that amount must
be subscribed and at least 25 percent of this subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60
percent of the subscriptions would be allocated to Filipinos and 40 percent of the
subscribed capital would be held by foreigners. Then we come to the paid-up
capitalization. Under the present rules in the Securities and Exchange Commission, a
foreign corporation is supposed to subscribe to a 40-percent share which must be fully
paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at
least 25 percent of the subscription must be paid up for purposes of complying with the
Corporation Law. We can illustrate the matter further by saying that the compliance of 25
percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40
percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the
25-percent requirement because of the totality due to the fully payment of the 40-percent
of the foreign investors, the payment of 25 percent paid-up on the subscription would
have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG I appreciate very much the explanation but I wonder if the committee
would subscribe to that view because I will stick to my thinking that in the computation
of the 60-40 ratio, the basis should be on the subscription. If the subscription is being
done by 60 percent Filipinos, whether it is paid-up or not and the subscription is
accepted by the corporation, I think that is the proper determinant. If we base the 60-40
on the paid-up capital stock, we have a problem here where the 40 percent is fully paid up
and the 60 percent is not fully paid up – this may be contrary to the provisions of the
Constitution. So I would like to ask for the proper advisement from the Committee as to
what should be the proper interpretation because this will cause havoc on the
interpretation of our Corporation Law.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is

based on the subscribed capital. I know only of one possible exception and that is where
the bylaws prohibit the subscriber from voting. But that is a very rare provision in bylaws.
Otherwise, my information and belief is that it is based on the subscribed capital.

MR. MAAMBONG. It is, therefore, the understanding of this Member that the
Commissioner is somewhat revising the answer of Commissioner Suarez to that extent?

MR. ROMULO. No, I do not think we contradict each other. He is talking really of the
instance where the subscriber is a non-resident and, therefore, must fully pay. That is
how I understand his position.
MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing
under the present formulation, the determinant is the paid-up capital stock to which I
disagree.

MR. ROMULO. At least, from my point of view, it is the subscribed capital stock.

MR. MAAMBONG. Then that is clarified.23

xxxx

August 23, 1986, Saturday

MS. ROSARIO BRAID. Madam President, I propose a new section to read: "THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the
committee assure us that this amendment will insure that past activities such as
management contracts will no longer be possible under this amendment?

MR. ROMULO. Madam President, if I may reply.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. May I ask the proponent to read the amendment again.

MS. ROSARIO BRAID. The amendment reads: "THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES."

MR. DE LOS REYES. Madam President, will Commissioner Rosario Braid agree to a
reformulation of her amendment for it to be more comprehensive and all-embracing?

THE PRESIDENT. Commissioner de los Reyes is recognized.

MR. DE LOS REYES. This is an amendment I submitted to the committee which reads:
"MAJORITY OF THE DIRECTORS OR TRUSTEES AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATION OR ASSOCIATION MUST BE
CITIZENS OF THE PHILIPPINES."

This amendment is more direct because it refers to particular officers to be all-Filipino

citizens.

MR. BENGZON. Madam President.

THE PRESIDENT. Commissioner Bengzon is recognized.

MR. BENGZON. The committee sitting out here accepts the amendment of
Commissioner de los Reyes which subsumes the amendment of Commissioner Rosario
Braid.

THE PRESIDENT. So this will be a joint amendment now of Commissioners Rosario

Braid, de los Reyes and others.

MR. REGALADO. Madam President, I join in that amendment with the request that it
will be the last sentence of Section 15 because we intend to put an anterior amendment.
However, that particular sentence which subsumes also the proposal of Commissioner
Rosario Braid can just be placed as the last sentence of the article.

THE PRESIDENT. Is that acceptable to the committee?

MR. VILLEGAS. Yes, Madam President.

MS. ROSARIO BRAID. Thank you.

MR. RAMA, The body is now ready to vote on the amendment.

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973
Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN
THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE
LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND…"

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE

GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO
THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF…" I do not have the
rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant
language. We accept the amendment. Is that all right with Commissioner Rosario
Braid?

MS. ROSARIO BRAID. Yes.

THE PRESIDENT. The original authors of this amendment are Commissioners

Rosario Braid, de los Reyes, Regalado, Natividad, Guingona and Fr. Bernas.

MR. DE LOS REYES. The governing body refers to the board of directors and
trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment which should be
the last sentence of Section 15 and has been accepted by the committee, pleas raise their
hand. (All Members raised their hand.)

As many as are against, please raise their hand. (No Member raised his hand.)

The results show 29 votes in favour and none against; so the proposed amendment
is approved.24

It can be concluded that the view advanced by Justice Carpio is incorrect as the
deliberations easily reveal that the intent of the framers was not to limit the
definition of the word "capital" as meaning voting shares/stocks.

The majority in the original decision reproduced the CONCOM deliberations held on
August 13 and August 15, 1986, but neglected to quote the other pertinent portions of the
deliberations that would have shed light on the true intent of the framers of the
Constitution.

It is conceded that Proposed Resolution No. 496 on the language of what would be Art.
XII of the Constitution contained the phrase "voting stock or controlling interest," viz:

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON

NATIONAL ECONOMY AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session

assembled, To incorporate the National Economy and Patrimony of the new Constitution,
the following provisions:

ARTICLE____
NATIONAL ECONOMY AND PATRIMONY

xxxx

SEC. 15. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least two-thirds of whose
voting stock or controlling interest is owned by such citizens. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public.25 (This
became Sec. 11, Art. XII)(Emphasis supplied.)

The aforequoted deliberations disclose that the Commission eventually and

unequivocally decided to use "capital," which refers to the capital stock of the
corporation, "as was employed in the 1935 and 1973 Constitution," instead of the
proposed "voting stock or controlling interest" as the basis for the percentage of
ownership allowed to foreigners. The following exchanges among Commissioners Foz,
Suarez and Bengzon reflect this decision, but the majority opinion in the June 28, 2011
Decision left their statements out:

MR. FOZ. Mr. Vice-President, in Sections 3 and 9,26 the provision on equity is both 60
percent, but I notice that this is now different from the provision in the 1973
Constitution in that the basis for the equity provision is voting stock or
controlling interest instead of the usual capital percentage as provided for in the 1973
Constitution. We would like to know what the difference would be between the
previous and the proposed provisions regarding equity interest.
xxxx

MR. SUAREZ. x x x As a matter of fact, this particular portion is still being reviewed x x x.
In Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage
should be based on the capital which is owned by such citizens. In the proposed
draft, this phrase was proposed: "voting stock or controlling interest." This was a
plan submitted by the UP Law Center.

x x x We would have three criteria to go by: One would be based on capital, which is
capital stock of the corporation, authorized, subscribed or paid up, as employed
under the 1935 and the 1973 Constitution. The idea behind the introduction of the
phrase "voting stock or controlling interest" was precisely to avoid the perpetration of
dummies, Filipino dummies of multinationals. It is theoretically possible that a situation
may develop where these multinational interests would not really be only 40 percent but
will extend beyond that in the matter of voting because they could enter into what is
known as a voting trust or voting agreement with the rest of the stockholders and,
therefore, notwithstanding the fact that on record their capital extent is only up to 40-
percent interest in the corporation, actually, they would be managing and controlling the
entire company. That is why the UP Law Center members suggested that we utilize the
words "voting interest" which would preclude multinational control in the matter of
voting, independent of the capital structure of the corporation. And then they also
added the phrase "controlling interest" which up to now they have not been able to
successfully define the exact meaning of. x x x And as far as I am concerned, I am not
speaking in behalf of the Committee, I would feel more comfortable if we go back
to the wording of the 1935 and the 1973 Constitution, that is to say, the 60-40
percentage could be based on the capital stock of the corporation.

xxxx

MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So
there are already two in the Committee who want to go back to the wording of the 1935
and the 1973 Constitution.27

In fact, in another portion of the CONCOM deliberations conveniently glossed over by

the June 28, 2011 Decision, then Commissioner Davide strongly resisted the retention of
the term "capital" as used in the 1935 and 1973 Constitution on the ground that the term
refers to both voting and nonvoting. Eventually, however, he came around to accept the
use of "CAPITAL" along with the majority of the members of the Committee on Natural
Economy and Patrimony in the afternoon session held on August 15, 1986:

MR. TREÑAS. x x x may I propose an amendment on line 14 of Section 3 by deleting

therefrom "whose voting stock and controlling interest." And in lieu thereof,
insert the CAPITAL so the line should read: "associations at least sixty percent of
the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been

accepted by the Committee.

Is there any objection? (Silence) The Chair hears none; the amendment is
approved.28

xxxx

MR. SUAREZ. x x x Two points are being raised by Commissioner Davide’s proposed
amendment. One has reference to the percentage of holdings and the other one is the
basis for the percentage x x x x Is the Commissioner not insisting on the voting
capital stock because that was already accepted by the Committee?

MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the
Committee? How shall it read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY
owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with Filipino
citizens or corporations or associations at least 60 percent of whose CAPITAL is owned by
such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not
really be the guiding principle. It is the ownership of the corporation. It may be
voting or not voting, but that is not the guiding principle.

xxxx

THE PRESIDENT…. Commissioner Davide is to clarify his point.

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in
place of "voting stock or controlling interest." This is an amendment already
accepted by the Committee.29

The above exchange precedes the clarifications made by then Commissioner Azcuna,
which were cited in the June 28, 2011 Decision. Moreover, the statements made
subsequent to the portion quoted in the June 28, 2011 Decision emphasize the CONCOM’s
awareness of the plain meaning of the term "capital" without the qualification espoused
in the majority’s decision:

MR. AZCUNA. May I be clarified as to [what] was accepted x x x.

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

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

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

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

MR. BENGZON. In the case of stock corporation, it is assumed.

MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.

MR. BENGZON. Yes, that is understood.

MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned
by the Filipinos," the capital may be voting or non-voting.

MR. BENGZON. That is correct.30

More importantly, on the very same August 15, 1986 session, Commissioner Azcuna no
longer insisted on retaining the delimiting phrase "controlling interest":

MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I

propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may enter
into co-production, joint venture, production sharing agreements with Filipino citizens or
corporations or associations at least SEVENTY-FIVE percent of whose CAPITAL stock or
controlling interest is owned by such citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not

insisting on the retention of the phrase "controlling interest," so we will retain
"CAPITAL" to go back really to the 1935 and 1973 formulations.31 (Emphasis supplied.)

The later deliberations held on August 22, 1986 further underscore the framers’ true
intent to include both voting and non-voting shares as coming within the pale of the
word "capital." The UP Law Center attempted to limit the scope of the word along the
line then and now adopted by the majority, but, as can be gleaned from the following
discussion, the framers opted not to adopt the proposal of the UP Law Center to
add the more protectionist phrase "voting stock or controlling interest":

MR. NOLLEDO. x x x I would like to propound some questions xxx. I have here a copy of
the approved provisions on Article on the National Economy and Patrimony. x x x

I notice that this provision was amended by Commissioner Davide by changing "voting
stocks" to "CAPITAL," but I still notice that there appears the term "controlling interest" x
x x. Besides, the wordings may indicate that the 60 percent may be based not only on
capital but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation to
Section 15 since they are related to each other. I notice that in Section 15, there still
appears the phrase "voting stock or controlling interest." The term "voting stocks" as the
basis of the Filipino equity means that if 60 percent of the voting stocks belong to
Filipinos, foreigners may now own more than 40 percent of the capital as long as the 40
percent or the excess thereof will cover nonvoting stock. This is aside from the fact that
under the Corporation Code, even nonvoting shares can vote on certain
instances. Control over investments may cover aspects of management and
participation in the fruits of production or exploitation.
So, I hope the committee will consider favorably my recommendation that instead
of using "controlling interests," we just use "CAPITAL" uniformly in cases where
foreign equity is permitted by law, because the purpose is really to help the
Filipinos in the exploitation of natural resources and in the operation of public
utilities. x x x

What does the committee say?

MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it was
really an oversight. We did decide on the word "CAPITAL." I think it was the opinion
of the majority that the phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or

controlling interest" in all the provisions that talk about foreign participation.

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.32 (Emphasis
supplied.)

In fact, on the very same day of deliberations, the Commissioners clarified that the proper
and more specific "interpretation" that should be attached to the word "capital" is that it
refers to the "subscribed capital," a corporate concept defined as "that portion of the
authorized capital stock that is covered by subscription agreements whether fully paid or
not"33 and refers to both voting and non-voting shares:

MR. MAAMBONG. x x x I would like to be clarified on the use of the word

"CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and the 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL." In the Corporation
Law, if I remember correctly, we have three types of capital: the authorized capital stock,
the subscribed capital stock and the paid-up capital stock.

xxxx

I would like to get clarification on this. If I remember my corporation law correctly,

we usually use a determinant in order to find out what the ratio of ownership is,
not really on the paid-up capital stock but on the subscribe capital stock.

xxxx

x x x I would like to know whether (Commissioner Suarez) is determined to put on the

record that in order to determine the 60-40 percent sharing, we have to determine
whether we will use a determinant which is the subscribed capital stock or the paid-up
capital stock.

MR. SUAREZ. We are principally concerned about the interpretation which would
be attached to it, that is, it should be limited to authorized capital stock, not to
subscribed capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

xxxx

Let us say authorized capital stock is ₱ 1 million. Under the present rules in the [SEC], at
least 25 percent of that amount must be subscribed and at least 25 percent of this
subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60
percent of the subscriptions would be allocated to Filipinos and 40 percent of the
subscribed capital stock would be held by foreigners. Then we come to the paid-up
capitalization. Under the present rules in the [SEC], a foreign corporation is supposed to
subscribe to 40-percent share which must be fully paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at
least 25 percent of the subscription must be paid up for purposes of complying with the
Corporation Law. We can illustrate the matter further by saying that the compliance of 25
percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40
percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the
25-percent requirement because of the totality due to the full payment of the 40-percent
of the foreign investors, the payment of 25 percent paid-up on the subscription would
have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG. I appreciate very much the explanation but I wonder if the committee
would subscribe to that view because I will stick to my thinking that in the computation
of the 60-40 ratio, the basis should be on the subscription. x x x

xxxx

MR. ROMULO. We go by the established rule which I believe is uniformly held. It

is based on the subscribed capital. x x x

xxxx
I do not think that we contradict each other. (Commisioner Suarez) is talking really of the
instance where the subscriber is a non-resident and, therefore, must fully pay. That is
how I understand his position.

MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing

under the present formulation, the determinant is the paid-up capital stock to which I
disagree.

MR . ROMULO. At least, from my point of view, it is the subscribed capital stock."34

Clearly, while the concept of voting capital as the norm to determine the 60-40 Filipino-
alien ratio was initially debated upon as a result of the proposal to use "at least two-
thirds of whose voting stock or controlling interest is owned by such citizens,"35 in what
would eventually be Sec. 11, Art. XII of the Constitution, that proposal was
eventually discarded. And nowhere in the records of the CONCOM can it be deduced
that the idea of full ownership of voting stocks presently parlayed by the majority was
earnestly, if at all, considered. In fact, the framers decided that the term "capital," as used
in the 1935 and 1973 Constitutions, should be properly interpreted as the "subscribed
capital," which, again, does not distinguish stocks based on their board-membership
voting features.

Indeed, the phrase "voting stock or controlling interest" was suggested for and in fact
deliberated, but was similarly dropped in the approved draft provisions on National
Economy and Patrimony, particularly in what would become Sections 236 and 10,37 Article
XII of the 1987 Constitution. However, the framers expressed preference to the
formulation of the provision in question in the 1935 and 1973 Constitutions, both of which
employed the word "capital" alone. This was very apparent in the aforementioned
deliberations and affirmed by amicus curiae Dr. Bernardo Villegas, Chair of the
Committee on the National Economy and Patrimony in charge of drafting Section 11 and
the rest of Article XII of the Constitution. During the June 26, 2012 oral arguments, Dr.
Villegas manifested that:

x x x Justice Abad was right. [If i]t was not in the minds of the Commissioners to define
capital broadly, these additional provisions would be meaningless. And it would have
been really more or less expressing some kind of a contradiction in terms. So, that is why
I was pleasantly surprised that one of the most pro-Filipino members of the Commission,
Atty. Jose Suarez, who actually voted "NO" to the entire Constitution has only said, was
one of the first to insist, during one of the plenary sessions that we should reject the UP
Law Center recommendation. In his words, I quote "I would feel more comfortable if
we go back to the wording of the 1935 and 1970 Constitutions that is to say the 60-
40 percentage could be based on the capital stock of the corporation." The final
motion was made by Commissioner Efren Treñas, in the same plenary session when he
moved, "Madam President, may I propose an amendment on line 14 of Section 3 by
deleting therefrom ‘whose voting stock and controlling interest’ and in lieu thereof, insert
capital, so the line should read: "associations of at least sixty percent (60%) of the capital
is owned by such citizens." After I accepted the amendment since I was the chairman
of the National Economy Committee, in the name of the Committee, the President
of the Commission asked for any objection. When no one objected, the President
solemnly announced that the amendment had been approved by the Plenary. It is
clear, therefore, that in the minds of the Commissioners the word "capital" in
Section 11 of Article XII refers, not to voting stock, but to total subscribed capital,
both common and preferred.38(Emphasis supplied.)

There was no change in phraseology from the 1935 and

1973 Constitutions, or a transitory provision that signals
such change, with respect to foreign ownership in public
utility corporations (2nd extrinsic aid)

If the framers wanted the word "capital" to mean voting capital stock, their terminology
would have certainly been unmistakably limiting as to leave no doubt about their
intention. But the framers consciously and purposely excluded restrictive phrases,
such as "voting stocks" or "controlling interest," in the approved final draft, the proposal
of the UP Law Center, Commissioner Davide and Commissioner Azcuna notwithstanding.
Instead, they retained "capital" as "used in the 1935 and 1973 Constitutions."39 There was,
therefore, a conscious design to avoid stringent words that would limit the meaning of
"capital" in a sense insisted upon by the majority. Cassus omissus pro omisso habendus
est––a person, object, or thing omitted must have been omitted intentionally. More
importantly, by using the word "capital," the intent of the framers of the Constitution was
to include all types of shares, whether voting or nonvoting, within the ambit of the word.

History or realities or circumstances prevailing during the

drafting of the Constitution validate the adoption of the plain
meaning of "Capital" (3rd extrinsic aid)

This plain, non-exclusive interpretation of "capital" also comes to light considering the
economic backdrop of the 1986 CONCOM when the country was still starting to rebuild
the financial markets and regain the foreign investors’ confidence following the changes
caused by the toppling of the Martial Law regime. As previously pointed out, the Court, in
construing the Constitution, must take into consideration the aims of its framers and the
evils they wished to avoid and address. In Civil Liberties Union v. Executive
Secretary,40 We held:

A foolproof yardstick in constitutional construction is the intention underlying the

provision under consideration. Thus, it has been held that the Court in construing a
Constitution should bear in mind the object sought to be accomplished by its
adoption, and the evils, if any, sought to be prevented or remedied. A doubtful
provision will be examined in the light of the history of the times, and the condition and
circumstances under which the Constitution was framed. The object is to ascertain the
reason which induced the framers of the Constitution to enact the particular
provision and the purpose sought to be accomplished thereby, in order to
construe the whole as to make the words consonant to that reason and calculated
to effect that purpose. (Emphasis supplied.)

It is, thus, proper to revisit the circumstances prevailing during the drafting period. In an
astute observation of the economic realities in 1986, quoted by respondent Pangilinan,
University of the Philippines School of Economics Professor Dr. Emmanuel S. de Dios
examined the nation’s dire need for foreign investments and foreign exchange during the
time when the framers deliberated on what would eventually be the National Economy
and Patrimony provisions of the Constitution:

The period immediately after the 1986 EDSA Revolution is well known to have
witnessed the country’s deepest economic crisis since the Second World
War. Official data readily show this period was characterised by the highest
unemployment, highest interest rates, and largest contractions in output the Philippine
economy experienced in the postwar period. At the start of the Aquino administration in
1986, total output had already contracted by more than seven percent annually for two
consecutive years (1984 and 1985), inflation was running at an average of 35 percent,
unemployment more than 11 percent, and the currency devalued by 35 percent.

The proximate reason for this was the moratorium on foreigndebt payments the
country had called in late 1983, effectively cutting off the country’s access to
international credit markets (for a deeper contemporary analysis of what led to the
debt crisis, see de Dios 1984). The country therefore had to subsist only on its current
earnings from exports, which meant there was a critical shortage of foreign
exchange. Imports especially of capital goods and intermediate goods therefore
had to be drastically curtailed x x x.

For the same reasons, obviously, new foreign investments were unlikely to be
forthcoming. This is recorded by Bautista 2003:158, who writes:

Long-term capital inflows have been rising at double-digit rates since 1980, except
during 1986-1990, a time of great political and economic uncertainty following the
period of martial law under President Marcos.

The foreign-exchange controls then effectively in place will have made importing inputs
difficult for new enterprises, particularly foreign investors (especially Japanese) interested
in relocating some of theirexport-oriented but import-dependent operations to the
Philippines. x x x The same foreign-exchange restrictions would have made the freedom
to remit profits a dicey affairs. Finally, however, the period was also characterised by
extreme political uncertainty, which did not cease even after the Marcos regime was
toppled.41 x x x
Surely, it was far from the minds of the framers to alienate and disenfranchise foreign
investors by imposing an indirect restriction that only exacerbates the dichotomy
between management and ownership without the actual guarantee of giving control and
protection to the Filipino investors. Instead, it can be fairly assumed that the framers
intended to avoid further economic meltdown and so chose to attract foreign investors by
allowing them to 40% equity ownership of the entirety of the corporate shareholdings
but, wisely, imposing limits on their participation in the governing body to ensure that
the effective control and ultimate economic benefits still remained with the Filipino
shareholders.

Judicial decisions and prior laws use and/or treat

"capital" as "capital stock" (4th extrinsic aid)

That the term "capital" in Sec. 11, Art. XII is equivalent to "capital stock," which
encompasses all classes of shares regardless of their nomenclature or voting capacity, is
easily determined by a review of various laws passed prior to the ratification of the 1987
Constitution. In 1936, for instance, the Public Service Act42 established the nationality
requirement for corporations that may be granted the authority to operate a "public
service,"43 which include most of the present-day public utilities, by referring to the paid-
up "capital stock" of a corporation, viz:

Sec. 16. Proceedings of the Commission, upon notice and hearing. – The Commission
shall have power, upon proper notice and hearing in accordance with the rules and
provisions of this Act, subject to the limitations and exceptions mentioned and saving
provisions to the contrary:

(a) To issue certificates which shall be known as certificates of public

convenience, authorizing the operation of public service within the
Philippines whenever the Commission finds that the operation of the public
service proposed and the authorization to do business will promote the
public interest in a proper and suitable manner. Provided, That
thereafter, certificates of public convenience and certificates of public
convenience and necessity will be granted only to citizens of the
Philippines or of the United States or to corporations, co-partnerships,
associations or joint-stock companies constituted and organized
under the laws of the Philippines; Provided, That sixty per centum of
the stock or paid-up capital of any such corporations, co-partnership,
association or joint-stock company must belong entirely to citizens
of the Philippines or of the United States: Provided, further, That no such
certificates shall be issued for a period of more than fifty years. (Emphasis
supplied.)
The heading of Sec. 2 of Commonwealth Act No. (CA) 108, or the Anti-Dummy Law,
which was approved on October 30, 1936, similarly conveys the idea that the term
"capital" is equivalent to "capital stock"44:

Section 2. Simulation of minimum capital stock — In all cases in which a

constitutional or legal provision requires that, in order that a corporation or
association may exercise or enjoy a right, franchise or privilege, not less than a
certain per centum of its capital must be owned by citizens of the Philippines or of
any other specific country, it shall be unlawful to falsely simulate the existence of
such minimum stock or capital as owned by such citizens, for the purpose of evading
said provision. The president or managers and directors or trustees of corporations or
associations convicted of a violation of this section shall be punished by imprisonment of
not less than five nor more than fifteen years, and by a fine not less than the value of the
right, franchise or privilege, enjoyed or acquired in violation of the provisions hereof but
in no case less than five thousand pesos.45 (Emphasis and underscoring supplied.)

Pursuant to these legislative acts and under the aegis of the Constitutional nationality
requirement of public utilities then in force, Congress granted various franchises upon
the understanding that the "capital stock" of the grantee is at least 60% Filipino. In 1964,
Congress, via Republic Act No. (RA) 4147,46 granted Filipinas Orient Airway, Inc. a
legislative franchise to operate an air carrier upon the understanding that its "capital
stock" was 60% percent Filipino-owned. Section 14 of RA 4147, provided:

Sec. 14. This franchise is granted with the understanding that the grantee is a
corporation sixty per cent of the capital stock of which is the bona fide property of
citizens of the Philippines and that the interest of such citizens in its capital stock or in
the capital of the Company with which it may merge shall at no time be allowed to fall
below such percentage, under the penalty of the cancellation of this franchise. (Emphasis
and underscoring supplied.)

The grant of a public utility franchise to Air Manila. Inc. to establish and maintain air
transport in the country a year later pursuant to RA 450147 contained exactly the same
Filipino capitalization requirement imposed in RA 4147:

Sec. 14. This franchise is granted with the understanding that the grantee is a
corporation, sixty per cent of the capital stock of which is owned or the bona fide
property of citizens of the Philippines and that the interest of such citizens in its
capital stock or in the capital of the company with which it may merge shall at no time be
allowed to fall below such percentage, under the penalty of the cancellation of this
franchise. (Emphasis and underscoring supplied.)

In like manner, RA 5514,48 which granted a franchise to the Philippine Communications

Satellite Corporation in 1969, required of the grantee to execute management contracts
only with corporations whose "capital or capital stock" are at least 60% Filipino:
Sec. 9. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this
franchise to any person or entity, except any branch or instrumentality of the
Government, without the previous approval of the Congress of the Philippines: Provided,
That the grantee may enter into management contract with any person or entity, with the
approval of the President of the Philippines: Provided, further, That such person or entity
with whom the grantee may enter into management contract shall be a citizen of the
Philippines and in case of an entity or a corporation, at least sixty per centum of the
capital or capital stock of which is owned by citizens of the Philippines. (Emphasis
supplied.)

In 1968, RA 5207,49 otherwise known as the "Atomic Energy Regulatory Act of 1968,"
considered a corporation sixty percent of whose capital stock as domestic:

Sec. 9. Citizenship Requirement. No license to acquire, own, or operate any atomic

energy facility shall be issued to an alien, or any corporation or other entity which is
owned or controlled by an alien, a foreign corporation, or a foreign government.

For purposes of this Act, a corporation or entity is not owned or controlled by an

alien, a foreign corporation of a foreign government if at least sixty percent (60%) of
its capital stock is owned by Filipino citizens. (Emphasis supplied.)

Anent pertinent judicial decisions, this Court has used the very same definition of capital
as equivalent to the entire capital stockholdings in a corporation in resolving various
other issues. In National Telecommunications Commission v. Court of Appeals,50 this
Court, thus, held:

The term "capital" and other terms used to describe the capital structure of a
corporation are of universal acceptance, and their usages have long been
established in jurisprudence. Briefly, capital refers to the value of the property or
assets of a corporation. The capital subscribed is the total amount of the capital
that persons (subscribers or shareholders) have agreed to take and pay for, which
need not necessarily be, and can be more than, the par value of the shares. In fine,
it is the amount that the corporation receives, inclusive of the premiums if any, in
consideration of the original issuance of the shares. In the case of stock dividends, it
is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the "trust fund" of the
corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund
for the payment of the debts of the corporation, to which the creditors may look for
satisfaction. Until the liquidation of the corporation, no part of the subscribed capital
may be returned or released to the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration
therefor.51
This is similar to the holding in Banco Filipino v. Monetary Board52 where the Court
treated the term "capital" as including both common and preferred stock, which are
usually deprived of voting rights:

It is clear from the law that a solvent bank is one in which its assets exceed its liabilities.
It is a basic accounting principle that assets are composed of liabilities and capital. The
term "assets" includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302).
On the other hand, the term "capital" includes common and preferred stock,
surplus reserves, surplus and undivided profits. (Manual of Examination Procedures,
Report of Examination on Department of Commercial and Savings Banks, p. 3-C). If
valuation reserves would be deducted from these items, the result would merely be the
networth or the unimpaired capital and surplus of the bank applying Sec. 5 of RA 337 but
not the total financial condition of the bank.

In Commissioner of Internal Revenue v. Court of Appeals,53 the Court alluded to the

doctrine of equality of shares in resolving the issue therein and held that all
shares comprise the capital stock of a corporation:

A common stock represents the residual ownership interest in the corporation. It is a

basic class of stock ordinarily and usually issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata division of profits. Preferred stocks are those
which entitle the shareholder to some priority on dividends and asset distribution. Both
shares are part of the corporation’s capital stock. Both stockholders are no
different from ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same venture, willing to
share in the profit and losses of the enterprise. Moreover, under the doctrine of
equality of shares --- all stocks issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences.54 (Emphasis supplied.)

The SEC has reflected the popular contemporaneous

construction of capital in computing the nationality
requirement based on the total capital stock, not only
the voting stock, of a corporation (5th extrinsic aid)

The SEC has confirmed that, as an institution, it has always interpreted and applied the
40% maximum foreign ownership limit for public utilities to the total capital stock, and
not just its total voting stock.

In its July 29, 2011 Manifestation and Omnibus Motion, the SEC reaffirmed its
longstanding practice and history of enforcement of the 40% maximum foreign
ownership limit for public utilities, viz:
5. The Commission respectfully submits that it has always performed its duty under
Section 17(4) of the Corporation Code to enforce the foreign equity restrictions under
Section 11, Article XII of the Constitution on the ownership of public utilities.

xxxx

8. Thus, in determining compliance with the Constitutional restrictions on foreign

equity, the Commission consistently construed and applied the term "capital" in
its commonly accepted usage, that is – the sum total of the shares subscribed
irrespective of their nomenclature and whether or not they are voting or non-
voting (Emphasis supplied).

9. This commonly accepted usage of the term ‘capital’ is based on persuasive authorities
such as the widely esteemed Fletcher Cyclopedia of the Law of Private Corporations, and
doctrines from American Jurisprudence. To illustrate, in its Opinion dated February 15,
1988 addresses to Gozon, Fernandez, Defensor and Associates, the Commission discussed
how the term ‘capital’ is commonly used:

"Anent thereto, please be informed that the term ‘capital’ as applied to corporations,
refers to the money, property or means contributed by stockholders as the form or basis
for the business or enterprise for which the corporation was formed and generally implies
that such money or property or means have been contributed in payment for stock issued
to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11
Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further ruled by the court, ‘capital
of a corporation is the fund or other property, actually or potentially in its
possession, derived or to be derived from the sale by it of shares of its stock or his
exchange by it for property other than money. This fund includes not only money or
other property received by the corporation for shares of stock but all balances of purchase
money, or instalments, due the corporation for shares of stock sold by it, and all unpaid
subscriptions for shares.’" (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc.
Corp., 1058 rev. vol., sec. 5080, p. 21).

The term ‘capital’ is also used synonymously with the words ‘capital stock’, as meaning
the amount subscribed and paidin and upon which the corporation is to conduct its
operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court
in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc.
Corp., 1958 rev. vol., sec. 5079 at 17), ‘The capital stock of a corporation is the amount
paidin by its stockholders in money, property or services with which it is to conduct its
business, and it is immaterial how the stock is classified, whether as common or
preferred.’

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum
total of the shares subscribed and paid by the shareholders or served to be paid,
irrespective of their nomenclature. (Letter to Supreme Technotronics Corporation, dated
April 14, 1987)." (Emphasis ours)

10. Further, in adopting this common usage of the term ‘capital,’ the Commission believed
in good faith and with sound reasons that it was consistent with the intent and purpose of
the Constitution. In an Opinion dated 27 December 1995 addressed to Joaquin Cunanan &
Co. the Commission observed that:

"To construe the 60-40% equity requirement as merely based on the voting shares,
disregarding the preferred non-voting share, not on the total outstanding subscribed
capital stock, would give rise to a situation where the actual foreign interest would not
really be only 40% but may extend beyond that because they could also own even the
entire preferred non-voting shares. In this situation, Filipinos may have the control in the
operation of the corporation by way of voting rights, but have no effective ownership of
the corporate assets which includes lands, because the actual Filipino equity constitutes
only a minority of the entire outstanding capital stock. Therefore, in essence, the
company, although controlled by Filipinos, is beneficially owned by foreigners
since the actual ownership of at least 60% of the entire outstanding capital stocks
would be in the hands of foreigners. Allowing this situation would open the
floodgates to circumvention of the intent of the law to make the Filipinos the
principal beneficiaries in the ownership of alienable lands." (Emphasis ours)

11. The foregoing settled principles and esteemed authorities relied upon by the
Commission show that its interpretation of the term ‘capital’ is reasonable.

12. And, it is well settled that courts must give due deference to an administrative
agency’s reasonable interpretation of the statute it enforces.55

It should be borne in mind that the SEC is the government agency invested with the
jurisdiction to determine at the first instance the observance by a public utility of the
constitutional nationality requirement prescribed vis-à-vis the ownership of public
utilities56 and to interpret legislative acts, like the FIA. The rationale behind the doctrine
of primary jurisdiction lies on the postulate that such administrative agency has the
"special knowledge, experience and tools to determine technical and intricate matters of
fact…"57 Thus, the determination of the SEC is afforded great respect by other executive
agencies, like the Department of Justice (DOJ),58 and by the courts.

Verily, when asked as early as 1988– "Would it be legal for foreigners to own in a public
utility entity more than 40% of the common shares but not more than 40% of the total
outstanding capital stock which would include both common and non-voting preferred
shares?" –the SEC, citing Fletcher, invariably answered in the affirmative, whether the
poser was made in light of the present or previous Constitutions:
The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads
in part thus:

"No franchise, certificate, or any form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines, or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens. . ." x x x

The issue raised on your letter zeroes in on the meaning of the word "capital" as
used in the above constitutional provision. Anent thereto, please be informed that
the term "capital" as applied to corporations, refers to the money, property or means
contributed by stockholders as the form or basis for the business or enterprise for which
the corporation was formed and generally implies that such money or property or means
have been contributed in payment for stock issued to the contributors. (United Grocers,
Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080
at 18). As further ruled by the court, "capital of a corporation is the fund or other
property, actually or potentially in its possession, derived or to be derived from the sale
by it of shares of its stock or his exchange by it for property other than money. This fund
includes not only money or other property received by the corporation for shares of stock
but all balances of purchase money, or installments, due the corporation for shares of
stock sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d
470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).

The term "capital" is also used synonymously with the words "capital stock", as meaning
the amount subscribed and paid-in and upon which the corporation is to conduct its
operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court
in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc.
Corp., 1958 rev. vol., sec. 5079 at 17), "The capital stock of a corporation is the amount
paid-in by its stockholders in money, property or services with which it is to
conduct its business, and it is immaterial how the stock is classified, whether as
common or preferred."

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the
sum total of the shares subscribed and paid by the shareholders or served to be
paid, irrespective of their nomenclature. (Letter to Supreme Technotronics
Corporation, dated April 14, 1987). Hence, your query is answered in the
affirmative.59 (Emphasis supplied.)

As it were, the SEC has held on the same positive response long before the 1987
Constitution came into effect, a matter of fact which has received due acknowledgment
from this Court. In People v. Quasha,60 a case decided under the 1935 Constitution, this
Court narrated that in 1946 the SEC approved the incorporation of a common carrier, a
public utility, where Filipinos, while not holding the controlling vote, owned the majority
of the capital, viz:
The essential facts are not in dispute. On November 4, 1946, the Pacific Airways
Corporation registered its articles of incorporation with the [SEC]. The articles were
prepared and the registration was effected by the accused, who was in fact the organizer
of the corporation. The articles stated that the primary purpose of the corporation was to
carry on the business of a common carrier by air, land, or water, that its capital stock
was ₱ 1,000,000, represented by 9,000 preferred and 100,000 common shares, each
preferred share being of the par value of ₱ 100 and entitled to 1/3 vote and each
common share, of the par value of ₱ 1 and entitled to one vote; that the amount of
capital stock actually subscribed was ₱ 200,000, and the names of the subscriber were
Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James O’bannon, Denzel J.
Cavin, and William H. Quasha, the first being a Filipino and the other five all
Americans; that Baylon’s subscription was for 1,145 preferred shares, of the total value of
₱ 114,500 and 6,500 common shares, of the total par value of ₱ 6,500, while the aggregate
subscriptions of the American subscribers were for 200 preferred shares, of the total par
value of ₱ 20,000 and 59,000 common shares, of the total par value of ₱ 59,000; and that
Baylon and the American subscribers had already paid 25 percent of their respective
subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon, did not have the controlling
vote because of the difference in voting power between the preferred shares and
the common shares. Still, with the capital structure as it was, the articles of
incorporation were accepted for registration and a certificate of incorporation was
issued by the [SEC]. (Emphasis supplied.)

The SEC has, through the years, stood by this interpretation. In an Opinion dated
November 21, 1989, the SEC held that the basis of the computation for the nationality
requirement is the total outstanding capital stock, to wit:

As to the basis of computation of the 60-40 percentage nationality requirement under

existing laws (whether it should be based on the number of shares or the aggregate
amount in pesos of the par value of the shares), the following definitions of corporate
terms are worth mentioning.

"The term capital stock signifies the aggregate of the shares actually subscribed". (11
Fletcher, Cyc. Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing
Paper Co., 73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).

"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis
supplied).

"In its primary sense a share of stock is simply one of the proportionate integers or units,
the sum of which constitutes the capital stock of corporation. (Fletcher, sec. 5083).

The equitable interest of the shareholder in the property of the corporation is represented
by the term stock, and the extent of his interest is described by the term shares. The
expression shares of stock when qualified by words indicating number and ownership
expresses the extent of the owner's interest in the corporate property (Ibid, Sec. 5083,
emphasis supplied).

Likewise, in all provisions of the Corporation Code the stockholders’ right to vote and
receive dividends is always determined and based on the "outstanding capital stock",
defined as follows:

"SECTION 137. Outstanding capital stock defined. — The term "outstanding capital stock"
as used in this Code, means the total shares of stock issued to subscribers or stockholders,
whether or not fully or partially paid (as long as there is a binding subscription
agreement, except treasury shares."

The computation, therefore, should be based on the total outstanding capital stock,
irrespective of the amount of the par value of the shares.

Then came SEC-OGC Opinion No. 08-14 dated June 02, 2008:

The instant query now centers on whether both voting and nonvoting shares are included
in the computation of the required percentage of Filipino equity, As a rule, the 1987
Constitution does not distinguish between voting and non-voting shares with regard to
the computation of the percentage interest by Filipinos and non-Filipinos in a
company. In other words, non-voting shares should be included in the
computation of the foreign ownership limit for domestic corporation. This was the
rule applied [in SEC Opinion No. 04-30 x x x It was opined therein that the ownership of
the shares of stock of a corporation is based on the total outstanding or subscribed/issued
capital stock regardless of whether they are classified as common voting shares or
preferred shares without voting rights. This is in line with the policy of the State to
develop an independent national economy effectively controlled by Filipinos. x x x
(Emphasis added.)

The SEC again echoed the same interpretation in an Opinion issued last April 19, 2011
wherein it stated, thus:

This is, thus, the general rule, such that when the provision merely uses the term "capital"
without qualification (as in Section 11, Article XII of the 1987 Constitution, which deals
with equity structure in a public utility company), the same should be interpreted to refer
to the sum total of the outstanding capital stock, irrespective of the nomenclature or
classification as common, preferred, voting or non-voting.61

The above construal is in harmony with the letter and spirit of Sec. 11, Art. XII of the
Constitution and its counterpart provisions in the 1935 and 1973 Constitution and, thus, is
entitled to respectful consideration. As the Court declared in Philippine Global
Communications, Inc. v. Relova:62
x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as
ponente, cited this excerpt from the leading American case of Pennoyer v. McConnaughy,
decided in 1891: "The principle that the contemporaneous construction of a statute
by the executive officers of the government, whose duty it is to execute it, is
entitled to great respect, and should ordinarily control the construction of the
statute by the courts, is so firmly embedded in our jurisprudence that no authorities
need be cited to support it.’ x x x There was a paraphrase by Justice Malcolm of such a
pronouncement in Molina v. Rafferty, (37 Phil. 545) a 1918 decision:" Courts will and
should respect the contemporaneous construction placed upon a statute by the executive
officers whose duty it is to enforce it, and unless such interpretation is clearly erroneous
will ordinarily be controlled thereby. (Ibid, 555) Since then, such a doctrine has been
reiterated in numerous decisions.63 (Emphasis supplied.)

Laxamana v. Baltazar64 restates this long-standing dictum: "[w]here a statute has

received a contemporaneous and practical interpretation and the statute as interpreted is
re-enacted, the practical interpretation is accorded greater weight than it ordinarily
receives, and is regarded as presumptively the correct interpretation of the law. The rule
here is based upon the theory that the legislature is acquainted with the
contemporaneous interpretation of a statute, especially when made by an administrative
body or executive officers charged with the duty of administering or enforcing the law,
and therefore impliedly adopts the interpretation upon re-enactment."65 Hence, it can be
safely assumed that the framers, in the course of deliberating the 1987 Constitution, knew
of the adverted SEC interpretation.

Parenthetically, it is immaterial whether the SEC opinion was rendered by the banc or by
the SEC-Office of the General Counsel (OGC) considering that the latter has been given
the authority to issue opinions on the laws that the SEC implements under SEC-EXS. Res.
No. 106, Series of 2002.66 The conferment does not violate Sec. 4.667of the Securities and
Regulation Code (SRC) that proscribes the non-delegation of the legislative rule making
power of the SEC, which is in the nature of subordinate legislation. As may be noted, the
same Sec. 4.6 does not mention the SEC’s power to issue interpretative "opinions and
provide guidance on and supervise compliance with such rules,"68 which is incidental to
the SEC’s enforcement functions. A legislative rule and an interpretative rule are two
different concepts and the distinction between the two is established in administrative
law.69 Hence, the various opinions issued by the SEC-OGC deserve as much respect as the
opinions issued by the SEC en banc.

Nonetheless, the esteemed ponente posits that the SEC, contrary to its claim, has been
less than consistent in its construal of "capital." During the oral arguments, he drew
attention to various SEC Opinions, nine (9) to be precise, that purportedly consider
"capital" as referring only to voting stocks.

Refuting this position, the SEC in its Memorandum dated July 25, 2012 explained in some
detail that the Commission has been consistent in applying the term "capital" to
the total outstanding capital stock, whether voting or non-voting. The SEC
Opinions referred to by Justice Carpio, which cited the provisions of the FIA, is not,
however, pertinent or decisive of the issue on the meaning of "capital." The said SEC
Memorandum states:

During the oral arguments held on 26 June 2012, the SEC was directed to explain nine (9)
of its Opinions in relation to the definition of "capital" as used in Section 11, Article XII of
the Constitution, namely: (1) Opinion dated 3 March 1993 for Mr. Francis F. How; (2)
Opinion dated 14 April 1993 for Director Angeles T. Wong; (3) Opinion dated 23
November 1993 for Mssrs. Dominador Almeda and Renato S. Calma; (4) Opinion dated 7
December 1993 for Roco Buñag Kapunan Migallos & Jardeleza Law Offices; (5) Opinion
dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles; (6)
Opinion dated 27 September 2007 for Reynaldo G. David; (7) Opinion dated 28 November
2007 for Santiago & Santiago law Offices; (8) Opinion dated 15 January 2008 for Attys.
Ruby Rose J. Yusi and Rudyard S. Arbolado; and (9) Opinion dated 18 August 2010 for
Castillo Laman Tan Pantaleon & San Jose.

xxxx

With due respect, the issue of whether "capital" refers to outstanding capital stock
or only voting stocks was never raised in the requests for these opinions. In fact,
the definition of "capital" could not have been a relevant and/or a material issue in some
of these opinions because the common and preferred shares involved have the same
voting rights. Also, some Opinions mentioned the FIA to emphasize that the said law
mandates the application of the Control Test. Moreover, these Opinions state they are
based solely on the facts disclosed and relevant only to the issues raised therein.

For one, the Opinion dated 3 March 1993 for Mr. Francis F. How does not discuss
whether "capital" refers to total outstanding capital stock or only voting stocks.
Instead, it talks about the application of the Control test in a mining corporation by
looking into the nationality of its investors. The FIA is not mentioned to provide a
definition of "capital," but to explain the nationality requirement pertinent to
investors of a mining corporation.

The Opinion dated 14 April 1993 for Dir. Angeles T. Wong also does not define "capital"
as referring to total outstanding capital or only to voting shares, but talks about
the application of the Control Test x x x. The FIA is again mentioned only to explain
the nationality required of investors of a corporation engaged in overseas recruitment.

The Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and Renato S.
Calma distinguishes between the nationality of a corporation as an investing
entity and the nationality of a corporation as an investee corporation. The FIA is
mentioned only in the discussion of the nationality of the investors of a
corporation owning land in the Philippines, composed of a trustee for pension or
other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals, and another domestic corporation which is 100% foreign owned.

Unlike the Decision rendered by this Honorable Court on 28 June 2011, the Opinion dated
07 December 1993 for Roco Buñag Kapunan Migallos & Jardeleza does not parley on the
issue of the proper interpretation of "capital" because it is not a relevant and/or a
material issue in this opinion xxx. The FIA is mentioned only to explain the
application of the control test. Note, however, that manufacturing fertilizer is neither a
nationalized or partly nationalized activity, which is another reason why this Opinion has
no relevance in this case.

The Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los
Angeles focuses on the nationality of the investors of a corporation that will acquire land
wherein one of the investors is a foundation. It confirms the view that the test for
compliance with the nationality requirement is based on the total outstanding
capital stock irrespective of the amount of the par value of shares. The FIA is used
merely to justify the application of the Control Test as adopted in the Department of
Justice Opinion, No. 18, Series of 1989, dated 19 January 1989m viz –

xxxx

The Opinion dated 27 September 2007 for Mr. Reynaldo G. David, likewise, does not
discuss whether "capital" refers to total outstanding capital stock or only to voting
stocks, but rather whether the Control Test is applicable in determining the
nationality of the proposed corporate bidder or buyer of PNOC-EDC shares. x x x
The FIA was cited only to emphasize that the said law mandates the application of the
Control Test.

The Opinion dated 28 November 2007 for Santiago & Santiago Law Offices maintains
and supports the position of the Commission that Section 11, Article XII of the
Constitution makes no distinction between common and preferred shares, thus,
both shares should be included in the computation of the foreign equity cap for
domestic corporations. Simply put, the total outstanding capital stock, without regard
to how the shares are classified, should be used as the basis in determining the
compliance by public utilities with the nationality requirement as provided for in Section
11, Article XII of the Constitution. Notably, all shares of the subject corporation, Pilipinas
First, have voting rights, whether common or preferred. Hence, the issue on whether
"capital" refers to total outstanding capital stock or only to voting stocks has no relevance
in this Opinion.

In the same way, the Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and
Rudyard S. Arbolada never discussed whether "capital" refers to outstanding capital
stock or only to voting stocks, but rather whether the Control Test is applicable or
not. The FIA was used merely to justify the application of the Control Test. More
importantly, the term "capital" could not have been relevant and/or material issue in this
Opinion because the common and preferred shares involved have the same voting rights.

The Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San
Jose reiterates that the test for compliance with the nationality requirement is
based on the total outstanding capital stock, irrespective of the amount of the par
value of the shares. The FIA is mentioned only to explain the application of the
Control Test and the Grandfather Rule in a corporation owning land in the
Philippines by looking into the nationality of its investors. (Emphasis supplied).70

In view of the foregoing, it is submitted that the long-established interpretation and

mode of computing by the SEC of the total capital stock strongly recognize the intent of
the framers of the Constitution to allow access to much-needed foreign investments
confined to 40% of the capital stock of public utilities.

Consequences of alternative interpretation: mischievous

effects of the construction proposed in the petition and
sustained in the June 28, 2011 Decision. (6th extrinsic aid)

Filipino shareholders will not

control the fundamental corporate
matters nor own the majority
economic benefits of the public
utility corporation.

Indeed, if the Court persists in adhering to the rationale underlying the majority’s original
interpretation of "capital" found in the first sentence of Section 11, Article XII, We may
perhaps be allowing Filipinos to direct and control the daily business of our public
utilities, but would irrevocably and injudiciously deprive them of effective "control"
over the major and equally important corporate decisions and the eventual
beneficial ownership of the corporate assets that could include, among others,
claim over our soil––our land. This undermines the clear textual commitment under
the Constitution that reserves ownership of disposable lands to Filipino citizens. The
interplay of the ensuing provisions of Article XII is unmistakable:

SECTION 2. All lands of the public domain x x x forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control
and supervision of the State. x x x

xxxx
SECTION 3. Lands of the public domain are classified into agricultural, forest or timber,
mineral lands, and national parks. Agricultural lands of the public domain may be further
classified by law according to the uses which they may be devoted. Alienable lands of the
public domain shall be limited to agricultural lands. Private corporations or associations
may not hold such alienable lands except by lease, for a period not exceeding twenty-five
years, renewable for not more than twenty-five years, and not to exceed one thousand
hectares in area. Citizens of the Philippines may lease not more than five hundred
hectares, or acquire not more than twelve hectares thereof by purchase, homestead or
grant.

xxxx

SECTION 7. Save in cases of hereditary succession, no private lands shall be

transferred or conveyed except to individuals, corporations or associations
qualified to acquire or hold lands of the public domain. (Emphasis supplied.)

Consider the hypothetical case presented in the original ponencia:

Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the term
"capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.

Albeit trying not to appear to, the majority actually finds fault in the wisdom of, or motive
behind, the provision in question through "highly unlikely scenarios of clinical extremes,"
to borrow from Veterans Federation Party v. COMELEC.71 It is submitted that the flip side
of the ponencia’s hypothetical illustration, which will be exhaustively elucidated in this
opinion, is more anomalous and prejudicial to Filipino interests.

For instance, let us suppose that the authorized capital stock of a public utility
corporation is divided into 100 common shares and 1,000,000 non-voting preferred
shares. Since, according to the Court’s June 28, 2011 Decision, the word "capital" in Sec. 11,
Art. XII refers only to the voting shares, then the 40% cap on foreign ownership applies
only to the 100 common shares. Foreigners can, therefore, own 100% of the 1,000,000
nonvoting preferred shares. But then again, the ponencia continues, at least, the "control"
rests with the Filipinos because the 60% Filipino-owned common shares will necessarily
ordain the majority in the governing body of the public utility corporation, the board of
directors/trustees. Hence, Filipinos are assured of control over the day-to-day activities of
the public utility corporation.
Let us, however, take this corporate scenario a little bit farther and consider the
irresistible implications of changes and circumstances that are inevitable and common in
the business world. Consider the simple matter of a possible investment of corporate
funds in another corporation or business, or a merger of the public utility corporation, or
a possible dissolution of the public utility corporation. Who has the "control" over
these vital and important corporate matters? The last paragraph of Sec. 6 of the
Corporation Code provides:

Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such (non-voting) shares shall nevertheless be entitled to
vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other

corporations;

7. Investment of corporate funds in another corporation or business in accordance with

this Code; and

8. Dissolution of the corporation."(Emphasis and underscoring supplied.)

In our hypothetical case, all 1,000,100 (voting and non-voting) shares are entitled to vote
in cases involving fundamental and major changes in the corporate structure, such as
those listed in Sec. 6 of the Corporation Code. Hence, with only 60 out of the 1,000,100
shares in the hands of the Filipino shareholders, control is definitely in the hands of the
foreigners. The foreigners can opt to invest in other businesses and corporations, increase
its bonded indebtedness, and even dissolve the public utility corporation against the
interest of the Filipino holders of the majority voting shares. This cannot plausibly be the
constitutional intent.

Consider further a situation where the majority holders of the total outstanding capital
stock, both voting and non-voting, decide to dissolve our hypothetical public utility
corporation. Who will eventually acquire the beneficial ownership of the corporate
assets upon dissolution and liquidation? Note that Sec. 122 of the Corporation Code
states:

Section 122. Corporate liquidation.–Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years… to dispose of and convey its property and to distribute
its assets, but not for the purpose of continuing the business for which it was
established.

At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such conveyance
by the corporation of its property in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members , creditors or other persons in
interest. (Emphasis and underscoring supplied.)

Clearly then, the bulk of the assets of our imaginary public utility corporation, which may
include private lands, will go to the beneficial ownership of the foreigners who can hold
up to 40 out of the 100 common shares and the entire 1,000,000 preferred non-voting
shares of the corporation. These foreign shareholders will enjoy the bulk of the proceeds
of the sale of the corporate lands, or worse, exercise control over these lands behind the
façade of corporations nominally owned by Filipino shareholders. Bluntly, while the
Constitution expressly prohibits the transfer of land to aliens, foreign stockholders may
resort to schemes or arrangements where such land will be conveyed to their dummies or
nominees. Is this not circumvention, if not an outright violation, of the fundamental
Constitutional tenet that only Filipinos can own Philippine land?

A construction of "capital" as referring to the total shareholdings of the company is an

acknowledgment of the existence of numerous corporate control-enhancing mechanisms,
besides ownership of voting rights, that limits the proportion between the separate and
distinct concepts of economic right to the cash flow of the corporation and the right to
corporate control (hence, they are also referred to as proportionality-limiting measures).
This corporate reality is reflected in SRC Rule 3(E) of the Amended Implementing Rules
and Regulations (IRR) of the SRC and Sec. 3(g) of The Real Estate Investment Trust Act
(REIT) of 2009,72 which both provide that control can exist regardless of ownership of
voting shares. The SRC IRR states:

Control is the power to govern the financial and operating policies of an enterprise
so as to obtain benefits from its activities. Control is presumed to exist when the parent
owns, directly or indirectly through subsidiaries, more than one half of the voting power
of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that
such ownership does not constitute control. Control also exists even when the parent
owns one half or less of the voting power of an enterprise when there is:

i. Power over more than one half of the voting rights by virtue of
an agreement with other investors;

ii. Power to govern the financial and operating policies of the

enterprise under a statute or an agreement;

iii. Power to appoint or remove the majority of the members of the

board of directors or equivalent governing body;

iv. Power to cast the majority of votes at meetings of the board of

directors or equivalent governing body. (Emphasis and underscoring
supplied.)

As shown above, ownership of voting shares or power alone without economic

control of the company does not necessarily equate to corporate control.
A shareholder’s agreement can effectively clip the voting power of a shareholder holding
voting shares. In the same way, a voting right ceiling, which is "a restriction prohibiting
shareholders to vote above a certain threshold irrespective of the number of voting shares
they hold,"73 can limit the control that may be exerted by a person who owns voting
stocks but who does not have a substantial economic interest over the company. So also
does the use of financial derivatives with attached conditions to ensure the acquisition of
corporate control separately from the ownership of voting shares, or the use
of supermajority provisions in the bylaws and articles of incorporation or association.
Indeed, there are innumerable ways and means, both explicit and implicit, by which
the control of a corporation can be attained and retained even with very limited voting
shares, i.e.., there are a number of ways by which control can be disproportionately
increased compared to ownership74 so long as economic rights over the majority of the
assets and equity of the corporation are maintained.

Hence, if We follow the construction of "capital" in Sec. 11, Art. XII stated in
the ponencia of June 28, 2011 and turn a blind eye to these realities of the business
world, this Court may have veritably put a limit on the foreign ownership of
common shares but have indirectly allowed foreigners to acquire greater
economic right to the cash flow of public utility corporations, which is a leverage to
bargain for far greater control through the various enhancing mechanisms or
proportionality-limiting measures available in the business world.

In our extremely hypothetical public utility corporation with the equity structure as thus
described, since the majority recognized only the 100 common shares as the "capital"
referred to in the Constitution, the entire economic right to the cash flow arising from the
1,000,000 non-voting preferred shares can be acquired by foreigners. With this economic
power, the foreign holders of the minority common shares will, as they easily can, bargain
with the holders of the majority common shares for more corporate control in order to
protect their economic interest and reduce their economic risk in the public utility
corporation. For instance, they can easily demand the right to cast the majority of votes
during the meeting of the board of directors. After all, money commands control.

The court cannot, and ought not, accept as correct a holding that routinely disregards
legal and practical considerations as significant as above indicated. Committing an error
is bad enough, persisting in it is worse.

Foreigners can be owners of fully

nationalized industries

Lest it be overlooked, "capital" is an oft-used term in the Constitution and various

legislative acts that regulate corporate entities. Hence, the meaning assigned to it within
the context of a constitutional provision limiting foreign ownership in corporations can
affect corporations whose ownership is reserved to Filipinos, or whose foreign equity is
limited by law pursuant to Sec. 10, Art. XII of the Constitution which states:

SECTION 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas
of investments. The Congress shall enact measures that will encourage the
formation and operation of enterprises whose capital is wholly owned by
Filipinos. (Emphasis supplied).

For instance, Republic Act No. 7042, also known as the Foreign Investments Act of
199175 (FIA), provides for the formation of a Regular Foreign Investment Negative List
(RFINL) covering investment areas/activities that are partially or entirely reserved to
Filipinos. The 8th RFINL76 provides that "No Foreign Equity" is allowed in the following
areas of investments/activities:

1. Mass Media except recording (Article XVI, Section 1 of the Constitution and
Presidential Memorandum dated May 4, 1994);

2. Practice of all professions (Article XII, Section 14 of the Constitution and Section 1, RA
5181);77

3. Retail trade enterprises with paid-up capital of less than $2,500,000 (Section 5, RA
8762);

4. Cooperatives (Chapter III, Article 26, RA 6938);

5. Private Security Agencies (Section 4, RA 5487);

6. Small-scale Mining (Section 3, RA 7076)

7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive

economic zone as well as small scale utilization of natural resources in rivers, lakes, bays,
and lagoons (Article XII, Section 2 of the Constitution);

8. Ownership, operation and management of cockpits (Section 5, PD 449);

9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Article II,

Section 8 of the Constitution);

10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and

radiological weapons and anti-personnel mines (Various treaties to which the Philippines
is a signatory and conventions supported by the Philippines);

11. Manufacture of fire crackers and other pyrotechnic devices (Section 5, RA 7183).

If the construction of "capital," as espoused by the June 28, 2011 Decision, were to be
sustained, the reservation of the full ownership of corporations in the foregoing industries
to Filipinos could easily be negated by the simple expedience of issuing and making
available non-voting shares to foreigners. After all, these non-voting shares do not,
following the June 28, 2011 Decision, form part of the "capital" of these supposedly fully
nationalized industries. Consequently, while Filipinos can occupy all of the seats in the
board of directors of corporations in fully nationalized industries, it is possible for
foreigners to own the majority of the equity of the corporations through "non-voting"
shares, which are nonetheless allowed to determine fundamental corporate matters
recognized in Sec. 6 of the Corporation Code. Filipinos may therefore be unwittingly
deprived of the "effective" ownership of corporations supposedly reserved to them by the
Constitution and various laws.

The Foreign Investments Act of 1991 does

not qualify or restrict the meaning of "capital"
in Sec. 11, Art. XII of the Constitution.

Nonetheless, Justice Carpio parlays the thesis that the FIA, and its predecessors, the
Investments Incentives Act of 1967 ("1967 IIA"),78 Omnibus Investments Code of 1981
("1981 OIC"),79 and the Omnibus Incentives Code of 1987 ("1987 OIC"),80 (collectively,
"Investment Incentives Laws") more particularly their definition of the term "Philippine
National," constitutes a good guide for ascertaining the intent behind the use of the term
"capital" in Sec. 11, Art. XII—that it refers only to voting shares of public utility
corporations.
I cannot share this posture. The Constitution may only be amended through the
procedure outlined in the basic document itself.81 An amendment cannot,
therefore, be made through the expedience of a legislative action that diagonally
opposes the clear provisions of the Constitution.

Indeed, the constitutional intent on the equity prescribed by Sec. 11, Art. XII cannot
plausibly be fleshed out by a look through the prism of economic statutes passed
after the adoption of the Constitution, such as the cited FIA, the Magna Carta for
Micro, Small and Medium Industries (Republic Act No. 6977) and other kindred laws
envisaged to Filipinize certain areas of investment. It should be the other way around.
Surely, the definition of a "Philippine National" in the FIA, or for that matter, the 1987
OIC82 could not have influenced the minds of the 1986 CONCOM or the people when
they ratified the Constitution. As heretofore discussed, the primary source whence to
ascertain constitutional intent or purpose is the constitutional text, or, to be more
precise, the language of the provision itself,83 as inquiry on any controversy arising out of
a constitutional provision ought to start and end as much as possible with the provision
itself.84 Legislative enactments on commerce, trade and national economy must be
so construed, when appropriate, to determine whether the purpose underlying
them is in accord with the policies and objectives laid out in the Constitution.
Surely, a law cannot validly broaden or restrict the thrust of a constitutional
provision unless expressly sanctioned by the Constitution itself. And the Court may
not read into the Constitution an intent or purpose that is not there. Any attempt to
enlarge the breadth of constitutional limitations beyond what its provision dictates
should be stricken down.

In fact, it is obvious from the FIA itself that its framers deemed it necessary to qualify the
term "capital" with the phrase "stock outstanding and entitled to vote" in defining a
"Philippine National" in Sec. 3(a). This only supports the construal that the term "capital,"
standing alone as in Sec. 11, Art. XII of the Constitution, applies to all shares, whether
classified as voting or non-voting, and this is the interpretation in harmony with the
Constitution.

In passing the FIA, the legislature could not have plausibly intended to restrict the 40%
foreign ownership limit imposed by the Constitution on all capital stock to only voting
stock. Precisely, Congress enacted the FIA to liberalize the laws on foreign investments.
Such intent is at once apparent in the very title of the statute, i.e., "An Act to Promote
Foreign Investments," and the policy: "attract, promote and welcome productive
investments from foreign individuals, partnerships, corporations, and
government,"85 expresses the same.

The Senate, through then Senator Vicente Paterno, categorically stated that the FIA is
aimed at "liberalizing foreign investments"86 because "Filipino investment is not going to
be enough [and] we need the support and the assistance of foreign investors x x x."87 The
senator made clear that "the term ‘Philippine national’" means either Filipino citizens or
enterprises of which the "total Filipino ownership" is 60 percent or greater, thus:

Senator Paterno. May I first say that the term "Philippine national" means either
Filipino citizens or enterprises of which the total Filipino ownership is 60 percent
or greater. In other words, we are not excluding foreign participation in domestic market
enterprises with total assets of less than ₱ 25 million. We are merely limiting foreign
participation to not more than 40 percent in this definition.88

Even granting, arguendo, that the definition of a "Philippine National" in the FIA was
lifted from the Investment Incentives Laws issued in 1967, 1981, and 1987 that defined
"Philippine National" as a corporation 60% of whose voting stocks is owned by Filipino
citizens, such definition does not limit or qualify the nationality requirement prescribed
for public utility corporations by Sec. 11, Art. XII of the 1987 Constitution. The latter does
not refer to the definition of a "Philippine National." Instead, Sec. 11, Art. XII reiterates the
use of the unqualified term "capital" in the 1935 and 1973 Constitutions. In fact, neither
the 1973 Constitutional Convention nor the 1986 CONCOM alluded to the Investment
Incentives Laws in their deliberations on the nationality requirement of public utility
corporations. With the unequivocal rejection of the UP Law Center proposal to use the
qualifying "voting stock or controlling interest," the non-consideration of the Investment
Incentives Laws means that these laws are not pertinent to the issue of the Filipino-
foreign capital ratio in public utility corporations.

Besides, none of the Investment Incentives Laws defining a "Philippine National" has
sought to expand or modify the definition of "capital," as used in the Constitutions then
existing. The definition of a "Philippine National" in these laws was, to stress, only
intended to identify the corporations qualified for registration to avail of the incentives
prescribed therein. The definition was not meant to find context outside the scope of the
various Investment Incentives Laws, much less to modify a nationality requirement set by
the then existing Constitution. This much is obvious in the very heading of the first of
these Investment Incentives Laws, 1967 IIA :

SECTION 3. Definition of Terms. - For purposes of this Act:

xxxx

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or

association wholly owned by citizens of the Philippines; or a corporation organized and
existing under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines
xxxx (Emphasis and underscoring supplied.)

Indeed, the definition of a "Philippine National" in the FIA cannot apply to the ownership
structure of enterprises applying for, and those granted, a franchise to operate as a public
utility under Sec. 11, Art. XII of the Constitution. As aptly observed by the SEC, the
definition of a "Philippine National" provided in the FIA refers only to a corporation that
is permitted to invest in an enterprise as a Philippine citizen (investorcorporation). The
FIA does not prescribe the equity ownership structure of the enterprise granted
the franchise or the power to operate in a fully or partially nationalized
industry (investee-corporation). This is apparent from the FIA itself, which also defines
the act of an "investment" and "foreign investment":

Section 3. Definitions. – As used in this Act:

a) The term "Philippine national" shall mean a citizen of the Philippines, or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent [60%] of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines x x x

b) The term "investment" shall mean equity participation in any enterprise organized
or existing the laws of the Philippines;

c) The term "foreign investment" shall mean as equity investment made by a non-
Philippine national in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Central Bank which shall
assess and appraise the value of such assets other than foreign exchange.

In fact, Sec. 7 of the FIA, as amended, allows aliens or non-Philippine nationals to own an
enterprise up to the extent provided by the Constitution, existing laws or the FINL:

Sec. 7. Foreign investments in domestic market enterprises. – Non- Philippine nationals

may own up to one hundred percent [100%] of domestic market enterprises unless
foreign ownership therein is prohibited or limited by the Constitution and existing laws
or the Foreign Investment Negative List under Section 8 hereof. (Emphasis supplied.)

Hence, pursuant to the Eight Regular FINL, List A, the foreign "equity" is up to 40% in
enterprises engaged in the operation and management of public utilities while the
remaining 60% of the "equity" is reserved to Filipino citizens and "Philippine Nationals"
as defined in Sec. 3(a) of the FIA. Notably, the term "equity" refers to the
"ownership interest in… a business"89 or a "share in a publicly traded company,"90 and
not to the "controlling" or "management" interest in a company. It necessarily includes all
and every share in a corporation, whether voting or non-voting.

Again, We must recognize the distinction of the separate concepts of "ownership" and
"control" in modern corporate governance in order to realize the intent of the framers of
our Constitution to reserve for Filipinos the ultimate and all-encompassing control of
public utility entities from their daily administration to the acts of ownership enumerated
in Sec. 6 of the Corporation Code.91 As elucidated, by equating the word "capital" in Sec.
11, Art. XII to the limited aspect of the right to control the composition of the board of
directors, the Court could very well be depriving Filipinos of the majority economic
interest in the public utility corporation and, thus, the effective control and ownership of
such corporation.

The Court has no jurisdiction over PLDT and foreign

stockholders who are indispensable parties in interest

More importantly, this Court cannot apply a new doctrine adopted in a precedent-setting
decision to parties that have never been given the chance to present their own views on
the substantive and factual issues involved in the precedent-setting case.

To recall, the instant controversy arose out of an original petition filed in February 2007
for, among others, declaratory relief on Sec. 11, Art. XII of the 1987 Constitution "to
clarify the intent of the Constitutional Commission that crafted the 1987 Constitution to
determine the very nature of such limitation on foreign ownership."92

The petition impleaded the following personalities as the respondents: (1) Margarito B.
Teves, then Secretary of Finance and Chair of the Privatization Council; (2) John P.
Sevilla, then undersecretary for privatization of the Department of Finance; (3) Ricardo
Abcede, commissioner of the Presidential Commission on Good Government; (4) Anthoni
Salim, chair of First Pacific Co. Ltd. and director of Metro Pacific Asset Holdings, Inc.
(MPAH); (5) Manuel V. Pangilinan, chairman of the board of PLDT; (6) Napoleon L.
Nazareno, the president of PLDT; (7) Fe Barin (Barin), then chair of the SEC; and (8)
Francis Lim (Lim), then president of the PSE.

Notably, neither PLDT itself nor any of its stockholders were named as respondents in the
petition, albeit it sought from the Court the following main reliefs:

5. x x x to issue a declaratory relief that ownership of common or voting shares is the sole
basis in determining foreign equity in a public utility and that any other government
rulings, opinions, and regulations inconsistent with this declaratory relief be declared as
unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. x x x to declare null and void all sales of common stocks to foreigners in excess of 40
percent of the total subscribed common shareholdings; and

7. x x x to direct the [SEC] and [PSE] to require PLDT to make a public disclosure of all of
its foreign shareholdings and their actual and real beneficial owners."

Clearly, the petition seeks a judgment that can adversely affect PLDT and its foreign
shareholders. If this Court were to accommodate the petition’s prayer, as the majority did
in the June 28, 2011 Decision and proposes to do presently, PLDT stands to lose its
franchise, while the foreign stockholders will be compelled to divest their voting shares in
excess of 40% of PLDT’s voting stock, if any, even at a loss. It cannot, therefore, be
gainsaid that PLDT and its foreign shareholders are indispensable parties to the instant
case under the terms of Secs. 2 and 7, Rule 3 of the Rules of Civil Procedure, which read:

Section 2. Parties in interest.–Every action must be prosecuted and defended in the name
of the real party in interest. All persons having an interest in the subject of the action and
in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an
interest in the controversy or the subject thereof adverse to the plaintiff, or who are
necessary to a complete determination or settlement of the questions involved therein,
shall be joined as defendants.

xxxx

Section 7. Compulsory joinder of indispensable parties.– Parties in interest without whom

no final determination can be had of an action shall be joined either as plaintiffs or
defendants.

Yet, again, PLDT and its foreign shareholders have not been given notice of this petition
to appear before, much less heard by, this Court. Nonetheless, the majority has allowed
such irregularity in contravention of the settled jurisprudence that an action cannot
proceed unless indispensable parties are joined93 since the non-joinder of these
indispensable parties deprives the court the jurisdiction to issue a decision binding on the
indispensable parties that have not been joined or impleaded. In other words, if an
indispensable party is not impleaded, any personal judgment would have no
effectiveness94 as to them for the tribunal’s want of jurisdiction.

In Arcelona v. Court of Appeals,95 We explained that the basic notions of due process
require the observance of this rule that refuses the effectivity of a decision that was
rendered despite the non-joinder of indispensable parties:

Basic considerations of due process, however, impel a similar holding in cases involving
jurisdiction over the persons of indispensable parties which a court must acquire before it
can validly pronounce judgments personal to said defendants. Courts acquire jurisdiction
over a party plaintiff upon the filing of the complaint. On the other hand, jurisdiction
over the person of a party defendant is assured upon the service of summons in the
manner required by law or otherwise by his voluntary appearance. As a rule, if a
defendant has not been summoned, the court acquires no jurisdiction over his person,
and a personal judgment rendered against such defendant is null and void. A decision
that is null and void for want of jurisdiction on the part of the trial court is not a
decision in the contemplation of law and, hence, it can never become final and
executory.
Rule 3, Section 7 of the Rules of Court, defines indispensable parties as parties-in-interest
without whom there can be no final determination of an action. As such, they must be
joined either as plaintiffs or as defendants. The general rule with reference to the
making of parties in a civil action requires, of course, the joinder of all necessary
parties where possible, and the joinder of all indispensable parties under any and
all conditions, their presence being a sine qua non for the exercise of judicial
power. It is precisely "when an indispensable party is not before the court (that)
the action should be dismissed." The absence of an indispensable party renders all
subsequent actions of the court null and void for want of authority to act, not only
as to the absent parties but even as to those present.96

Hence, the June 28, 2011 Decision having been rendered in a case where the indispensable
parties have not been impleaded, much less summoned or heard, cannot be given any
effect and is, thus, null and void. Ergo, the assailed June 28, 2011 Decision is virtually a
useless judgment, at least insofar as it tends to penalize PLDT and its foreign
stockholders. It cannot bind and affect PLDT and the foreign stockholders or be enforced
and executed against them. It is settled that courts of law "should not render
judgments which cannot be enforced by any process known to the law,"97 hence,
this Court should have refused to give cognizance to the petition.

The ineffectivity caused by the non-joinder of the indispensable parties, the deprivation
of their day in court, and the denial of their right to due process, cannot be cured by the
sophistic expedience of naming PLDT in the fallo of the decision as a respondent. The
dispositive portion of the June 28, 2011 Decision all the more only highlights the
unenforceability of the majority’s disposition and serves as an implied admission of this
Court’s lack of jurisdiction over the persons of PLDT and its foreign stockholders when it
did not directly order the latter to dispose the common shares in excess of the 40% limit.
Instead, it took the circuitous route of ordering the SEC, in the fallo of the assailed
decision, "to apply this definition of the term ‘capital’ in determining the extent of
allowable ownership in respondent PLDT and, if there is a violation of Sec. 11, Art. XII of
the Constitution, to impose the appropriate sanctions under the law."98

Clearly, since PLDT and the foreign stockholders were not impleaded as
indispensable parties to the case, the majority would want to indirectly execute its
decision which it could not execute directly. The Court may be criticized for
violating the very rules it promulgated and for trenching the provisions of Sec. 5,
Art. VIII of the Constitution, which defines the powers and jurisdiction of this
Court.

It is apropos to stress, as a reminder, that the Rules of Court is not a mere body of
technical rules that can be disregarded at will whenever convenient. It forms an integral
part of the basic notion of fair play as expressed in this Constitutional caveat: "No person
shall be deprived of life, liberty or property without due process of law,"99 and obliges this
Court, as well as other courts and tribunals, to hear a person first before rendering a
judgment for or against him. As Daniel Webster explained, "due process of law is more
clearly intended the general law, a law which hears before it condemns; which proceeds
upon enquiry, and renders judgment only after trial."100 The principle of due process of
law "contemplates notice and opportunity to be heard before judgment is rendered,
affecting one’s person or property."101 Thus, this Court has stressed the strict observance
of the following requisites of procedural due process in judicial proceedings in order to
comply with this honored principle:

(1) There must be a court or tribunal clothed with judicial power to hear and determine
the matter before it;

(2) Jurisdiction must be lawfully acquired over the person of the defendant or over the
property which is the subject of the proceedings;

(3) The defendant must be given an opportunity to be heard; and

(4) Judgment must be rendered upon lawful hearing.102

Apparently, not one of these requisites has been complied with before the June 28, 2011
Decision was rendered. Instead, PLDT and its foreign stockholders were not given their
day in court, even when they stand to lose their properties, their shares, and even the
franchise to operate as a public utility. This stands counter to our discussion in Agabon v.
NLRC,103 where We emphasized that the principle of due process comports with the
simplest notions of what is fair and just:

To be sure, the Due Process Clause in Article III, Section 1 of the Constitution embodies a
system of rights based on moral principles so deeply imbedded in the traditions and
feelings of our people as to be deemed fundamental to a civilized society as conceived by
our entire history. Due process is that which comports with the deepest notions of
what is fair and right and just. It is a constitutional restraint on the legislative as
well as on the executive and judicial powers of the government provided by the Bill
of Rights.104

Parenthetically, the present petition partakes of a collateral attack on PLDT’s franchise as

a public utility. Giving due course to the recourse is contrary to the Court’s ruling
in PLDT v. National Telecommunications Commission,105where We declared a
franchise to be a property right that can only be questioned in a direct
proceeding.106 Worse, the June 28, 2011 Decision facilitates and guarantees the success
of that unlawful attack by allowing it to be undertaken in the absence of PLDT.

The Philippine Government is barred by estoppel from

ordering foreign investors to divest voting shares
in public utilities in excess of the 40 percent cap
The Philippine government’s act of pushing for and approving the sale of the PTIC shares,
which is equivalent to 12 million PLDT common shares, to foreign investors precludes it
from asserting that the purchase violates the Constitutional limit on foreign ownership of
public utilities so that the foreign investors must now divest the common PLDT shares
bought. The elementary principle that a person is prevented from going back on his own
act or representation to the prejudice of another who relied thereon107 finds application in
the present case.

Art. 1431 of the Civil Code provides that an "admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against a
person relying thereon." This rule is supported by Section 2(a) of Rule 131 of the Rules of
Court on the burden of proof and presumptions, which states:

Section 2. Conclusive presumptions. – The following are instances of conclusive

presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission, be permitted to
falsify it.

The government cannot plausibly hide behind the mantle of its general immunity to
resist the application of this equitable principle for "the rule on non-estoppel of the
government is not designed to perpetrate an injustice."108Hence, this Court has allowed
several exceptions to the rule on the government’s non-estoppel. As succinctly explained
in Republic of the Philippines v. Court of Appeals:109

The general rule is that the State cannot be put in estoppel by the mistakes or errors of its
officials or agents. However, like all general rules, this is also subject to exceptions, viz.:

"Estoppel against the public are little favored. They should not be invoked except in rare
and unusual circumstances and may not be invoked where they would operate to defeat
the effective operation of a policy adopted to protect the public. They must be applied
with circumspection and should be applied only in those special cases where the interests
of justice clearly require it. Nevertheless, the government must not be allowed to deal
dishonorably or capriciously with its citizens, and must not play an ignoble part
or do a shabby thing; and subject to limitations . . ., the doctrine of equitable
estoppel may be invoked against public authorities as well as against private
individuals."

In Republic v. Sandiganbayan, the government, in its effort to recover ill-gotten wealth,

tried to skirt the application of estoppel against it by invoking a specific constitutional
provision. The Court countered:
"We agree with the statement that the State is immune from estoppel, but this concept is
understood to refer to acts and mistakes of its officials especially those which are irregular
(Sharp International Marketing vs. Court of Appeals, 201 SCRA 299; 306 1991; Republic v.
Aquino, 120 SCRA 186 1983), which peculiar circumstances are absent in the case at bar.
Although the State's right of action to recover ill-gotten wealth is not vulnerable to
estoppel[;] it is non sequitur to suggest that a contract, freely and in good faith
executed between the parties thereto is susceptible to disturbance ad infinitum. A
different interpretation will lead to the absurd scenario of permitting a party to
unilaterally jettison a compromise agreement which is supposed to have the
authority of res judicata (Article 2037, New Civil Code), and like any other
contract, has the force of law between parties thereto (Article 1159, New Civil Code;
Hernaez vs. Kao, 17 SCRA 296 1966; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3
Aquino, Civil Code, 1990 ed., p. 463) . . ."

The Court further declared that "(t)he real office of the equitable norm of estoppel is
limited to supply[ing] deficiency in the law, but it should not supplant positive
law."110 (Emphasis supplied.)

Similarly, in Ramos v. Central Bank of the Philippines,111 this Court berated the
government for reneging on its representations and urged it to keep its word, viz:

Even in the absence of contract, the record plainly shows that the CB [Central Bank]
made express representations to petitioners herein that it would support the OBM
[Overseas Bank of Manila], and avoid its liquidation if the petitioners would execute (a)
the Voting Trust Agreement turning over the management of OBM to the CB or its
nominees, and (b) mortgage or assign their properties to the Central Bank to cover the
overdraft balance of OBM. The petitioners having complied with these conditions and
parted with value to the profit of the CB (which thus acquired additional security for its
own advances), the CB may not now renege on its representations and liquidate the
OBM, to the detriment of its stockholders, depositors and other creditors, under the rule
of promissory estoppel (19 Am. Jur., pages 657-658; 28 Am. Jur. 2d, 656-657; Ed. Note, 115
ALR, 157).

"The broad general rule to the effect that a promise to do or not to do something in the
future does not work an estoppel must be qualified, since there are numerous cases in
which an estoppel has been predicated on promises or assurances as to future conduct.
The doctrine of ‘promissory estoppel’ is by no means new, although the name has been
adopted only in comparatively recent years. According to that doctrine, an estoppel may
arise from the making of a promise even though without consideration, if it was intended
that the promise should be relied upon and in fact it was relied upon, and if a refusal to
enforce it would be virtually to sanction the perpetration of fraud or would result in other
injustice. In this respect, the reliance by the promises is generally evidenced by action or
forbearance on his part, and the idea has been expressed that such action or forbearance
would reasonably have been expected by the promisor. Mere omission by the promisee to
do whatever the promisor promised to do has been held insufficient ‘forbearance’ to give
rise to a promissory estoppel." (19 Am. Jur., loc. cit.)

The exception established in the foregoing cases is particularly appropriate presently

since the "indirect" sale of PLDT common shares to foreign investors partook of a
propriety business transaction of the government which was not undertaken as an
incident to any of its governmental functions. Accordingly, the government, by
concluding the sale, has descended to the level of an ordinary citizen and stripped itself of
the vestiges of immunity that is available in the performance of governmental acts.112

Ergo, the government is vulnerable to, and cannot hold off, the application of the
principle of estoppel that the foreign investors can very well invoke in case they are
compelled to divest the voting shares they have previously acquired through the
inducement of no less the government. In other words, the government is precluded from
penalizing these alien investors for an act performed upon its guarantee, through its
facilities, and with its imprimatur.

Under the "fair and equitable treatment" clause of our bilateral

investment treaties and fair trade agreements, foreign investors
have the right to rely on the same legal framework existing at the
time they made their investments

Not only is the government put in estoppel by its acts and representations during the sale
of the PTIC shares to MPAH, it is likewise bound by its guarantees in the Bilateral
Investment Treaties (BITs) and Free Trade Agreements (FTAs) with other countries.

To date, the Philippines has concluded numerous BITs and FTAs to encourage and
facilitate foreign direct investments in the country. These BITs and FTAs invariably
contain guarantees calculated to ensure the safety and stability of these foreign
investments. Foremost of these is the commitment to give fair and equitable treatment
(FET) to the foreign investors and investments in the country.

Take for instance the BIT concluded between the Philippines and China,113 Article 3(1)
thereof provides that "investments and activities associated with such investments of
investors of either Contracting Party shall be accorded equitable treatment and shall
enjoy protection in the territory of the other Contracting Party."114 The same assurance
is in the Agreement on Investment of the Framework Agreement on Comprehensive
Economic Cooperation Between the Association of Southeast Asian Nations and the
People’s Republic of China (ASEAN-China Investment Agreement)115 where the
Philippines assured Chinese investors that the country "shall accord to [them] fair and
equitable treatment and full protection and security."116 In the same manner, the
Philippines agreed to "accord investments [made by Japanese investors] treatment in
accordance with international law, including fair and equitable treatment and full
protection and security"117 in the Agreement between the Republic of the Philippines and
Japan for Economic Partnership (JPEPA).118

Similar provisions are found in the ASEAN Comprehensive Investment Agreement

(ACIA)119 and the BITs concluded by the Philippines with, among others, the Argentine
Republic,120 Australia,121 Austria,122Bangladesh,123 Belgium,124 Cambodia,125 Canada,126 Chile,
127 the Czech

Republic,128 Denmark,129 Finland,130France,131 Germany,132 India,133 Indonesia,134 Iran,135 Italy

,136 Mongolia,137 Myanmar,138 Netherlands,139Pakistan,140 Portuguese
Republic,141 Romania,142 Russia,143 Saudi
Arabia,144 Spain,145 Sweden,146Switzerland,147 Thailand,148 Turkey,149 United
Kingdom,150 and Vietnam.151

Explaining the FET as a standard concordant with the rule of law, Professor Vandevelde
wrote that it requires the host county to treat foreign investments with consistency,
security, non-discrimination and reasonableness:

The thesis is that the awards issued to date implicitly have interpreted the fair and
equitable treatment standard as requiring treatment in accordance with the concept of
the rule of law. That is, the concept of legality is the unifying theory behind the fair
and equitable treatment standard.

xxxx

Thus, international arbitral awards interpreting the fair and equitable treatment standard
have incorporated the substantive and procedural principles of the rule of law into that
standard. The fair and equitable treatment standard in BITs has been interpreted
as requiring that covered investment or investors receive treatment that is
reasonable, consistent, non-discriminatory, transparent, and in accordance with
due process. As will be seen, these principles explain virtually all of the awards applying
the fair and equitable treatment standard. No award is inconsistent with this theory of
the standard.

Understanding fair and equitable treatment as legality is consistent with the purposes of
the BITs. BITs essentially are instruments that impose legal restraints on the treatment of
covered investments and investors by host states. The very essence of a BIT is a partial
subordination of the sovereign's power to the legal constraints of the treaty. Further,
individual BIT provisions are themselves a reflection of the principles of the rule of law.
(Emphasis and underscoring supplied.)152

On the requirement of consistency, the International Centre for the Settlement of

Investment Disputes (ICSID) explained in Tecnicas Medioambientales Tecmed S.A. v.
The united Mexican States153 that the host country must maintain a
stable and predictable legal and business environment to accord a fair and equitable
treatment to foreign investors.

153. The Arbitral Tribunal finds that the commitment of fair and equitable
treatment included in Article 4(1) of the Agreement is an expression and part of
the bona fide principle recognized in international law, although bad faith from the
State is not required for its violation:

To the modern eye, what is unfair or inequitable need not equate with the outrageous or
the egregious. In particular, a State may treat foreign investment unfairly and inequitably
without necessarily acting in bad faith.

154. The Arbitral Tribunal considers that this provision of the Agreement, in light of the
good faith principle established by international law, requires the Contracting Parties
to provide to international investments treatment that does not affect the basic
expectations that were taken into account by the foreign investor to make the
investment. The foreign investor expects the host State to act in a consistent
manner, free from ambiguity and totally transparently in its relations with the
foreign investor, so that it may know beforehand any and all rules and regulations
that will govern its investments, as well as the goals of the relevant policies and
administrative practices or directives, to be able to plan its investment and
comply with such regulations. Any and all State actions conforming to such criteria
should relate not only to the guidelines, directives or requirements issued, or the
resolutions approved thereunder, but also to the goals underlying such regulations. The
foreign investor also expects the host State to act consistently, i.e. without
arbitrarily revoking any preexisting decisions or permits issued by the State that
were relied upon by the investor to assume its commitments as well as to plan and
launch its commercial and business activities. The investor also expects the State
to use the legal instruments that govern the actions of the investor or the
investment in conformity with the function usually assigned to such instruments,
and not to deprive the investor of its investment without the required
compensation. In fact, failure by the host State to comply with such pattern of conduct
with respect to the foreign investor or its investments affects the investor’s ability to
measure the treatment and protection awarded by the host State and to determine
whether the actions of the host State conform to the fair and equitable treatment
principle. Therefore, compliance by the host State with such pattern of conduct is
closely related to the above-mentioned principle, to the actual chances of
enforcing such principle, and to excluding the possibility that state action be
characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized
"…by any reasonable and impartial man," or, although not in violation of specific
regulations, as being contrary to the law because:

...(it) shocks, or at least surprises, a sense of juridical propriety. (Emphasis and

underscoring supplied added.)
The Philippines, therefore, cannot, without so much as a notice of policy shift,
alter and change the legal and business environment in which the foreign
investments in the country were made in the first place. These investors obviously
made the decision to come in after studying the country’s legal framework-its restrictions
and incentives––and so, as a matter of fairness, they must be accorded the right to expect
that the same legal climate and the same substantive set of rules will remain during the
period of their investments.

The representation that foreigners can invest up to 40% of the entirety of the total
stockholdings, and not just the voting shares, of a public utility corporation is an implied
covenant that the Philippines cannot renege without violating the FET guarantee.
Especially in this case where the Philippines made specific commitments to countries like
Japan and China that their investing nationals can own up to 40% of the equity of a
public utility like a telecommunications corporation. In the table contained in Schedule
1(B), Annex 6 of the JPEPA, the Philippines categorically represented that Japanese
investors’ entry into the Philippine telecommunications industry, specifically
corporations offering "voice telephone services," is subject to only the following
requirements and conditions:

A. Franchise from Congress of the Philippines

B. Certificate of Public Convenience and Necessity (CPCN) from the National

Telecommunications Commission

C. Foreign equity is permitted up to 40 percent.

D. x x x154 (Emphasis supplied.)

The same representation is made in the Philippines’ Schedule of Specific Commitments

appended to the ASEAN-China Agreement on Trade in Services.155

Further, as previously pointed out, it was the Philippine government that pushed for and
approved the sale of the 111,415 PTIC shares to MPAH, thereby indirectly transferring the
ownership of 6.3 percent of the outstanding common shares of PLDT, to a foreign firm
and so increasing the foreign voting shareholding in PLDT. Hence, the presence of good
faith may not be convincingly argued in favour of the Philippine government in a suit for
violation of its FET guarantee.

In fact, it has been held that a bona fide change in policy by a branch of government does
not excuse compliance with the FET obligations. In Occidental Exploration and
Production Company (OEPC) v. the Republic of Ecuador,156 the United Nations
Commission on International Trade Law (UNCITRAL) ruled that Ecuador violated the
US/Ecuador BIT by denying OEPC fair and equitable treatment when it failed to provide a
predictable framework for its investment planning. Ruling thus, the tribunal cited
Ecuador’s change in tax law and its tax authority’s unsatisfactory and vague response to
OEPC’s consulta, viz:

183. x x x The stability of the legal and business framework is thus an essential element of
fair and equitable treatment.

184. The tribunal must note in this context that the framework under which the
investment was made and operates has been changed in an important manner by
actions adopted by [the Ecuadorian tax authority]. … The clarifications that OEPC
sought on the applicability of VAT by means of "consulta" made to [the Ecuadorian tax
authority] received a wholly unsatisfactory and thoroughly vague answer. The tax law
was changed without providing any clarity abut its meaning and extend and the
practice and regulations were also inconsistent with such changes.

185. Various arbitral tribunals have recently insisted on the need for this stability. The
tribunal in Metalcad held that the Respondent "failed to ensure a transparent and
predictable framework for Metalcad’s business planning and investment. The totality of
these circumstances demonstrate a lack of orderly process and timely disposition in
relation to an investor of a Party acting in the expectation that it would be treated fairly
and justly…" x x x

186. It is quite clear from the record of this case and from the events discussed in this
Final Award that such requirements were not met by Ecuador. Moreover, this is an
objective requirement that does not depend on whether the Respondent has
proceeded in good faith or not.

187. The Tribunal accordingly holds that the Respondent has breached its obligations to
accord fair and equitable treatment under Article II (3)

(a) of the Treaty. x x x

xxxx

191. The relevant question for international law in this discussion is not whether there is
an obligation to refund VAT, which is the point on which the parties have argued most
intensely, but rather whether the legal and business framework meets the
requirements of stability and predictability under international law. It was earlier
concluded that there is not a VAT refund obligation under international law, except in
the specific case of the Andean Community Law, which provides for the option of either
compensation or refund, but there is certainly an obligation not to alter the legal
and business environment in which the investment has been made. In this case it
is the latter question that triggers a treatment that is not fair and equitable.
(Emphasis supplied.)
To maintain the FET guarantee contained in the various BITs and FTAs concluded by the
country and avert a deluge of investor suits before the ICSID, the UNCITRAL or
other fora, any decision of this court that tends to drastically alter the foreign
investors’ basic expectations when they made their investments, taking into
account the consistent SEC Opinions and the executive and legislative branches’ Specific
Commitments, must be applied prospectively.

This Court cannot turn oblivious to the fact that if We diverge from the prospectivity rule
and implement the resolution on the present issue immediately and, without giving due
deference to the foreign investors’ rights to due process and the equal protection of the
laws, compel the foreign stockholders to divest their voting shares against their wishes at
prices lower than the acquisition costs, these foreign investors may very well shy away
from Philippine stocks and avoid investing in the Philippines. Not to mention, the validity
of the franchise granted to PLDT and similarly situated public utilities will be put under a
cloud of doubt. Such uncertainty and the unfair treatment of foreign investors who
merely relied in good faith on the policies, rules and regulations of the PSE and the SEC
will likely upset the volatile capital market as it would have a negative impact on the
value of these companies that will discourage investors, both local and foreign, from
purchasing their shares. In which case, foreign direct investments (FDIs) in the country
(which already lags behind our Asian neighbors) will take a nosedive. Indeed, it cannot be
gainsaid that a sudden and unexpected deviation from the accepted and consistent
construction of the term "capital" will create a domino effect that may cripple our capital
markets.

Therefore, in applying the new comprehensive interpretation of Sec. 11, Art. XII of the
Constitution, the current voting shares of the foreign investors in public utilities in excess
of the 40% capital shall be maintained and honored. Otherwise the due process guarantee
under the Constitution and the long established precepts of justice, equity and fair play
would be impaired.

Prospective application of new laws or changes in interpretation

The June 28, 2011 Decision construed "capital" in the first sentence of Section 11, Article
XII of the Constitution as "full beneficial ownership of 60 percent of the outstanding
capital stocks coupled with 60 percent of the voting rights." In the Resolution denying the
motions for reconsideration, it further amplified the scope of the word "capital" by
clarifying that "the 60- 40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares whether common, preferred, preferred voting or any
other class of shares." This is a radical departure from the clear intent of the framers of
the 1987 Constitution and the long established interpretation ascribed to said word by the
Securities and Exchange Commission—that "capital" in the first sentence of Sec. 11, Art.
XII means capital stock or BOTH voting and non-voting shares. The recent interpretation
enunciated in the June 28, 2011 and in the Resolution at hand can only be applied
PROSPECTIVELY. It cannot be applied retroactively to corporations such as PLDT and its
investors such as its shareholders who have all along relied on the consistent reading of
"capital" by SEC and the Philippine government to apply it to a public utility’s total
capital stock.

Lex prospicit, non respicit – "laws have no retroactive effect unless the contrary is
provided."157 As a necessary corollary, judicial rulings should not be accorded retroactive
effect since "judicial decisions applying or interpreting the laws or the Constitution shall
form part of the legal system of the Philippines."158 It has been the constant holding of the
Court that a judicial decision setting a new doctrine or principle ("precedent-setting
decision") shall not retroactively apply to parties who relied in good faith on the
principles and doctrines standing prior to the promulgation thereof ("old
principles/doctrines"), especially when a retroactive application of the precedent-setting
decision would impair the rights and obligations of the parties. So it is that as early as
1940, the Court has refused to apply the new doctrine of jus sanguinis to persons who
relied in good faith on the principle of jus soli adopted in Roa v. Collector of
Customs.159 Similarly, in Co v. Court of Appeals,160 the Court sustained petitioner Co’s
bona fide reliance on the Minister of Justice’s Opinion dated December 15, 1981 that the
delivery of a "rubber" check as guarantee for an obligation is not a punishable offense
despite the Court’s pronouncement on September 21, 1987 in Que v. People that Batas
Pambansa Blg. (BP) 22 nonetheless covers a check issued to guarantee the payment of an
obligation. In so ruling, the Court quoted various decisions applying precedent-setting
decisions prospectively. We held:

Judicial decisions applying or interpreting the laws or the Constitution shall form
a part of the legal system of the Philippines," according to Article 8 of the Civil
Code. "Laws shall have no retroactive effect, unless the contrary is provided,"
declares Article 4 of the same Code, a declaration that is echoed by Article 22 of the
Revised Penal Code: "Penal laws shall have a retroactive effect insofar as they favor the
person guilty of a felony, who is not a habitual criminal . . ."

xxxx

The principle of prospectivity has also been applied to judicial decisions which,
"although in themselves not laws, are nevertheless evidence of what the laws
mean, . . . (this being) the reason why under Article 8 of the New Civil Code,
'Judicial decisions applying or interpreting the laws or the Constitution shall form
a part of the legal system . . .' "

So did this Court hold, for example, in Peo. v. Jabinal, 55 SCRA 607, 611:

xxxx
So, too, did the Court rule in Spouses Gauvain and Bernardita Benzonan v. Court of
Appeals, et al. (G.R. No. 97973) and Development Bank of the Philippines v. Court of
Appeals, et al. (G.R. No 97998), Jan. 27, 1992, 205 SCRA 515, 527-528:

xxxx

A compelling rationalization of the prospectivity principle of judicial decisions is well set

forth in the oft-cited case of Chicot County Drainage Dist. v. Baxter States Bank, 308 US
371, 374 1940. The Chicot doctrine advocates the imperative necessity to take account of
the actual existence of a statute prior to its nullification, as an operative fact
negating acceptance of "a principle of absolute retroactive invalidity."

xxxx

Much earlier, in De Agbayani v. PNB, 38 SCRA 429 xxx the Court made substantially the
same observations…

xxxx

Again, treating of the effect that should be given to its decision in Olaguer v. Military
Commission No 34, — declaring invalid criminal proceedings conducted during the
martial law regime against civilians, which had resulted in the conviction and
incarceration of numerous persons — this Court, in Tan vs. Barrios, 190 SCRA 686, at p.
700, ruled as follows:

"In the interest of justice and consistency, we hold that Olaguer should, in
principle, be applied prospectively only to future cases and cases still ongoing or
not yet final when that decision was promulgated. x x x"

It would seem, then, that the weight of authority is decidedly in favor of the
proposition that the Court’s decision of September 21, 1987 in Que v. People, 154 SCRA
160 (1987) — i.e., that a check issued merely to guarantee the performance of an
obligation is nevertheless covered by B.P. Blg. 22 — should not be given retrospective
effect to the prejudice of the petitioner and other persons similarly situated, who
relied on the official opinion of the Minister of Justice that such a check did not fall
within the scope of B.P. Blg. 22. (Emphasis supplied).

Indeed, pursuant to the doctrine of prospectivity, new doctrines and principles must be
applied only to acts and events transpiring after the precedent-setting judicial decision,
and not to those that occurred and were caused by persons who relied on the "old"
doctrine and acted on the faith thereof.

Not content with changing the rule in the middle of the game, the majority, in the June
28, 2011 Decision, went a little further by ordering respondent SEC Chairperson "to apply
this definition of the term ‘capital’ in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone Company, and if there is a
violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions
under the law." This may be viewed as unreasonable and arbitrary. The Court in the
challenged June 28, 2011 Decision already made a finding that foreigners hold 64.27% of
the total number of PLDT common shares while Filipinos hold only 35.73%.161 In this
factual setting, PLDT will, as clear as day, face sanctions since its present capital structure
is presently in breach of the rule on the 40% cap on foreign ownership of voting shares
even without need of a SEC investigation.

In answering the SEC’s query regarding the proper period of application and imposition
of appropriate sanctions against PLDT, Justice Carpio tersely stated that "once the 28 June
2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it
finds after due hearing that, at the start of the administrative cases or investigation, there
is an existing violation of Sec. 11, Art. XII of the Constitution."162 As basis therefor, Justice
Carpio cited Halili v. Court of Appeals163 and United Church Board for World Ministries
(UCBWM) v. Sebastian.164However, these cases do not provide a jurisprudential
foundation to this mandate that may very well deprive PLDT foreign shareholders of their
voting shares. In fact, UCBWM v. Sebastian respected the voluntary transfer in a will by
an American of his shares of stocks in a land-holding corporation. In the same
manner, Halili v. Court of Appeals sustained as valid the waiver by an alien of her right of
inheritance over a piece of land in favour of her son. Nowhere in these cases did this
Court order the involuntary dispossession of corporate stocks by alien stockholders. At
most, these two cases only recognized the principle validating the transfer of land to an
alien who, after the transfer, subsequently becomes a Philippine citizen or transfers the
land to a Filipino citizen. They do not encompass the situation that will eventually ensue
after the investigation conducted by the SEC in accordance with the June 28, 2011 and the
present resolution. They do not justify the compulsory deprivation of voting shares in
public utility corporations from foreign stockholders who had legally acquired these
stocks in the first instance.

The abrupt application of the construction of Sec. 11, Art. XII of the Constitution to
foreigners currently holding voting shares in a public utility corporation is not only
constitutionally problematic; it is likewise replete with pragmatic difficulties that could
hinder the real-world translation of this Court’s Resolution. Although apparently
benevolent, the majority’s concession to allow "public utilities that fail to comply with the
nationality requirement under Section 11, Article XII and the FIA [to] cure their
deficiencies prior to the start of the administrative case or investigation"165 could
indirectly occasion a compulsory deprivation of the public utilities’ foreign stockholders
of their voting shares. Certainly, these public utilities must immediately pare down their
foreign-owned voting shares to avoid the imposable sanctions. This holds true especially
for PLDT whose 64.27% of its common voting shares are foreign-subscribed and held.
PLDT is, therefore, forced to immediately deprive, or at the very least, dilute the property
rights of their foreign stockholders before the commencement of the administrative
proceedings, which would be a mere farce considering the transparency of the public
utility from the onset.

Even with the chance granted to the public utilities to remedy their supposed deficiency,
the nebulous time-frame given by the majority, i.e., "prior to the start of the
administrative case or investigation,"166 may very well prove too short for these public
utilities to raise the necessary amount of money to increase the number of their
authorized capital stock in order to dilute the property rights of their foreign
stockholders holding voting shares.167 Similarly, if they induce their foreign stockholders
to transfer the excess voting shares to qualified Philippine nationals, this period before
the filing of the administrative may not be sufficient for these stockholders to find
Philippine nationals willing to purchase these voting shares at the market price. This
Court cannot ignore the fact that the voting shares of Philippine public utilities like PLDT
are listed and sold at large in foreign capital markets. Hence, foreigners who have
previously purchased their voting shares in these markets will not have a ready Philippine
market to immediately transfer their shares. More than likely, these foreign stockholders
will be forced to sell their voting shares at a loss to the few Philippine nationals with
money to spare, or the public utility itself will be constrained to acquire these voting
shares to the prejudice of its retained earnings.168

Whatever means the public utilities choose to employ in order to cut down the foreign
stockholdings of voting shares, it is necessary to determine who among the foreign
stockholders of these public utilities must bear the burden of unloading the voting shares
or the dilution of their property rights. In a situation like this, there is at present no
settled rule on who should be deprived of their property rights. Will it be the foreign
stockholders who bought the latest issuances? Or the first foreign stockholders of the
public utility corporations? This issue cannot be realistically settled within the time-
frame given by the majority without raising more disputes. With these loose ends, the
majority cannot penalize the public utilities if they should fail to comply with the
directive of complying with the "nationality requirement under Section 11, Article XII and
the FIA" within the unreasonably nebulous and limited period "prior to the start of the
administrative case or investigation."169

In the light of the new pronouncement of the Court that public utilities that fail to
comply with the nationality requirement under Section 11, Article XII of the Constitution
CAN CURE THEIR DEFICIENCIES prior to the start of the administrative case or
investigation, I submit that affected companies like PLDT should be given reasonable
time to undertake the necessary measures to make their respective capital structure
compliant, and the SEC, as the regulatory authority, should come up with the appropriate
guidelines on the process and supervise the same. SEC should likewise adopt the
necessary rules and regulations to implement the prospective compliance by all affected
companies with the new ruling regarding the interpretation of the provision in question.
Such rules and regulations must respect the due process rights of all affected corporations
and define a reasonable period for them to comply with the June 28, 2011 Decision.
 A final note.

Year in and year out, the government’s trade managers attend economic summits
courting businessmen to invest in the country, doubtless promising them a playing field
where the rules are friendly as they are predictable. So it would appear odd if a branch of
government would make business life complicated for investors who are already here.
Indeed, stability and predictability are the key pillars on which our legal system must be
founded and run to guarantee a business environment conducive to the country’s
sustainable economic growth. Hence, it behoves this Court to respect the basic
expectations taken into account by the investors at the time they made the investments.
In other words, it is the duty of this Court to stand guard against any untoward change of
the rules in the middle of the game.

I, therefore, vote to GRANT the motions for reconsideration and

accordingly REVERSE and SET ASIDE the June 28, 2011 Decision. The Court should
declare that the word "capital" in the first sentence of Section 11, Article Xll of the 1987
Constitution means the entire capital stock or both voting and non-voting shares.

Since the June 28, 2011 Decision was however sustained, I submit that said decision should
take effect only on the date of its finality and should be applied prospectively.

PLDT should be given time to umkrtake the nec~ssary meast1res to make its capital
structure compliant, and th~ Securities and Exchange Commission should formulalc
appropriate guidelines and supervise the process. Said Commission should also adopt
ruks and regulations to implement the prospective compliance by all affected companies
with the new ruling on the interpretation of Sec. 11, Art. XII of the Constitution. Such
rules and regulations must respect the due process rights of all affected corporations and
provide a reasonable period for them to com pi y with the June 28, 2011 Decision. The
rights of foreigners over the voting shares they presently own in excess of 40% of said
shares should, in the meantime, be respected.

PRESBITERO J. VELASCO, JR.

Associate Justice

Footnotes

1 Penned by Justice Antonio T. Carpio.

2Webster’s Third New International Dictionary of the English Language:

Unabridged (1981), Springfield, MA, p. 1646.
3Allied Banking Corporation v. Court of Appeals, G.R. No. 124290, January 16, 1998,
284 SCRA 327, 367 and Inding v. Sandiganbayan, G.R. No. 143047, July 14, 2004, 434
SCRA 388, 403.

4 Agpalo, Ruben E. Statutory Construction, 6th ed. (2009), p. 585.

5 Id.; citations omitted.

6 See also Macalintal v. Presidential Electoral Tribunal, G.R. No. 191618, November
23, 2010, 635 SCRA 783; La Bugal-B’Laan Tribal Assn., Inc. v. Ramos, G.R. No.
127882, December 1, 2002; Francisco v. House of Representatives, November 10,
2010; Victoria v. COMELEC, G.R. No. 109005, January 10, 1994.

7 No. L-21064, February 18, 1970, 31 SCRA 413, 422-423.

8Memorandum, The Meaning of "Capital," p. 10, read by Fr. Bernas as amicus

curiae in the June 26, 2012 Oral Argument.

9Webster’s Third New International Dictionary Unabridged, Merriam-Websters

Inc., Springfield, MA. 1981, p. 322.

10 Id.; emphasis supplied.

11 Id.

12Black’s law Dictionary, 9th Ed., for the iPhone/iPad/iPod touch, Version 2.0.0
(B10239), p. 236.

13 Id.; emphasis supplied.

14Agpalo, Ruben E. Agpalo’s Legal Words and Phrases, 1987 Ed., p. 96 citing Ruben
E. Agpalo Comments on the Corporation Code, 1993 ed., p. 45.

15 Id.

16Villanueva, Cesar Lapuz. Philippine Corporate Law. 2003 Ed., p. 537. Emphasis
and underscoring supplied.

17De Leon, Hector S. The Corporation Code of the Philippines Annotated, 2002 Ed.
Manila, Phil. P. 71-72 citing (SEC Opinion, Feb. 15, 1988 which states: The term
"capital" denotes the sum total of the shares subscribed and paid by the
stockholders or agreed to be paid irrespective of their nomenclature. It would,
therefore, be legal for foreigners to own more than 40% of the common shares but
not more than the 40% constitutional limit of the outstanding capital stock which
would include both common and non-voting preferred shares." (Emphasis and
underscoring supplied.)

18 Tongson v. Arellano, G.R. No. 77104, November 6, 1992, 215 SCRA 426.

19 Agpalo, Ruben E. Statutory Construction, 6th ed. (2009), p. 588.

20 Record of the (1986) Constitutional Commission, Vol. III, pp. 250-256.

21 Id. at 326-327.

22 Id. at 357-365.

23 Id. at 582-584.

24 Id. at 665-666.

25 Record of the (1986) Constitutional Commission, Vol. III, pp. 250-251.

26 Referring to Sections 2 and 10, Article XII of the 1987 Constitution.

27 Records of the Constitutional Commission, Volume III, pp. 326-327.

28 Id. at 357.

29 Records of the Constitutional Commission, Volume III, pp. 357-360.

30 Records of the Constitutional Commission, Volume III, p. 360.

31 Id. at 364.

32 Id. at 582.

33Sundiang Jose, R. and Aquino, Timoteo B. Reviewer on Commercial Law, 2006

Ed., p. 257.

34 Records of the Constitutional Commission, Volume III, pp. 583-584.

35 See Bernas, S.J., The Intent of the 1986 Constitution Writers, 1995 ed., p. 849.

36 Section 2, Article XII, 1987 Constitution:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by
 the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or
it may enter into coproduction, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. x x x x
(Emphasis supplied.)

37 Section 10, Article XII, 1987 Constitution:

Section 10. The Congress shall, upon recommendation of the economic and
planning agency, when the national interest dictates, reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum
of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. The Congress shall
enact measures that will encourage the formation and operation of
enterprises whose capital is wholly owned by Filipinos. (Emphasis
supplied.)

38 June 26, 2012 Oral Arguments TSN, pp. 115-116.

39 Records of the Constitutional Commission, Volume III, pp. 326, 583.

40 G.R. No. 83896, February 22, 1991, 194 SCRA 317.

41Respondent Pangilinan’s Motion for Reconsideration dated July 14, 2011, pp. 36-
37 citing Philippine Institute of Development Studies, "Key Indicators of the
Philippines, 1970-2011", at http://econdb.pids.gov.ph/tablelists/table/326 and de
Dios, E. (ed.) 1984 An Analysis of the Philippine Economic Crisis. A workshop
report. Quezon City: University of the Philippines; also de Dios, E. 2009"Governance,
institutions, and political economy" in: D. Canlas, M.E. Khan and J. Zhuang,
eds. Diagnosing the Philippine economy: toward inclusive growth. London: Anthem
Press and Asian Development Bank. 295-336 and Bautista, R. 2003 "International
dimensions", in: A. Balisacan and H. Hill Eds. The Philippine economy:
development, policies, and challenges. Oxford University Press. 136- 171.

42 Commonwealth Act No. (CA) 146, as amended and modified by Presidential

Decree No. 1, Integrated Reorganization Plan and EO 546; Approved on November
7, 1936.

43Sec. 13(b), CA 146: The term "public service" includes every person that now or
hereafter may own, operate, manage, or control in the Philippines, for hire or
compensation, with general or limited clientele, whether permanent, occasional or
accidental, and done for general business purposes, any common carrier, railroad,
street railway, traction railway, sub-way motor vehicle, either for freight or
passenger, or both with or without fixed route and whether may be its
classification, freight or carrier service of any class, express service, steamboat or
steamship line, pontines, ferries, and water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine railways, marine repair shop,
[warehouse] wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation
system, gas, electric light, heat and power water supply and power, petroleum,
sewerage system, wire or wireless communications system, wire or wireless
broadcasting stations and other similar public services x x x.

44"Headnotes, heading or epigraphs of sections of a statute are convenient index

to the contents of its provisions." (Agpalo, Ruben, Statutory Construction, Sixth
Edition 2009, p. 166 citing In re Estate of Johnson, 39 Phil. 156 1918; Kare v. Platon, 56
Phil. 248 1931).

45 As amended by Republic Act No. 134, which was approved on June 14, 1947.

46Entitled "An Act Granting A Franchise To Filipinas Orient Airways,

Incorporated, To Establish And Maintain Air Transport Service In The Philippines
And Between The Philippines And Other Countries." Approved on June 20, 1964.

47Entitled "An Act Granting A Franchise To Air Manila, Incorporated, To Establish

And Maintain Air Transport Service In The Philippines And Between The
Philippines And Other Countries." Approved on June 19, 1965.

48Entitled "An Act Granting The Philippine Communications Satellite Corporation

A Franchise To Establish And Operate Ground Satellite Terminal Station Or
Stations For Telecommunication With Satellite Facilities And Delivery To
Common Carriers." Approved on June 21, 1969

49Entitled "An Act Providing For The Licensing And Regulation Of Atomic Energy
Facilities And Materials, Establishing The Rules On Liability For Nuclear Damage,
And For Other Purposes," as amended by PD 1484. Approved on June 15, 1968 and
published in the Official Gazette on May 5, 1969.

50 G.R. No. 127937 July 28, 1999, 311 SCRA 508.

51 Emphasis supplied.

52G.R. No. 70054, December 11, 1991, 204 SCRA 767. Emphasis and underscoring
supplied.

53 G.R. No. 108576, January 20, 1999, 301 SCRA 152.

54See also Republic Planters Bank v. Agana, G.R. No. 51765, March 3, 1997, 269
SCRA 1, where this Court stated that "Shareholders, both common and preferred,
are considered risk takers who invest capital in the business and who can look only
to what is left after corporate debts and liabilities are fully paid."

55 Citations omitted.

56 Ponencia, pp. 30-31.

57
Office of the Ombudsman v. Heirs of Margarita Vda. De Ventura, G.R. No. 151800,
November 5, 2009, 605 SCRA 1.

58In numerous Opinions, the DOJ refused to construe the Constitutional

provisions on the nationality requirement imposed by various legislative
acts like the FIA, in relation to the 1987 Constitution, on the ground that the
interpretation and application of the said law properly fall within the
jurisdiction of the National Economic Development Authority (NEDA), in
consultation with the Bureau of Investments (BOI) and the Securities and
Exchange Commission. (Opinion No. 16, Series 1999, February 2, 1999 citing Sec.
of Justice Opn. No. 3, current series; Nos. 16, 44 and 45, s. 1998; Opinion No. 13,
Series of 2008, March 12, 2008 citing Sec. of Justice Op. NO. 53, current series No.
75, s. 2006.

59 SEC Opinion dated February 15, 1988.

60 93 Phil. 333 (1953).

61 SEC-OGC Opinion No. 26-11.

62Philippine Global Communications, Inc. v. Relova, No. L-60548, November 10,

1986, 145 SCRA 385; citing Philippine Association of Free Labor Unions [PAFLU] v.
Bureau of Labor Relations, August 21, 1976, 72 SCRA 396, 402.

63 Id.

64 No. L-5955, September 19, 1952.

65 Id.

66Annex "B" of the SEC Memorandum dated July 25, 2012 wherein the Commission
Secretary certified that: "During the Commission En Banc meeting held on July 2,
2002 at the Commission Room, 8th Florr, SEC Building, EDSA, Greenhills,
Mandaluyong City, the Commission En Banc approved the following:
 "RESOLVED, That all opinions to be issues by the SEC pursuant to a formal
request, prepared and acted upon by the appropriate operating departments
shall be reviewed by the OGC and be issued under the signature of the SEC
General Counsel. Henceforth, all opinions to be issues by the SEC shall be
numbered accordingly

(SEC-EXS. RES. NO. 106 s, of 2002)

67 SEC. 4.6, SRC: The Commission may, for purposes of efficiency, delegate any of
its functions to any department or office of the Commission, an individual
Commissioner or staff member of the Commission except its review or appellate
authority and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of
any interested party any action of any department or office, individual
Commissioner, or staff member of the Commission.

68 Sec. 5.1 (g), SRC.

69Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance

Secretary, G.R. No. 108524, November 10, 1994, 238 SCRA 63; citing Victorias
Milling Co. v. Social Security Commission, 114 Phil. 555 (1962) and Philippine
Blooming Mills v. Social Security System, 124 Phil. 499 (1966).

70 SEC Memorandum dated July 25, 2012, pp. 33-36.

71 G.R. Nos. 136781, 136786, 136795, October 6, 2000, 342 SCRA 244, 270.

72 Republic Act 9856, Lapsed into law on December 17, 2009.

73
Report on the Proportionality Principle in the European Union: External Study
Commissioned by the European Commission, p. 7.

74
This fact is recognized even by the Organisation for Economic Cooperation and
Development (OECD), viz.:

"Economic literature traditionally identifies two main channels through

which corporate investors may decouple the cash flows and voting rights of
shares, including the leveraging of voting power and mechanisms to "lock
in" control. The most commonly used such mechanisms are listed below.
Not covered by the present section are a number of company-internal
arrangements that can in some circumstances also be employed to leverage
the control of certain shareholders. For instance, the ongoing discussions in
the United States about corporate proxies and the voting arrangements at
general meetings (e.g. majority versus plurality vote) may have important
ramifications for the allocation of control rights in US companies. In
addition, a number of marketed financial instruments are increasingly
available that can be used by investors, including incumbent management,
to hedge their financial interest in a company while retaining voting rights.

Leveraging of voting power. The two main types PLMs used to bolster the
voting powers of individuals, hence creating controlling shareholders, are
differentiated voting rights on company shares and multi-firm structures.
Mechanisms include:

Differentiated voting rights. The most straightforward – and, as the case

may be, transparent – way of leveraging voting power is to stipulate
differential voting rights in the corporate charter or bylaws. Companies
have gone about this in a number of ways, including dualclass share
structures and, in addition to common stock, issuing non-voting shares or
preference shares without or with limited voting rights. The latter is a
borderline case: preference shares have common characteristics with debt
as well as equity, and in most jurisdictions they assume voting rights if the
issuers fail to honour their preference commitments.

 Multi-firm structures. Voting rights can be separated from cash-flow

rights even with a single class of shares by creating a set of cascading
shareholdings or a pyramidal hierarchy in which higher-tier companies own
shares in lower-tier companies. Pyramids are complementary to dual-class
share structures insofar as almost any pyramidal control structure can be
reproduced through dual (or, rather, multiple) share classes. However, for
complex control structures, the controlling shareholders may prefer
pyramids since the underlying shares tend to be more liquid than stocks
split into several classes. (In the remainder of this paper the word "pyramid"
is used jointly to denote truly pyramidal structures and cascading
shareholdings.)

Lock-in mechanisms. The other main category of PLMs consists of

instruments that lock in control – that is cut off, or in some cases bolster,
the voting rights of common stock. A clear-cut lock-in mechanism is voting
right ceilings prohibiting shareholders from voting about a certain
threshold irrespective of the Corporate Affairs Division, Directorate for
Financial and Enterprise Affairs Organisation for Economic Co-operation
and Development 2 rue André-Pascal, Paris 75116, France
www.oecd.org/daf/corporate-affairs/ number of voting shares they hold.
Secondly, a type of lock-in mechanism that confers greater voting right on
selected shareholders is priority shares, which grant their holders
extraordinary power over specific types of corporate decisions. This type of
 lock-in mechanism, when held by the state, is commonly referred to as a
"golden share". Finally, company bylaws or national legislation may contain
supermajority provisions according to which a simple majority is
insufficient to approve certain major corporate changes.

Related or complementary instruments. Other instruments, while not

themselves sources of disproportionality, may either compound the effect
of PLMs or produce some of the same corporate governance consequences
as PLMs. One example is cross-shareholdings, which can be used to
leverage the effectiveness of PLMs and, in consequence, are often an
integral part of pyramidal structures. A second such instrument is
shareholder agreements that, while their effects can be replicated by
shareholders acting in concert of their own accord, nevertheless add an
element of certainty to voting coalitions…" (Lack of Proportionality between
Ownership and Control: Overview and Issues for Discussion. Issued by the
Organisation for Economic Co-Operation and Development (OECD)
Steering Group on Corporate Governance, December 2007, pp. 12-13.
Available from http://www.oecd.org/dataoecd/21/32/40038351.pdf, last
accessed February 7, 2012. See also Clarke, Thomas and Chanlat, Jean
Francois. European Corporate Governance: Readings and Perspectives.
(2009) Routledge, New York, p. 33; Report on the Proportionality Principle
in the European Union: External Study Commissioned by the European
Commission. See also Hu and Black, supra.

75 Approved on June 13, 1991, and amended by Republic Act No. 8179.

76 Executive Order No. 858, February 5, 2010.

77See also PD 1570 (Aeronautical engineering); RA 8559 (Agricultural Engineering);

RA 9297 (Chemical engineering); RA 1582 (Civil engineering) RA 7920 (Electrical
Engineering); RA 9292 (Electronics and Communication Engineering); RA 8560
(Geodetic Engineering); RA 8495 (Mechanical Engineering); PD 1536 (Metallurgical
Engineering); RA 4274 (Mining Engineering); RA 4565 (Naval Architecture and
Marine Engineering); RA 1364 (Sanitary Engineering; RA 2382 as amended by RA
4224 (Medicine); RA 5527 as amended by RA 6318, PD 6138, PD 498 and PD 1534
(Medical Technology); RA 9484 (Dentistry); RA 7392 (Midwifery); RA 9173
(Nursing); PD 1286 (Nutrition and Dietetics); RA 8050 (Optometry); RA 5921
(Pharmacy); RA 5680 (Physical and Occupational Therapy); RA 7431 (Radiologic
and X-ray Technology); RA 9268 (Veterinary Medicine); RA 9298 (Accountancy);
RA 9266 (Architecture); RA 6506 (Criminology); RA 754 (Chemistry); RA 9280
(Customs Brokerage); PD 1308 (Environmental Planning); RA 6239 (Forestry); RA
4209 (Geology); RA 8534 (Interior Design); RA 9053 (Landscape Architecture);
Article VIII, Section 5 of the Constitution, Rule 138, Section 2 of the Rules of Court
of the Philippines (Law); RA 9246 (Librarianship); RA 8544 (Marine Deck Officers
and Marine Engine Officers); RA 1378 (Master Plumbing): RA 5197 (Sugar
Technology); RA 4373 (Social Work); RA 7836 (Teaching); RA 8435 (Agriculture);
RA 8550 (Fisheries); and RA 9258 (Guidance Counselling).

78 Republic Act No. 5186, approved on September 16, 1967.

79Presidential Decree 1789, Published in the Daily Express dated April 1, 1981 and
Amended by Batas Pambansa Blg. 391 otherwise known as "Investment Incentive
Policy Act of 1983," approved April 28, 1983.

80Executive Order (s1987) No. 226, known as the "Omnibus Investments Code of
1987," approved on July 16, 1987.

81Section 1, Article XVII. Any amendment to, or revision of, this Constitution may
be proposed by:

(1) The Congress, upon a vote of three-fourths of all its Members; or

(2) A constitutional convention.

Section 2. Amendments to this Constitution may likewise be directly

proposed by the people through initiative….

xxx xxx xxx

Section 4. Any amendment to, or revisions of, this Constitution under

Section 1 hereof shall be valid when ratified by a majority vote of the votes
cast in a plebiscite which shall be held not earlier than sixty days nor later
than ninety days after the approval of such amendment or revision.

82The 1987 OIC was enacted as EO 226 on July 16, 1987, or after the ratification of
the 1987 Constitution.

83 Ang Bagong Bayani v. COMELEC, 412 Phil. 308 (2001).

84See Dissenting Opinion of Justice Padilla in Romualdez-Marcos v. COMELEC,

G.R. No. 119976, September 18, 1995, 248 SCRA 300, 369.

85 Republic Act No. 7042, Section 2.

86 Record of the Senate, Vol. II, No. 57, p. 1965.

87 Id. at 1964.
88 Id. Vol. 3, No. 76, p. 205.

89Black’s Law Dictionary, 9th Ed., for the iPhone/iPad/iPod touch. Version: 2.1.0
(B12136), p. 619.

90 Id.

91As early as 1932, Adolf A. Berle and Gardine C. Means in their book "The Modern
Corporation and Private Property" explained that the large business corporation is
characterized by "separation of ownership and control." See also Hu, Henry T.C.
and Black, Bernard S., Empty Voting and Hidden (Morphable) Ownership:
Taxonomy, Implications, and Reforms. As published in Business Lawyer, Vol. 61,
pp. 1011-1070, 2006; European Corporate Governance Institute - Law Research
Paper No. 64/2006; University of Texas Law, Law and Economics Research Paper
No. 70. Available at SSRN: http://ssrn.com/abstract=887183; Ringe, Wolf-Georg,
Deviations from Ownership-Control Proportionality - Economic Protectionism
Revisited (2010). COMPANY LAW AND ECONOMIC PROTECTIONISM - NEW
CHALLENGES TO EUROPEAN INTEGRATION, U. Bernitz and W.G. Ringe, eds.,
OUP, 2010; Oxford Legal Studies Research Paper No. 23/2011. Available at SSRN:
http://ssrn.com/abstract=1789089.

92 Rollo, p. 11.

93 Cortez v. Avila, 101 Phil 705 (1957); Borlasa v. Polistico, 47 Phil. 345 (1925).

94 Regalado, Remedial Law Compendium, p. 91.

95 G.R. No. 102900, October 2, 1997, 280 SCRA 20.

96Id.; citing Echevarria v. Parsons Hardware Co., 51 Phil. 980, 987 (1927); Borlasa v.
Polistico, 47 Phil. 345, 347 (1925); People et al. v. Hon. Rodriguez, et al., 106 Phil 325,
327 (1959), among others. Emphasis and underscoring supplied.

97Board of Ed. of City of San Diego v. Common Council of City of San Diego, 1
Cal.App. 311, 82 P. 89, Cal.App. 2 Dist. 1905, July 13, 1905 citing Johnson v. Malloy,
74 Cal. 432. See also Kilberg v. Louisiana Highway Commission, 8 La.App. 441 cited
in Perry v. Louisiana Highway Commission 164 So. 335 La.App. 2 Cir. 1935.
December 13, 1935 and Oregon v. Louisiana Power & Light Co., 19 La.App. 628, 140
So. 282; Succession of Carbajal, 154 La. 1060, 98 So. 666 (1924) cited in In re Gulf
Oxygen Welder's Supply Profit Sharing Plan and Trust Agreement 297 So.2d 663 LA
1974. July 1, 1974 .

98 Gamboa v. Teves, G.R. No. 176579, June 28, 2011, 652 SCRA 690, 744.
99 Section 1, Article III, 1987 Constitution.

100
Oscar Palma Pagasian v. Cesar Azura, A.M. No. RTJ-89-425, April 17, 1990, 184
SCRA 391.

101 Lopez v. Director of Lands, 47 Phil. 23, 32 (1924); emphasis supplied.

102 Banco Español Filipino v. Palanca, 37 Phil. 921, 934 (1918).

103 G.R. No. 158693, November 17, 2004, 442 SCRA 573.

104 G.R. No. 158693, November 17, 2004, 442 SCRA 573. Emphasis supplied.

105 G.R. No. 84404, October 18, 1990, 190 SCRA 717.

106 Id. at 729.

107PNB v. Palma, G.R. No. 157279, August 9, 2005; citing Laurel v. Civil Service
Commission, G.R. No. 71562, October 28, 1991, 203 SCRA 195; Stokes v. Malayan
Insurance Inc., 212 Phil. 705 (1984); Medija v. Patcho, 217 Phil. 509 (1984); Llacer v.
Muñoz, 12 Phil. 328 (1908).

108
Leca Realty Corporation v. Republic of the Philippines, represented by the
Department of Public Works and Highways, G.R. No. 155605, September 27, 2006,
503 SCRA 563.

109 G.R. No. 116111, January 21, 1999, 301 SCRA 366.

110
Citing 31 CJS 675-676; Republic v. Sandiganbayan, G.R. No. 108292, September 10,
1993, 226 SCRA 314.

111
No. L-29352, October 4, 1971, 41 SCRA 565; see also San Roque Realty and
Development Corporation v. Republic of the Philippines (through the Armed Forced
of the Philippines), G.R. No. 155605, September 27, 2006.

112Republic v. Vinzon, G.R. No. 154705, June 26, 2003, 405 SCRA 126; Air
Transportation Office v. David and Ramos. G.R. No. 159402, February 23, 2011. See
also Minucher v. Court of Appeals, G.R. No. 142396, February 11, 2003 citing Gary L.
Maris’, ‘International Law, An Introduction,"

University Press of America, 1984, p. 119; D.W. Grieg, ‘International

Law," London Butterworths, 1970, p. 221.
113
Particularly relevant in the case of PLDT whose biggest group of foreign
shareholders is Chinese, followed by the Japanese and the Americans. Per the
General Information Sheet (GIS) of PLDT as of June 14, 2012, the following are the
foreign shareholders of PLDT: (1) Hong-Kong based J.P. Morgan Asset Holdings
(HK) Limited owns 49,023,801 common shares [including 8,533,253, shares of
PLDT common stock underlying ADS beneficially owned by NTT DoCoMo and
7,653,703 shares of PLDT common stock underlying ADS beneficially-owned by
non-Philippine wholly-owned subsidiaries of First Pacific Company, Limited]; the
Japanese firms, (2) NTT DoCoMo, Inc. holding 22,796,902 common shares; (3)
NTT Communications Corporation with 12,633,487 common shares; and the
Americans, (4) HSBC OBO A/C 000-370817-550 with 2,690,316 common shares; (5)
Edward Tortorici and/or Anita R. Tortorici with 96,874 common shares; (6) Hare
and Co., holding 34,811 common shares; and (7) Maurice Verstraete, with 29,744
common shares.

(http://www.pldt.com.ph/investor/Documents/GIS_(as%20of%2006%2029
%2012)_final.pdf last accessed September 25, 2012)

114
1992 Agreement Between the Government of The People’s Republic Of China
and The Government of the Republic of the Philippines Concerning
Encouragement and Reciprocal Protection of Investments, Signed in Manila,
Philippines on July 20, 1992. Emphasis and underscoring supplied.

115 January 14, 2007.

116
ASEAN-China Investment Agreement, Article 7(1), emphasis and underscoring
supplied. See also the ASEAN-Korea Investment Agreement, Article 5 (1).

117 JPEPA, Article 91. Emphasis and underscoring supplied.

118 Signed on September 9, 2006.

119
ACIA, Article II (1) requires that the parties thereto must give "investments of
investors of [the other parties] fair and equitable treatment and full protection
and security." Emphasis and underscoring supplied.

120
Article III (1) – Each Contracting Party shall at all times ensure fair and
equitable treatment of the investments by investors of the other Contracting Party
and shall not impair the management, maintenance, use, enjoyment or disposal
thereof, through unjustified and discriminatory measures. (Emphasis and
underscoring supplied.)

121
Article 3(2) thereof provides that the Philippines "shall ensure that [Australian]
investments are accorded fair and equitable treatment."
122Article 2 (1) – Each Contracting Party shall in its territory promote, as far as
possible, investments of investors of the other Contracting Party, admit such
investments in accordance with its legislation and in any case accord such
investments fair and equitable treatment. (Emphasis and underscoring supplied.)

123
Article III (1) – Investments and returns of investors of each Contracting Party
shall at all times be accorded fair and equitable treatment and shall enjoy full
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied.)

124Article II – Each Contracting Party shall promote investments in its territory by

investors of the other Contracting Party and shall admit such investments in
accordance with its Constitution, laws, and regulations. Such investments shall be
accorded fair and equitable treatment. (Emphasis and underscoring supplied.)

125Article II (2) – Investments of nationals of either Contracting Party shall at all

times be accorded fair and equitable treatment and shall enjoy adequate
protection and security in the territory of the other Contracting Party. Emphasis
and underscoring supplied.)

126Article II (2) – Each Contracting Party shall accord investments or returns of

investors of the other Contracting Party [:] (a) fair and equitable treatment in
accordance with the principles of international law, and (b) full protection and
security. (Emphasis and underscoring supplied.)

127Article IV (1) – Each Contracting Party shall guarantee fair and equitable
treatment to investments made by investors of the other Contracting Party on its
territory and shall ensure that the exercise of the right thus recognized shall not be
hindered in practice. (Emphasis and underscoring supplied.)

128Article II (2) – Investment[s[] of investors of [the] other Contracting Party shall

at all times be accorded fair and equitable treatment and enjoy full protection and
security in the territory of the other Contracting Party. (Emphasis and
underscoring supplied.)

129Article III (1) – Each Contracting Party shall accord to investments made by
investors of the other Contracting Party fair and equitable treatment. (Emphasis
and underscoring supplied.)

130Article 3(1) – Each Contracting Party shall guarantee fair and equitable
treatment to investments made by investors of the other Contracting Party in its
territory. Emphasis and underscoring supplied.)
131
Article 3 – Either Contracting Party shall extend fair and equitable treatment in
accordance with the principles of International Law to investments made by
nationals and companies of the other Contracting Party in its territory and shall
ensure that the exercise of the right thus recognized shall not be hindered.
Emphasis and underscoring supplied.)

132Article 2 (1) – Each Contracting State shall promote as far as possible

investments in its territory by investors of the other Contracting Party and admit
such investments in accordance with its Constitution, laws and regulations as
referred to in Article 1 paragraph 1. Such investments shall be accorded fair and
equitable treatment. (Emphasis and underscoring supplied.)

133Article IV (1) – Each Contracting Party shall accord fair and equitable treatment
to investments made by investors of the other Contracting Party in its territory.
(Emphasis and underscoring supplied)

134Article II (2) – Investments of investors of either Contracting party shall at all

times be accorded fair and equitable treatment and shall enjoy adequate
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied)

135Article 4(1) – Admitted investments of investors of one Contracting Party

effected within the territory of the other Contracting Party in accordance with the
laws and regulations of the latter, shall receive in the other Contracting Party full
legal protection and fair treatment not less favourable than that accorded to its
own investor or investors of any third state which are in a comparable situation.

136Article I – Each Contracting Party shall promote as far as possible the

investments in its territory by investors of the other Contracting party admit such
investments according to its laws and regulations and accord such investments
equitable and reasonable treatment. (Emphasis and underscoring supplied)

137
Article IV (2) – Each Contracting Party shall ensure fair and equitable treatment
within its territory of the investments of the investors of the other Contracting
Party… (Emphasis and underscoring supplied)

138Article I(1) – Each Contracting Party shall promote as far as possible investments
in its territory by nationals and companies of one Contracting Party and shall
admit such investments in accordance with its Constitution, laws and regulations.
Such investments shall be accorded equitable and reasonable treatment.
((Emphasis and underscoring supplied)

139
Article 3 (2) – Investments of nationals of either Contracting Party shall, in their
entry, operation, management, maintenance, use enjoyment or disposal, be
accorded fair and equitable treatment and shall enjoy full protection and security
in the territory of the other Contracting party. (Emphasis and underscoring
supplied)

140Article I – Each Contracting Party shall promote as far as possible investments

in its territory by investors of the other Contracting Party and shall admit such
investments in accordance with its Constitution, laws, and regulations. Such
investments shall be accorded equitable and reasonable treatment. (Emphasis
supplied)

141
Article 2(1) – Each contracting party shall promote and encourage, as far as
possible, within its territory investments made by investors of the other
Contracting Party and shall admit such investments into its territory in accordance
with its laws and regulations. It shall in any case accord such investments fair and
equitable treatment. (Emphasis and underscoring supplied)

142Article 2(3) – Each Contracting Party undertakes to provide in its territory a fair
and equitable treatment for investments of investors of the other Contracting
Party. Neither Contracting Party shall in any way impair by arbitrary, unreasonable
or discriminatory measures the management, maintenance or use of investments
as well as the right to the disposal thereof. (Emphasis and underscoring supplied)

143
Article III (1) – Each Contracting Party shall ensure in its territory fair and
equitable treatment of the investments made by the investor of the other
Contracting Party and any activities in connection with such investments exclude
the use of discriminatory measures that might hinder management and
administration of investments. (Emphasis and underscoring supplied)

144Article @(1) – Each Contracting Party shall in its territory promote as far as
possible investments by investors of the other Contracting Party and admit such
investments in accordance with its legislation. It shall in any case accord such
investments free and equitable treatment. (Emphasis supplied)

145Article II – Each party shall promote, as far as possible, investments in its

territory by investors of the other Party and shall admit such investments in
accordance with its existing laws and regulation. Such investments shall be
accorded equitable and fair treatment.(Emphasis and underscoring supplied)

146Article III (1) – Each Contracting Party shall at all times ensure fair and
equitable treatment of the investments by investors of the other contracting party
and shall not impair the management, maintenance, use, enjoyment or disposal
thereof nor the acquisition of goods and services or the sale of their production,
through unreasonable or discriminatory measures. (Emphasis and underscoring
supplied)
147
Article IV (1) – Investments and returns of investors of each Contracting Party
shall at all times be accorded fair and equitable treatment and shall enjoy full
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied)

148Article III (2) – Investments of national or companies of one Contracting Party

in the territory of the other Contracting Party, and also the returns therefrom,
shall at all times be accorded fair and equitable treatment and shall enjoy the
constant protection and security in the territory of the host country. (Emphasis
and underscoring supplied)

149Article II (1) – Each Contracting Party shall promote as far as possible

investments in its territory of one Contracting Party and shall admit, on a basis no
less favourable than that accorded in similar situations to investments of any third
country, in accordance with its Constitution, laws and regulations. Such
investments shall be accorded equitable and reasonable treatment. (Emphasis and
underscoring supplied)

150
Article III (2) – Investments of nationals or companies of either Contracting
Party shall at all times be accorded fair and equitable treatment and shall enjoy full
protection and security in the territory of the other contracting party. (Emphasis
and underscoring supplied)

151
Article II (2) – Investments of investors of each Contracting Party shall at all
times be accorded fair and equitable treatment and shall enjoy adequate
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied)

152
Kenneth J. Vandevelde, A Unified Theory of Fair and Equitable Treatment, 43
N.Y.U. J. Int'l L. & Pol. 43.

153 ICSID Case No. ARB AF/00/2, Award of May 29, 2003.

154Annex 6 Referred to in Chapter 7 of the JPEPA: Schedule of Specific

Commitments and List of Most-Favored-Nation Treatment Exemptions. Last
accessed at
http://www.mofa.go.jp/region/asiapaci/philippine/epa0609/annex6.pdf on August
30, 20112.

155
Annex 1/SC1, ASEAN-China Agreement on Trade in Services. Last accessed at
http://www.asean.org/22160.htm on August 30, 2012.

156 London Court of International Arbitration Administered Case No. UN 3467, July
1, 2004. Last accessed at
http://arbitrationlaw.com/files/free_pdfs/Occidental%20v%20Ecuador%20-
%20Award.pdf on August 30, 2012.

157 Article 4, Civil Code of the Philippines.

158 Article 8, Civil Code of the Philippines.

159 23 Phil. 315 (1912).

160
G.R. No. 100776, October 28, 1993, 227 SCRA 444, 448-455; Monge, et al. v.
Angeles, et al., 101 Phil. 563 (1957); among others.

161 Decision, G.R. No. 176579, June 28, 2011.

162 Resolution, p. 47.

163 350 Phil. 906 (1998).

164 242 Phil. 848 (1988).

165 Resolution, p. 47.

166 Id.

167Sec. 38, Corporation Code. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. - No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.

xxxx

Any increase or decrease in the capital stock or the incurring, creating or

increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
 One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation.

From and after approval by the Securities and Exchange Commission and
the issuance by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring, creating or increasing
of any bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission shall
not accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-
five (25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors. (Emphasis supplied.)

168
Sec. 41, Corporation Code. Power to acquire own shares. - A stock corporation
shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out

of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for

their shares under the provisions of this Code.

169 Resolution, p. 47.

The Lawphil Project - Arellano Law Foundation

 DISSENTING OPINION

ABAD, J.:

In the Decision dated June 28, 2011, the Court partially granted the petition for
prohibition, injunction, declaratory relieC and declaration of nullity of sale, of Wilson P.
Gamboa, a Philippine Long Distance Telephone Company (PLDT) stockholder, and ruled
that the term "capital" in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus only to common
shares, and not to the total outstanding capital stock (common and non-voting preferred
shares). The Court also directed the Chairperson of the Securities and Exchange
Commission (SEC) to apply this definition of the term "capital" in determining the extent
of allowable hm~ign ownership in PLDT, and to impose the appropriate sanctions if there
is a violation of Section 11, Article XII ofthe 1987 Constitution.

Respondents Manuel V. Pangilinan, Napoleon L. Nazareno, Francis Lim, Pablito V.

Sanidad, Arno V. Sanidad, and the SEC filed their respective motions for reconsideration.

Thereafter, the Court conducted oral arguments to hear the parties on the following
issues:

1. Whether the term ''capital" in Section ll, Article XII of the 1987 Constitution
refers only to shares of stock with the right to vote in the election of directors
(common shares), or to all kinds of shares of stock, including those with no right
to vote in the election of directors;

2. Assuming the term "capital" refers only to shares of stock with the right to vote
in the election of directors, whether this ruling of the Court should have
retroactive effect to affect such shares of stock owned by foreigners prior to this
ruling;

3. Whether PLDT and its foreign stockholders are indispensable parties in the
resolution of the legal issue on the definition of the term "capital" in Section 11,
Article XII of the 1987 Constitution; and

3.1. If so, whether the Court has acquired jurisdiction over the persons of
PLDT and its foreign stockholders.

I am constrained to maintain my dissent to the majority opinion.

One. To reiterate, the authority to define and interpret the meaning of "capital" in
Section 11, Article XII of the 1987 Constitution belongs, not to the Court, but to Congress,
as part of its policy making powers. This matter is addressed to the sound discretion of
the lawmaking department of government since the power to authorize and control a
public utility is admittedly a prerogative that stems from Congress.1 It may very well in its
wisdom define the limit of foreign ownership in public utilities.

Section 11, Article XII of the 1987 Constitution which reads:

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

is one of the constitutional provisions that are not self-executing and need sufficient
details for a meaningful implementation. While the provision states that no franchise for
the operation of a public utility shall be granted to a corporation organized under
Philippine laws unless at least 60% of its capital is owned by Filipino citizens, it does not
provide for the meaning of the term "capital."

As Fr. Joaquin G. Bernas, S.J. explained, acting as Amicus Curiae, the result of the absence
of a clear definition of the term "capital," was to base the 60-40 proportion on the total
outstanding capital stock, that is, the combined total of both common and non-voting
preferred shares. But while this has become the popular and common understanding of
the people, it is still incomplete. He added that in the Foreign Investments Act of 1991
(FIA), Congress tried to clarify this understanding by specifying what capital means for
the purpose of determining corporate citizenship, thus:

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

a. The term "Philippine national" shall mean a citizen of the Philippines; of a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to
vote of each of both corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (As amended by Republic Act 8179)

Indeed, the majority opinion also resorted to the various investment Laws2 in construing
the term "capital." But while these laws admittedly govern foreign investments in the
country, they do not expressly or impliedly seek to supplant the ambiguity in the
definition of the term "capital" nor do they seek to modify foreign ownership limitation in
public utilities. It is a rule that when the operation of the statute is limited, the law
should receive a restricted construction.3

More particularly, much discussion was made on the FIA since it was enacted after the
1987 Constitution took effect. Yet it does not seem to be a supplementary or enabling
legislation which accurately defines the term "capital."

For one, it specifically applies only to companies which intend to invest in certain areas of
investment. It does not apply to companies which intend to apply for a franchise, much
less to those which are already enjoying their franchise. It aims "to attract, promote or
welcome productive investments from foreign individuals, partnerships, corporations and
government, including their political subdivisions, in activities which significantly
contribute to national industrialization and socio-economic development."4 What the FIA
provides are new rules for investing in the country.

Moreover, with its adoption of the definition of the term "Philippine national," has the
previous understanding that the term "capital" referred to the total outstanding capital
stock, as Fr. Bernas explained, been supplanted or modified? While it is clear that the
term "Philippine national" shall mean a corporation organized under Philippine laws at
least 60% of the capital stock outstanding and entitled to vote is owned and held by
Filipino citizens "as used in the FIA," it is not evident whether Congress intended this
definition to be used in all other cases where the term "capital" presents itself as an issue.

Two. Granting that it is the Court, and not Congress, which must define the meaning of
"capital," I submit that it must be interpreted to encompass the entirety of a corporation’s
outstanding capital stock (both common and preferred shares, voting or non-voting).

First, the term "capital" is also used in the fourth sentence of Section 11, Article XII, as
follows:

Section 11. xxx The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the
Philippines.

If the term "capital" as used in the first sentence is interpreted as pertaining only to shares
of stock with the right to vote in the election of directors, then such sentence will already
prescribe the limit of foreign participation in the election of the board of directors. On
the basis of the first sentence alone, the capacity of foreign stockholders to elect the
directors will already be limited by their ownership of 40% of the voting shares. This will
then render the fourth sentence meaningless and will run counter to the principle that
the provisions of the Constitution should be read in consonance with its other related
provisions.

Second, Dr. Bernardo M. Villegas, also an Amicus Curiae, who was the Chairman of the
Committee on the National Economy that drafted Article XII of the 1987 Constitution,
emphasized that by employing the term "capital," the 1987 Constitution itself did not
distinguish among classes of shares.

During their Committee meetings, Dr. Villegas explained that in both economic and
business terms, the term "capital" found in the balance sheet of any corporation always
meant the entire capital stock, both common and preferred. He added that even the non-
voting shares in a corporation have a great influence in its major decisions such as: (1) the
amendment of the articles of incorporation; (2) the adoption and amendment of by-laws;
(3) the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporate property; (4) incurring, creating or increasing bonded indebtedness;
(5) the increase or decrease of capital stock; (6) the merger or consolidation of the
corporation with another corporation or other corporations; (7) the investment of
corporate funds in another corporation or business in accordance with this Code; and (8)
the dissolution of the corporation.

Thus, the Committee decisively rejected in the end the proposal of the UP Law Center to
define the term "capital" as voting stock or controlling interest. To quote Dr. Villegas, "in
the minds of the Commissioners the word ‘capital’ in Section 11 of Article XII refers, not to
voting stock, but to total subscribed capital, both common and preferred."

Finally, Dr. Villegas observed that our existing policy on foreign ownership in public
utilities already discourages, as it is, foreign investments to come in. To impose additional
restrictions, such as the restrictive interpretation of the term "capital," will only aggravate
our already slow economic growth and incapacity to compete with our East Asian
neighbours.

The Court can simply adopt the interpretations given by Fr. Bernas and Dr. Villegas since
they were both part of the Constitutional Commission that drafted the 1987 Constitution.
No one is in a better position to determine the intent of the framers of the questioned
provision than they are. Furthermore, their interpretations also coincide with the long-
standing practice to base the 60-40 proportion on the total outstanding capital stock, that
is, both common and preferred shares.

For sure, both common and preferred shares have always been considered part of the
corporation’s capital stock. Its shareholders are no different from ordinary investors who
take on the same investment risks. They participate in the same venture, willing to share
in the profits and losses of the enterprise. Under the doctrine of equality of shares – all
stocks issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the Articles of Incorporation is silent on such differences.5

As a final note, the Filipinization of public utilities under the 1987 Constitution is a
recognition of the very strategic position of public utilities both in the national economy
and for national security.6 The participation of foreign capital is enjoined since the
establishment and operation of public utilities may require the investment of substantial
capital which Filipino citizens may not afford. But at the same time, foreign involvement
is limited to prevent them from assuming control of public utilities which may be
inimical to national interest.7 Section 11, Article XII of the 1987 Constitution already
provides three limitations on foreign participation in public utilities. The Court need not
add more by further restricting the meaning of the term ''capital" when none was
intended by the flamers of the 1987 Constitution.

Based on these considerations, I vote to GRANT the motions for reconsideration.

ROBERTO A. ABAD
Associate Justice

G.R. No. 154618 April 14, 2004

AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., petitioner,

vs.
INTEGRATED SILICON TECHNOLOGY PHILIPPINES CORPORATION, TEOH
KIANG HONG, TEOH KIANG SENG, ANTHONY CHOO, JOANNE KATE M. DELA
CRUZ, JEAN KAY M. DELA CRUZ and ROLANDO T. NACILLA, respondents.

DECISION

YNARES-SANTIAGO, J.:

This petition for review assails the Decision dated August 12, 2002 of the Court of Appeals
in CA-G.R. SP No. 66574, which dismissed Civil Case No. 3123-2001-C and annulled and
set aside the Order dated September 4, 2001 issued by the Regional Trial Court of
Calamba, Laguna, Branch 92.
Petitioner Agilent Technologies Singapore (Pte.), Ltd. ("Agilent") is a foreign corporation,
which, by its own admission, is not licensed to do business in the
Philippines.1 Respondent Integrated Silicon Technology Philippines Corporation
("Integrated Silicon") is a private domestic corporation, 100% foreign owned, which is
engaged in the business of manufacturing and assembling electronics
components.2 Respondents Teoh Kiang Hong, Teoh Kiang Seng and Anthony Choo,
Malaysian nationals, are current members of Integrated Silicon’s board of directors, while
Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz, and Rolando T. Nacilla are its former
members.3

The juridical relation among the various parties in this case can be traced to a 5-year
Value Added Assembly Services Agreement ("VAASA"), entered into on April 2, 1996
between Integrated Silicon and the Hewlett-Packard Singapore (Pte.) Ltd., Singapore
Components Operation ("HP-Singapore").4 Under the terms of the VAASA, Integrated
Silicon was to locally manufacture and assemble fiber optics for export to HP-Singapore.
HP-Singapore, for its part, was to consign raw materials to Integrated Silicon; transport
machinery to the plant of Integrated Silicon; and pay Integrated Silicon the purchase
price of the finished products.5 The VAASA had a five-year term, beginning on April 2,
1996, with a provision for annual renewal by mutual written consent.6 On September 19,
1999, with the consent of Integrated Silicon,7 HP-Singapore assigned all its rights and
obligations in the VAASA to Agilent.8

On May 25, 2001, Integrated Silicon filed a complaint for "Specific Performance and
Damages" against Agilent and its officers Tan Bian Ee, Lim Chin Hong, Tey Boon Teck
and Francis Khor, docketed as Civil Case No. 3110-01-C. It alleged that Agilent breached
the parties’ oral agreement to extend the VAASA. Integrated Silicon thus prayed that
defendant be ordered to execute a written extension of the VAASA for a period of five
years as earlier assured and promised; to comply with the extended VAASA; and to pay
actual, moral, exemplary damages and attorney’s fees.9

On June 1, 2001, summons and a copy of the complaint were served on Atty. Ramon
Quisumbing, who returned these processes on the claim that he was not the registered
agent of Agilent. Later, he entered a special appearance to assail the court’s jurisdiction
over the person of Agilent.

On July 2, 2001, Agilent filed a separate complaint against Integrated Silicon, Teoh Kang
Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz
and Rolando T. Nacilla,10 for "Specific Performance, Recovery of Possession, and Sum of
Money with Replevin, Preliminary Mandatory Injunction, and Damages", before the
Regional Trial Court, Calamba, Laguna, Branch 92, docketed as Civil Case No. 3123-2001-
C. Agilent prayed that a writ of replevin or, in the alternative, a writ of preliminary
mandatory injunction, be issued ordering defendants to immediately return and deliver
to plaintiff its equipment, machineries and the materials to be used for fiber-optic
components which were left in the plant of Integrated Silicon. It further prayed that
defendants be ordered to pay actual and exemplary damages and attorney’s fees.11

Respondents filed a Motion to Dismiss in Civil Case No. 3123-2001-C,12 on the grounds of
lack of Agilent’s legal capacity to sue;13 litis pendentia;14 forum shopping;15 and failure to
state a cause of action.16

On September 4, 2001, the trial court denied the Motion to Dismiss and granted
petitioner Agilent’s application for a writ of replevin.17

Without filing a motion for reconsideration, respondents filed a petition for certiorari
with the Court of Appeals.18

In the meantime, upon motion filed by respondents, Judge Antonio S. Pozas of Branch 92
voluntarily inhibited himself in Civil Case No. 3123-2001-C. The case was re-raffled and
assigned to Branch 35, the same branch where Civil Case No. 3110-2001-C is pending.

On August 12, 2002, the Court of Appeals granted respondents’ petition for certiorari, set
aside the assailed Order of the trial court dated September 4, 2001, and ordered the
dismissal of Civil Case No. 3123-2001-C.

Hence, the instant petition raising the following errors:

I.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT DISMISSING

RESPONDENTS’ PETITION FOR CERTIORARI FOR RESPONDENTS’ FAILURE TO FILE
A MOTION FOR RECONSIDERATION BEFORE RESORTING TO THE REMEDY OF
CERTIORARI.

II.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ANNULLING AND

SETTING ASIDE THE TRIAL COURT’S ORDER DATED 4 SEPTEMBER 2001 AND
ORDERING THE DISMISSAL OF CIVIL CASE NO. 3123-2001-C BELOW ON THE
GROUND OF LITIS PENDENTIA, ON ACCOUNT OF THE PENDENCY OF CIVIL CASE
NO. 3110-2001-C.

III.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ANNULLING AND

SETTING ASIDE THE TRIAL COURT’S ORDER DATED 4 SEPTEMBER 2001 AND
ORDERING THE DISMISSAL OF CIVIL CASE NO. 3123-2001-C BELOW ON THE
GROUND OF FORUM SHOPPING, ON ACCOUNT OF THE PENDENCY OF CIVIL CASE
NO. 3110-2001-C.

IV.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ORDERING THE

DISMISSAL OF CIVIL CASE NO. 323-2001-C BELOW INSTEAD OF ORDERING IT
CONSOLIDATED WITH CIVIL CASE NO. 3110-2001-C.19

The two primary issues raised in this petition: (1) whether or not the Court of Appeals
committed reversible error in giving due course to respondents’ petition, notwithstanding
the failure to file a Motion for Reconsideration of the September 4, 2001 Order; and (2)
whether or not the Court of Appeals committed reversible error in dismissing Civil Case
No. 3123-2001-C.

We find merit in the petition.

The Court of Appeals, citing the case of Malayang Manggagawa sa ESSO v. ESSO Standard
Eastern, Inc.,20 held that the lower court had no jurisdiction over Civil Case No. 3123-2001-
C because of the pendency of Civil Case No. 3110-2001-C and, therefore, a motion for
reconsideration was not necessary before resort to a petition for certiorari. This was error.

Jurisdiction is fixed by law. Batas Pambansa Blg. 129 vests jurisdiction over the subject
matter of Civil Case No. 3123-2001-C in the RTC.21

The Court of Appeals’ ruling that the assailed Order issued by the RTC of Calamba,
Branch 92, was a nullity for lack of jurisdiction due to litis pendentia and forum shopping,
has no legal basis. The pendency of another action does not strip a court of the
jurisdiction granted by law.

The Court of Appeals further ruled that a Motion for Reconsideration was not necessary
in view of the urgent necessity in this case. We are not convinced. In the case of Bache
and Co. (Phils.), Inc. v. Ruiz,22 relied on by the Court of Appeals, it was held that "time is
of the essence in view of the tax assessments sought to be enforced by respondent officers
of the Bureau of Internal Revenue against petitioner corporation, on account of which
immediate and more direct action becomes necessary." Tax assessments in that case were
based on documents seized by virtue of an illegal search, and the deprivation of the right
to due process tainted the entire proceedings with illegality. Hence, the urgent necessity
of preventing the enforcement of the tax assessments was patent. Respondents, on the
other hand, cite the case of Geronimo v. Commission on Elections,23 where the urgent
necessity of resolving a disqualification case for a position in local government warranted
the expeditious resort to certiorari. In the case at bar, there is no analogously urgent
circumstance which would necessitate the relaxation of the rule on a Motion for
Reconsideration.
Indeed, none of the exceptions for dispensing with a Motion for Reconsideration is
present here. None of the following cases cited by respondents serves as adequate basis
for their procedural lapse.

In Vigan Electric Light Co., Inc. v. Public Service Commission,24 the questioned order was
null and void for failure of respondent tribunal to comply with due process requirements;
in Matanguihan v. Tengco,25 the questioned order was a patent nullity for failure to
acquire jurisdiction over the defendants, which fact the records plainly disclosed; and
in National Electrification Administration v. Court of Appeals,26 the questioned orders
were void for vagueness. No such patent nullity is evident in the Order issued by the trial
court in this case. Finally, while urgency may be a ground for dispensing with a Motion
for Reconsideration, in the case of Vivo v. Cloribel,27 cited by respondents, the slow
progress of the case would have rendered the issues moot had a motion for
reconsideration been availed of. We find no such urgent circumstance in the case at bar.

Respondents, therefore, availed of a premature remedy when they immediately raised the
matter to the Court of Appeals on certiorari; and the appellate court committed reversible
error when it took cognizance of respondents’ petition instead of dismissing the same
outright.

We come now to the substantive issues of the petition.

Litis pendentia is a Latin term which literally means "a pending suit." It is variously
referred to in some decisions as lis pendens and auter action pendant. While it is normally
connected with the control which the court has on a property involved in a suit during
the continuance proceedings, it is more interposed as a ground for the dismissal of a civil
action pending in court.

Litis pendentia as a ground for the dismissal of a civil action refers to that situation
wherein another action is pending between the same parties for the same cause of action,
such that the second action becomes unnecessary and vexatious. For litis pendentia to be
invoked, the concurrence of the following requisites is necessary:

(a) identity of parties or at least such as represent the same interest in both
actions;

(b) identity of rights asserted and reliefs prayed for, the reliefs being founded on
the same facts; and

(c) the identity in the two cases should be such that the judgment that may be
rendered in one would, regardless of which party is successful, amount to res
judicata in the other.28
The Court of Appeals correctly appreciated the identity of parties in Civil Cases No. 3123-
2001-C and 3110-2001-C. Well-settled is the rule that lis pendens requires only substantial,
and not absolute, identity of parties.29 There is substantial identity of parties when there
is a community of interest between a party in the first case and a party in the second case,
even if the latter was not impleaded in the first case.30 The parties in these cases are vying
over the interests of the two opposing corporations; the individuals are only incidentally
impleaded, being the natural persons purportedly accused of violating these corporations’
rights.

Likewise, the fact that the positions of the parties are reversed, i.e., the plaintiffs in the
first case are the defendants in the second case or vice versa, does not negate the identity
of parties for purposes of determining whether the case is dismissible on the ground
of litis pendentia.31

The identity of parties notwithstanding, litis pendentia does not obtain in this case
because of the absence of the second and third requisites. The rights asserted in each of
the cases involved are separate and distinct; there are two subjects of controversy
presented for adjudication; and two causes of action are clearly involved. The fact that
respondents instituted a prior action for "Specific Performance and Damages" is not a
ground for defeating the petitioners’ action for "Specific Performance, Recovery of
Possession, and Sum of Money with Replevin, Preliminary Mandatory Injunction, and
Damages."

In Civil Case No. 3110-2001-C filed by respondents, the issue is whether or not there was a
breach of an oral promise to renew of the VAASA. The issue in Civil Case No. 3123-2001-C,
filed by petitioner, is whether petitioner has the right to take possession of the subject
properties. Petitioner’s right of possession is founded on the ownership of the subject
goods, which ownership is not disputed and is not contingent on the extension or non-
extension of the VAASA. Hence, the replevin suit can validly be tried even while the prior
suit is being litigated in the Regional Trial Court.

Possession of the subject properties is not an issue in Civil Case No. 3110-2001-C. The
reliefs sought by respondent Integrated Silicon therein are as follows: (1) execution of a
written extension or renewal of the VAASA; (2) compliance with the extended VAASA;
and (3) payment of overdue accounts, damages, and attorney’s fees. The reliefs sought by
petitioner Agilent in Civil Case No. 3123-2001-C, on the other hand, are as follows: (1)
issuance of a Writ of Replevin or Writ of Preliminary Mandatory Injunction; (2) recovery
of possession of the subject properties; (3) damages and attorney’s fees.

Concededly, some items or pieces of evidence may be admissible in both actions. It

cannot be said, however, that exactly the same evidence will support the decisions in
both, since the legally significant and controlling facts in each case are entirely different.
Although the VAASA figures prominently in both suits, Civil Case No. 3110-2001-C is
premised on a purported breach of an oral obligation to extend the VAASA, and damages
arising out of Agilent’s alleged failure to comply with such purported extension. Civil
Case No. 3123-2001-C, on the other hand, is premised on a breach of the VAASA itself, and
damages arising to Agilent out of that purported breach.

It necessarily follows that the third requisite for litis pendentia is also absent. The
following are the elements of res judicata:

(a) The former judgment must be final;

(b) The court which rendered judgment must have jurisdiction over the parties
and the subject matter;

(c) It must be a judgment on the merits; and

(d) There must be between the first and second actions identity of parties, subject
matter, and cause of action.32

In this case, any judgment rendered in one of the actions will not amount to res
judicata in the other action. There being different causes of action, the decision in one
case will not constitute res judicata as to the other.

Of course, a decision in one case may, to a certain extent, affect the other case. This,
however, is not the test to determine the identity of the causes of action. Whatever
difficulties or inconvenience may be entailed if both causes of action are pursued on
separate remedies, the proper solution is not the dismissal order of the Court of Appeals.
The possible consolidation of said cases, as well as stipulations and appropriate modes of
discovery, may well be considered by the court below to subserve not only procedural
expedience but, more important, the ends of justice.33

We now proceed to the issue of forum shopping.

The test for determining whether a party violated the rule against forum-shopping was
laid down in the case of Buan v. Lopez.34 Forum shopping exists where the elements
of litis pendentia are present, or where a final judgment in one case will amount to res
judicata in the final other. There being no litis pendentia in this case, a judgment in the
said case will not amount to res judicata in Civil Case No. 3110-2001-C, and respondents’
contention on forum shopping must likewise fail.

We are not unmindful of the afflictive consequences that may be suffered by both
petitioner and respondents if replevin is granted by the trial court in Civil Case No. 3123-
2001-C. If respondent Integrated Silicon eventually wins Civil Case No. 3110-2001-C, and
the VAASA’s terms are extended, petitioner corporation will have to comply with its
obligations thereunder, which would include the consignment of properties similar to
those it may recover by way of replevin in Civil Case No. 3123-2001-C. However, petitioner
will also suffer an injustice if denied the remedy of replevin, resort to which is not only
allowed but encouraged by law.

Respondents argue that since Agilent is an unlicensed foreign corporation doing business
in the Philippines, it lacks the legal capacity to file suit.35 The assailed acts of petitioner
Agilent, purportedly in the nature of "doing business" in the Philippines, are the
following: (1) mere entering into the VAASA, which is a "service contract";36 (2)
appointment of a full-time representative in Integrated Silicon, to "oversee and supervise
the production" of Agilent’s products;37 (3) the appointment by Agilent of six full-time
staff members, who were permanently stationed at Integrated Silicon’s facilities in order
to inspect the finished goods for Agilent;38 and (4) Agilent’s participation in the
management, supervision and control of Integrated Silicon,39 including instructing
Integrated Silicon to hire more employees to meet Agilent’s increasing production
needs,40 regularly performing quality audit, evaluation and supervision of Integrated
Silicon’s employees,41 regularly performing inventory audit of raw materials to be used by
Integrated Silicon, which was also required to provide weekly inventory updates to
Agilent,42 and providing and dictating Integrated Silicon on the daily production
schedule, volume and models of the products to manufacture and ship for Agilent.43

A foreign corporation without a license is not ipso facto incapacitated from bringing an
action in Philippine courts. A license is necessary only if a foreign corporation is
"transacting" or "doing business" in the country. The Corporation Code provides:

Sec. 133. Doing business without a license. — No foreign corporation transacting

business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

The aforementioned provision prevents an unlicensed foreign corporation "doing

business" in the Philippines from accessing our courts.

In a number of cases, however, we have held that an unlicensed foreign corporation doing
business in the Philippines may bring suit in Philippine courts against a Philippine citizen
or entity who had contracted with and benefited from said corporation.44 Such a suit is
premised on the doctrine of estoppel. A party is estopped from challenging the
personality of a corporation after having acknowledged the same by entering into a
contract with it. This doctrine of estoppel to deny corporate existence and capacity
applies to foreign as well as domestic corporations.45 The application of this principle
prevents a person contracting with a foreign corporation from later taking advantage of
its noncompliance with the statutes chiefly in cases where such person has received the
benefits of the contract.46
The principles regarding the right of a foreign corporation to bring suit in Philippine
courts may thus be condensed in four statements: (1) if a foreign corporation does
business in the Philippines without a license, it cannot sue before the Philippine
courts;47 (2) if a foreign corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction or on a cause of action
entirely independent of any business transaction48; (3) if a foreign corporation does
business in the Philippines without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from challenging the foreign
corporation’s corporate personality in a suit brought before Philippine courts;49 and (4) if
a foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction.

The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is doing
business in the Philippines. However, there is no definitive rule on what constitutes
"doing", "engaging in", or "transacting" business in the Philippines, as this Court observed
in the case of Mentholatum v. Mangaliman.50 The Corporation Code itself is silent as to
what acts constitute doing or transacting business in the Philippines.

Jurisprudence has it, however, that the term "implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to or in progressive prosecution of
the purpose and subject of its organization."51

In Mentholatum,52 this Court discoursed on the two general tests to determine whether or
not a foreign corporation can be considered as "doing business" in the Philippines. The
first of these is the substance test, thus:53

The true test [for doing business], however, seems to be whether the foreign
corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to
another.

The second test is the continuity test, expressed thus:54

The term [doing business] implies a continuity of commercial dealings and

arrangements, and contemplates, to that extent, the performance of acts or works
or the exercise of some of the functions normally incident to, and in the
progressive prosecution of, the purpose and object of its organization.

Although each case must be judged in light of its attendant circumstances, jurisprudence
has evolved several guiding principles for the application of these tests. For instance,
considering that it transacted with its Philippine counterpart for seven years, engaging in
futures contracts, this Court concluded that the foreign corporation in Merrill Lynch
Futures, Inc. v. Court of Appeals and Spouses Lara,55 was doing business in the Philippines.
In Commissioner of Internal Revenue v. Japan Airlines ("JAL"),56 the Court held that JAL
was doing business in the Philippines, i.e., its commercial dealings in the country were
continuous – despite the fact that no JAL aircraft landed in the country – as it sold tickets
in the Philippines through a general sales agent, and opened a promotions office here as
well.

In General Corp. of the Phils. v. Union Insurance Society of Canton and Fireman’s Fund
Insurance,57 a foreign insurance corporation was held to be doing business in the
Philippines, as it appointed a settling agent here, and issued 12 marine insurance policies.
We held that these transactions were not isolated or casual, but manifested the
continuity of the foreign corporation’s conduct and its intent to establish a continuous
business in the country. In Eriks PTE Ltd. v. Court of Appeals and Enriquez,58 the foreign
corporation sold its products to a Filipino buyer who ordered the goods 16 times within
an eight-month period. Accordingly, this Court ruled that the corporation was doing
business in the Philippines, as there was a clear intention on its part to continue the body
of its business here, despite the relatively short span of time involved. Communication
Materials and Design, Inc., et al. v. Court of Appeals, ITEC, et al. 59 and Top-Weld
Manufacturing v. ECED, IRTI, et al.60 both involved the License and Technical Agreement
and Distributor Agreement of foreign corporations with their respective local
counterparts that were the primary bases for the Court’s ruling that the foreign
corporations were doing business in the Philippines.61 In particular, the Court cited
the highly restrictive nature of certain provisions in the agreements involved, such that,
as stated in Communication Materials, the Philippine entity is reduced to a mere
extension or instrument of the foreign corporation. For example, in Communication
Materials, the Court deemed the "No Competing Product" provision of the Representative
Agreement therein restrictive.62

The case law definition has evolved into a statutory definition, having been adopted with
some qualifications in various pieces of legislation. The Foreign Investments Act of 1991
(the "FIA"; Republic Act No. 7042, as amended), defines "doing business" as follows:

Sec. 3, par. (d). The phrase "doing business" shall include soliciting orders, service
contracts, opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity, or corporation in the Philippines; and any other
act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in the progressive prosecution of,
commercial gain or of the purpose and object of the business organization.

An analysis of the relevant case law, in conjunction with Section 1 of the

Implementing Rules and Regulations of the FIA (as amended by Republic Act No.
 8179), would demonstrate that the acts enumerated in the VAASA
do not constitute "doing business" in the Philippines.

Section 1 of the Implementing Rules and Regulations of the FIA (as amended by
Republic Act No. 8179) provides that the following shall not be deemed "doing
business":

(1) Mere investment as a shareholder by a foreign entity in domestic

corporations duly registered to do business, and/or the exercise of rights as
such investor;

(2) Having a nominee director or officer to represent its interest in such

corporation;

(3) Appointing a representative or distributor domiciled in the Philippines

which transacts business in the representative’s or distributor’s own name
and account;

(4) The publication of a general advertisement through any print or

broadcast media;

(5) Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;

(6) Consignment by a foreign entity of equipment with a local company to

be used in the processing of products for export;

(7) Collecting information in the Philippines; and

(8) Performing services auxiliary to an existing isolated contract of sale

which are not on a continuing basis, such as installing in the Philippines
machinery it has manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar incidental
services.

By and large, to constitute "doing business", the activity to be undertaken in the

Philippines is one that is for profit-making.63

By the clear terms of the VAASA, Agilent’s activities in the Philippines were confined to
(1) maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by Integrated Silicon; and (2) consignment of equipment with Integrated
Silicon to be used in the processing of products for export. As such, we hold that, based
on the evidence presented thus far, Agilent cannot be deemed to be "doing business" in
the Philippines. Respondents’ contention that Agilent lacks the legal capacity to file suit is
therefore devoid of merit. As a foreign corporation not doing business in the Philippines,
it needed no license before it can sue before our courts.

Finally, as to Agilent’s purported failure to state a cause of action against the individual
respondents, we likewise rule in favor of petitioner. A Motion to Dismiss hypothetically
admits all the allegations in the Complaint, which plainly alleges that these individual
respondents had committed or permitted the commission of acts prejudicial to Agilent.
Whether or not these individuals had divested themselves of their interests in Integrated
Silicon, or are no longer members of Integrated Silicon’s Board of Directors, is a matter of
defense best threshed out during trial.

WHEREFORE, PREMISES CONSIDERED, the petition is GRANTED. The Decision of

the Court of Appeals in CA-G.R. SP No. 66574 dated August 12, 2002, which dismissed
Civil Case No. 3123-2001-C,

is REVERSED and SET ASIDE. The Order dated September 4, 2001 issued by the
Regional Trial Court of Calamba, Laguna, Branch 92, in Civil Case No. 3123-2001-C,
is REINSTATED. Agilent’s application for a Writ of Replevin is GRANTED.

No pronouncement as to costs.

SO ORDERED.

METROPOLITAN BANK and TRUST G.R. No. 180974

COMPANY,
Petitioner,
Present:

- versus - CARPIO, J., Chairperson,

BRION,
PEREZ
CENTRO DEVELOPMENT SERENO, and
CORPORATION, CHONGKING REYES, JJ.
KEHYENG, MANUEL CO
KEHYENG and QUIRINO KEHYENG, Promulgated:
Respondents.
June 13, 2012

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

DECISION
SERENO, J.:

The present Petition for Review[1] assails the Court of Appeals (CA)

Decision[2] promulgated on 30 August 2007 and Resolution[3] dated 26 November 2007 in

CA-G.R. CV No. 80778. The antecedent facts follow.

On 20 March 1990, in a special meeting of the board of directors of respondent

Centro Development Corporation (Centro), its president Go Eng Uy was authorized to

mortgage its properties and assets to secure the medium-term loan of ₱84 million of

Lucky Two Corporation and Lucky Two Repacking. The properties and assets consisted of

a parcel of land with a building and improvements located at Salcedo St., Legaspi Village,

Makati City, and covered by Transfer Certificate of Title (TCT) Nos. 139880 and 139881.

This authorization was subsequently approved on the same day by the

stockholders.[4] Maria Jacinta V. Go, the corporate secretary, issued a Secretarys

Certificate stating:

I, MARIA JACINTA V. GO, Filipino citizen, of legal age, married and

with office address at Second Floor, CENTRO building, 180 Salcedo Street,
Legaspi Village, Makati, Metro Manila, after being first duly sworn, depose
and say:

xxx xxx xxx

2) That at a special meeting of the Board of Directors of the aforesaid

corporation duly called and held on March 20, 1990 and wherein a quorum
was present, the following resolution was unanimously approved pursuant
to the Minutes of the Special Meeting of the Stockholders of Centro
Development Corporation dated March 16, 1990;

RESOLUTION:
 RESOLVED, as it is hereby resolved, that the President, GO ENG UY,
of Centro Development Corporation, be as he is hereby authorized to
mortgage and use as collateral the real estate property of the Corporation
identified as a parcel of land with building and improvements located at
Salcedo St., Legaspi Village, Makati, Metro Manila covered by Transfer
Certificate of Title Nos. 139880 and 139881 to secure the medium-term loan
of LUCKY TWO CORPORATION, a corporation duly organized and
existing under the Philippine laws, and LUCKY TWO REPACKING, a single
proprietorship with principal office at Concepcion, Tarlac, with the Bank of
the Philippine Islands for EIGHTY FOUR (84) MILLION PESOS, Philippine
Currency (₱84,000,000.00);

RESOLVED FURTHER, that said GO ENG UY, be as he is hereby

authorized to sign all papers and documents needed and necessary to carry
into effect the aforesaid purpose or undertaking for the benefit and to the
credit of Lucky Two Corporation and Lucky Two Repacking.

Thus, on 21 March 1990, respondent Centro, represented by Go Eng Uy, executed a

Mortgage Trust Indenture (MTI) with the Bank of the Philippines Islands (BPI). [5] Under

the MTI, respondent Centro, together with its affiliates Lucky Two Corporation and

Lucky Two Repacking or Go Eng Uy, expressed its desire to obtain from time to time

loans and other credit accommodations from certain creditors for corporate and other

business purposes.[6] To secure these obligations from different creditors, respondent

Centro constituted a continuing mortgage on all or substantially all of its properties and

assets enumerated above unto and in favor of BPI, the trustee. Should respondent Centro

or any of its affiliates fail to pay their obligations when due, the trustee shall cause the

foreclosure of the mortgaged property.

Thereafter, the mortgage was duly recorded with the Registry of Deeds of Makati

City.[7]
 On 31 March 1993, Centro and BPI amended the MTI to allow an additional loan

of ₱36 million and to include San Carlos Milling Company, Inc. (San Carlos) as a borrower

in addition to Centro, Lucky Two Corp. and Lucky Two Repacking.[8] Then, on 28 July

1994, Centro and BPI again amended the MTI for another loan of ₱24 million, bringing

the total obligation to ₱144 million.[9]

Meanwhile, respondent Centro, represented by Go Eng Uy, approached petitioner

Metropolitan Bank and Trust Company (Metrobank) sometime in 1994 and proposed that

the latter assume the role of successor-trustee of the existing MTI. After petitioner

Metrobank agreed to the proposal, the board of directors of respondent Centro allegedly

resolved on 12 August 1994 to constitute petitioner as successor-trustee of BPI.[10]

Thereafter, on 27 September 1994,[11] petitioner and respondent Centro executed

the assailed MTI,[12] amending the previous agreements by appointing the former as the

successor-trustee of BPI. It is worth noting that this MTI did not amend the amount of

the total obligations covered by the previous MTIs.

It was only sometime in 1998 that respondents herein, Chongking Kehyeng,

Manuel Co Kehyeng and Quirino Kehyeng, allegedly discovered that the properties of

respondent Centro had been mortgaged, and that the MTI that had been executed

appointing petitioner as trustee. Notably, respondent Chongking Kehyeng had been a

member of the board of directors of Centro since 1989, while the two other respondents,

Manuel Co Kehyeng and Quirino Keyheng, had been stockholders since 1987.
Respondents Kehyeng were minority stockholders who owned thirty percent (30%) of the

outstanding capital stock of respondent Centro.

On different dates, 4 September 1998, 9 September 1998 and 2 October 1998, the

Kehyengs allegedly questioned the mortgage of the properties through letters addressed

to Go Eng Uy and Jacinta Go.[13] They alleged that they were not aware of any board or

stockholders meeting held on 12 August 1994, when petitioner was appointed as

successor-trustee of BPI in the MTI. Respondents demanded a copy of the minutes of the

meeting held on that date, but received no response.

Thereafter, on 14 October 1998 and 19 November 1998, the Kehyengs allegedly

wrote to petitioner, informing it that they were not aware of the 12 August 1994 board of

directors meeting. Petitioner did not respond to the letters.[14]

Meanwhile, during the period April 1998 to December 1998, San Carlos obtained

loans in the total principal amount of ₱812,793,513.23 from petitioner Metrobank.[15]

San Carlos failed to pay these outstanding obligations despite demand. Thus,

petitioner, as trustee of the MTI, enforced the conditions thereof and initiated foreclosure

proceedings, denominated as Foreclosure No. S-04-11, on the mortgaged properties. On 22

June 2000, petitioner Metrobank filed a Petition for Extrajudicial Foreclosure of Mortgage

with the executive judge of the Regional Trial Court (RTC) of Makati City. Petitioner

alleged that the total amount of the Promissory Notes that San Carlos executed in favor of
the former amounted to ₱812,793,513.23. As of 30 April 2000, the total outstanding

obligation, inclusive of interests and penalties, was ₱1,178,961,181.45.[16]

We note that there are no documents in the records evidencing the amendment of

the MTI to accommodate these additional obligations. As of 27 September 1994, the date

of the last amendment as borne out by the records, the total outstanding obligation

reflected in the MTI amounted to only ₱144 million. The latest MTI merely referred to the

amendments made on 31 March 1993 and 28 July 1994.

Before the scheduled foreclosure date, on 3 August 2000, respondents herein filed

a Complaint for the annulment of the 27 September 1994 MTI with a prayer for a

temporary restraining order (TRO) and preliminary injunction at Branch 138 of the RTC

of Makati City. Docketed as Civil Case No. 00-942, the Complaint was against petitioner,

Go Eng Uy, Alexander V. Go, Ramon V. Go, Maria Jacinta Go and Enriqueto Magpantay.

The bone of contention in Civil Case No. 00-942 was that since the mortgaged

properties constituted all or substantially all of the corporate assets, the amendment of

the MTI failed to meet the requirements of Section 40 of the Corporation Code on notice

and voting requirements. Under this provision, in order for a corporation to mortgage all

or substantially all of its properties and assets, it should be authorized by the vote of its

stockholders representing at least 2/3 of the outstanding capital stock in a meeting held

for that purpose. Furthermore, there must be a written notice of the proposed action and

of the time and place of the meeting. Thus, respondents alleged, the representation of Go
Eng Uy that he was authorized by the board of directors and/or stockholders of Centro

was false.

On 15 December 2003, after trial on the merits, the RTC dismissed the

Complaint.[17] It held that the evidence presented by respondents was insufficient to

support their claim that there were no meetings held authorizing the mortgage of Centros

properties. It noted that the stocks of respondents Kehyeng constituted only 30% of the

outstanding capital stock, while the Go family owned the majority 70%, which

represented more than the 2/3 vote required by Section 40 of the Corporation Code. The

trial court ruled that respondents Kehyeng, particularly Chongking Kehyeng, who sat in

the board of directors, should have done periodic inquiries and verifications of

documents pertaining to corporate properties. The RTC also held that laches had

attached, considering that eight (8) years had lapsed before respondents questioned the

mortgage executed in 1990.

The trial court also noted the absence of evidence showing the steps respondents

had taken to seek redress for the alleged misrepresentations of Go Eng Uy and Maria

Jacinta Go. On the other hand, the court found that no neglect could be imputed to

petitioner for relying on the Secretarys Certificate, which apparently established Go Eng

Uys authority to mortgage Centros properties and assets.

Respondents subsequently filed an appeal with the CA docketed as CA-G.R. CV

No. 80778. On 26 February 2004, they filed an Urgent Motion for the Issuance of a

Temporary Restraining Order and Writ of Preliminary Injunction seeking to restrain

petitioner, the clerk of court, the ex-officio sheriff of the RTC, and their agents from

foreclosing and selling at public auction on 4 and 22 March 2004 the mortgaged

properties subject of Civil Case No. 00-942. On 3 March 2004, a TRO was issued by the

CA effective for a period of sixty (60) days, unless earlier set aside by a resolution.[18]

On 19 May 2004, the CA issued a Resolution[19] in CA-G.R. CV No. 80778 denying

the application for the issuance of a writ of preliminary injunction.

Not giving up, on 27 May 2004, respondents Centro and San Carlos filed a

Complaint docketed as Civil Case No. 04-612 at Branch 56 of the RTC of Makati City. They

prayed for the nullification of the foreclosure proceedings and prayed for the issuance of a

TRO/injunction. Centro and San Carlos alleged that the total obligation due was only

₱657,000,000 and not ₱812,793,513.23; that the sale of the San Carlos properties found in

Negros Occidental fully satisfied their outstanding obligations; and that the action to

foreclose the Makati properties was illegal and void.[20]

While Civil Case No. 04-612 was pending, the clerk of court and the ex-

officio sheriff of the RTC of Makati City held an auction sale of the disputed property,

during which petitioner was adjudged as the highest bidder for ₱344,700,000. A

Certificate of Sale was accordingly issued on 3 June 2004, which states:[21]

On June 2, 2004, a public auction sale was conducted and

METROPOLITAN BANK & TRUST CO. submitted a bid for the sale to
him/it of the mortgaged property in the amount of ₱344,700,000 xxx, which
was the highest bid hence declared as the winning bidder and being the
creditor he/it did not delivery or pay cash/monies to the Clerk of Court and
Ex-Officio Sheriff the bid price of ₱344,700,000 xxx and the selling price was
 credited as partial/full satisfaction of indebtedness secured by the
mortgage.

In consideration thereof, the Certificate of Sale was issued in favor of

METROPOLITAN BANK& TRUST CO. of Metrobank Plaza, Sen. Gil Puyat
Ave., Makati.

This sale is subject to redemption in the manner provided by law.

Because of this development, the Complaint in Civil Case No. 04-612 was amended,

and Centro and San Carlos prayed for the issuance of a writ of injunction to prevent the

registration of the Certificate of Sale and the subsequent transfer to petitioner of the title

to the properties. However, Branch 56 of the RTC of Makati City subsequently denied the

application.

Respondent Centro thereafter filed before the CA a Petition for Certiorari docketed

as CA-G.R. SP No. 84447. The Petition assailed the Order of the RTC in Civil Case No. 04-

612.

During this time, CA-G.R. CV No. 80778, which involved the legality of the MTI,

was still pending.

On 30 August 2007, the CA promulgated the assailed Decision in CA-G.R. CV No.

80778. The appellate court first determined whether the requirements of Section 40 of

the Corporation Code on the sale of all or substantially all of the corporations property

were complied with. Based on the 18 August 1994 Secretarys Certificate, the CA found

that only a quorum was present during the stockholders meeting on 12 August 1994. The

appellate court thus held that the 2/3 vote required by Section 40 was not met. It ruled
that the minority stockholders were deprived of their right to dissent from or to approve

the proposed mortgage, considering that they had not been notified in writing of the

meeting in which the corporate action was to be discussed.

The CA also considered the testimony of Perla Saballe, an officer of petitioner

Metrobank, who opined that the term quorum meant only the majority of the

stockholders.

Furthermore, the appellate court held that petitioner was duty-bound to ensure

that respondent Centro submitted proof that the proposed corporate action had been

duly approved by a vote of the stockholders representing 2/3 of the outstanding capital

stock.

Regarding the issue of whether laches had already attached, the CA ruled that the

MTI could not be ratified, considering that the requirements of the Corporation Code

were not complied with.

Thus, the dispositive portion of the CA Decision in CA-G.R. CV No. 80778 reads:[22]

WHEREFORE, the Appeal is PARTIALLY

GRANTED. The Judgment dated 15 December 2003 of the Regional Trial
Court of Makati City, Branch 138, is REVERSED and SET ASIDE insofar as
the dismissal of the Complaint for Annulment of Trust Indenture Agreement is
concerned. The Trust Indenture executed on 27 September 1994 is hereby
declared NULL and VOID. Accordingly, the foreclosure of the mortgage and
the sale at public auction involving the subject properties are declared of no
force and effect. The certificates of title issued in the name of Metropolitan
Bank and Trust Company are CANCELLED.
 Conformably with the foregoing discussion, the appellants prayer for
damages is hereby DENIED.

SO ORDERED.

On 14 September 2007, a different Division of the CA rendered a

Decision[23] denying the Petition in CA-G.R. SP No. 84447. That Petition had questioned

the Decision of Branch 56 of the RTC of Makati City denying a Petition to enjoin the

foreclosure of the mortgaged properties on the ground that respondents Centro and San

Carlos had failed to show any clear right of the RTC to issue an injunctive writ. The CA

further ruled that the foreclosure of the property became a matter of right on the part of

petitioner because of respondents failure to pay the loans due.

On 26 November 2007, the CA in CA-G.R. CV No. 80778 rendered the assailed

Resolution denying petitioners Motion for Reconsideration.

Hence, this Petition.

Petitioner contends that the stockholders Resolution No. 005, s. 1994 did not

constitute a new mortgage in favor of petitioner. Instead, the stockholders merely

amended the existing MTI by appointing petitioner as the new trustee for the MTI, which

was already existing and held by BPI. Thus, there was no need to secure a 2/3 vote from

the stockholders. Petitioner posits that the authority to mortgage the properties was

granted in 1990, upon the execution of the first MTI between respondent Centro and BPI.
 Further, petitioner alleges that respondents do not deny or question the previous

MTI and its subsequent amendments. It further alleges that the constituted mortgage

under the MTI was duly annotated with the Registry of Deeds of Makati City.

Petitioner also maintains that the CA erred in interpreting the phrase at which

meeting a quorum was present contained in the Secretarys Certificate dated 18 August

1994. The bank points out that the phrase indicates that at least a quorum was present,

rather than that only a quorum was present. Thus, the Secretarys Certificate did not in

any way limit the number of those actually present.

Additionally, petitioner argues that Perla Saballe, whose testimony was considered

by the CA, was not a competent witness to interpret the directors Resolution. Allegedly,

she was never present during the meetings of Centro regarding the present issue, and she

was not in a position to answer the questions propounded to her in relation to the

requirements of Section 40 of the Corporation Code.

Moreover, petitioner cites the CA Decision in CA-G.R. SP No. 84447, which upheld

the validity of the foreclosure of the mortgage. It also challenges the CA ruling that the

former failed to exercise due diligence in transacting with respondent Centro. Finally,

petitioner insists that laches attached when respondents failed to question the MTI and

the stockholders Resolution at the earliest possible time.

 On the other hand, respondents contend that, based on the Pre-Trial Brief and the

Amended Pre-Trial Order, petitioner admitted that the subject properties were

mortgaged under the MTI of 27 September 1994, and not under that of 21 March 1990.

Second, on the issue of whether the 2/3 voting requirement was met, respondents

claim that petitioner cannot impugn the testimony of its own officer and witness, Perla

Saballe, on the interpretation of the term quorum as referred to in the Secretarys

Certificate dated 18 August 1994.

Respondents also allege that petitioner failed to controvert the testimony of

Chongking Kehyeng, a member and vice-chairperson of the board of directors, that he

was unaware of any stockholders meeting ever being held, and that he and the other

Kehyengs were not informed of that meeting. Respondents further insist that petitioner

was negligent when it merely relied on the Secretarys Certificate, instead of exercising

due diligence to ensure that all legal requirements had been complied with under the

MTI. On the issue of laches, respondents contend that it was not raised before the trial

court, and is thus improperly invoked in the present Petition. Nevertheless, they allegedly

undertook a number of measures to question the transactions between petitioner and

CENTRO. Moreover, they argue that the MTI, being null and void, cannot be given effect

through laches.

The Courts Ruling

In summary, this Court is tasked to resolve the following issues:

 1. Whether the requirements of Section 40 of the Corporation Code was
complied with in the execution of the MTI;

2. Whether petitioner was negligent or failed to exercise due diligence;

3. Whether laches has already attached, such that respondents can no

longer question the MTI.

We shall first discuss the issue of laches.

Laches is defined as the failure or neglect for an unreasonable and unexplained

length of time to do that which, by exercising due diligence, could or should have been

done earlier; it is negligence or omission to assert a right within a reasonable time,

warranting a presumption that the party entitled to assert it either has abandoned it or

declined to assert it.[24]

In the case at bar, the RTC in Civil Case No. 00-942 held that laches attached when

respondents allowed eight (8) years to pass before questioning the mortgage, which was

constituted in 1990. Thus, the trial court said:

As it appears now, the mortgage on the land and building of Centro

was first constituted in 1990 in favor of [the] Bank of the Philippine Islands.
Individual plaintiffs stated that discovery of the mortgage was sometime in
1998, (par. 6, Affidavit of Chongking Kehyeng). He was in the Board of
Directors of Centro and he holds office at the fourth floor of the building on
the mortgaged property. There is evidence that the holding of meetings of
the Board of Directors was irregular and purely reportorial.

Considering that as shown by planitiffs evidence, conduct of business

in Centro was informal, vigilance over its property was required from all
individual plaintiffs, particularly plaintiff Chongking Kehyeng who sits in the
Board of Directors. Periodic inquiries and verification of documents
pertaining to corporate properties should have been done and the existence
 of the mortgage was verifiable. A simple inquiry about the status of the title,
information on the title number and actual verification with the Register of
Deeds a task which can be accomplished in an hour or two will provide
information about the existence of the mortgage. None of the individual
plaintiffs did this.

The inaction of the plaintiffs for which no explanation was submitted

resulted in the acquisition of rights by the defendant Bank adverse to them.
Such neglect, taken in conjunction with the lapse of time of about eight (8)
years operates as a bar.[25]

A perusal of the TCTs[26] of the subject properties would reveal that only the values

of the mortgage securing the loans totalling ₱144 million were annotated, based on the

MTIs executed on 21 March 1990, 31 March 1993 and 28 July 1994. As for the last

annotation, it only stated that petitioner was the successor-trustee to all obligations due

to the creditors. Respondents, in their Complaint, did not question these mortgages

constituted by the MTIs executed on 21 March 1990, 31 March 1993 and 28 July 1994,

respectively. What they questioned was the additional loans granted to San

Carlos after the execution of the 27 September 1994 MTI and the foreclosure of the

mortgage resulting from the nonpayment of San Carlos obligations. Thus, contrary to the

finding of the trial court, only four years had lapsed from the execution of the 27

September 1994 MTI when respondents questioned the mortgage allegedly constituted to

cover these loans.

Furthermore, as mentioned earlier, the TCTs were not accordingly annotated to

cover these additional loans. Also, the mortgage of the property securing all the loans

were not disclosed in Centros financial statements for the years 1991 to 1998. [27] Thus,

absent any proof that the individual respondents were notified of the stockholders
meeting on 12 August 1994 or that they were present during the meeting, these

respondents could not have been informed of the alleged additional loans and the

corresponding mortgage constituted over the properties.

It cannot therefore be said that laches had attached and that respondents were

already barred from assailing the MTI in 1998. We now proceed to discuss the validity of

the challenged MTI.

The 18 August 1994 Secretarys Certificate issued by Maria Jacinta V. Go reads as

follows:[28]

I, JACINTA V. GO, Corporate Secretary of CENTRO DEVELOPMENT

CORPORATION, a corporation duly organized and existing under our laws with
principal office located at the 2nd Floor Centro Buidling, 180 Salcedo St., Legaspi
Village, Makati, Metro Manila, do hereby certify that during a special meeting of
the board of Directors of the Corporation held at its main office in Makati, Metro
Manila on August 12, 1994, at 3:00 p.m., at which meeting a quorum was present,
the following resolution was approved and adopted:

Resolution No. 005, s. 1994

APPOINTING METROBANK TRUST BANKING GROUP AS

THE NEW TRUSTEE FOR THE EXISTING MTI OF CDC REAL
ESTATE PROPERTY

RESOLVED, AS IT IS HEREBY RESOLVED, that in connection

with the existing Mortgage Trust Indenture of real estate property
covered by Transfer Certificate of Title Nos. 139880 and 139881
situated at 180 Salcedo St., Legaspi Village, Makati, Metro Manila,
with an area of 1,608 square meters more or less, the Corporation be
[sic], as it is hereby authorized, to appoint Metrobank Trust Banking
Group (Metrobank) as the new trustee for the existing mortgage
trust indenture presently held by the Bank of the Philippines Islands;

RESOLVED FURTHER, that the President, Mr. Go Eng Uy be,

as he is hereby, authorized and empowered to sign the Real Estate
 Mortgage and all documents/instruments with the said bank, for and
in behalf of the Company which are necessary and pertinent thereto;

RESOLVED FINALLY, that any resolution or resolutions

heretofore adopted by this Board, inconsistent with the provisions
hereof be, as they hereby are amended and/or revoked accordingly.

That at the meeting of the Stockholders of said corporation held on

August 12, 1994 at 4:00 p.m., at which meeting a quorum was present and
acting throughout, the following resolution was unanimously approved:

STOCKHOLDERS RESOLUTION

RESOLVED, that the stockholders approve, ratify and

confirm, as they have hereby approved, ratified and confirmed, the
board resolution dated August 12, 1994 appointing Metrobank Trust
Banking Group as the new trustee, presently held by the Bank of the
Philippine Islands, for the existing MTI of real estate property
covered by Transfer Certificate of Title Nos. 139880 and 139881
situated at 180 Salcedo St., Legaspi Village, Makati, Metro Manila
with an area of 1,608 square meters, and that the President, Mr. Go
Eng Uy[,] to sign the Real Estate Mortgage and all documents/
instruments with the said bank, for and in behalf of the Company
which are necessary and pertinent thereto; xxx.

Reading carefully the Secretarys Certificate, it is clear that the main purpose of the

directors Resolution was to appoint petitioner as the new trustee of the previously

executed and amended MTI. Going through the original and the revised MTI, we find no

substantial amendments to the provisions of the contract. We agree with petitioner that

the act of appointing a new trustee of the MTI was a regular business transaction. The

appointment necessitated only a decision of at least a majority of the directors present at

the meeting in which there was a quorum, pursuant to Section 25 of the Corporation

Code.
 The second paragraph of the directors Resolution No. 005, s. 1994, which

empowered Go Eng Uy to sign the Real Estate Mortgage and all documents/instruments

with the said bank, for and in behalf of the Company which are necessary and pertinent

thereto, must be construed to mean that such power was limited by the conditions of the

existing mortgage, and not that a new mortgage was thereby constituted.

Moreover, it is worthy to note that respondents do not assail the previous MTI

executed with BPI. They do not question the validity of the mortgage constituted over all

or substantially all of respondent Centros assets pursuant to the 21 March 1994 MTI in the

amount of ₱84 million. Nor do they question the additional loans increasing the value of

the mortgage to ₱144 million; or the use of Centros properties as collateral for the loans of

San Carlos, Lucky Two Corporation, and Lucky Two Repacking.

Thus, Section 40[29] of the Corporation Code finds no application in the present

case, as there was no new mortgage to speak of under the assailed directors Resolution.

Nevertheless, while we uphold the validity of the stockholders Resolution

appointing Metrobank as successor-trustee, this is not to say that we uphold the validity

of the extrajudicial foreclosure of the mortgage.

After a careful review of the records of this case, we find that petitioner failed to

establish its right to be entitled to the proceeds of the MTI.

 There is no evidence that petitioner, as creditor or as trustee, had a cause of action

to move for the extrajudicial foreclosure of the subject properties mortgaged under the

MTI.

The conditions of the MTI are very clear. Section 3.3 of the MTI provides: [30]

It is the intent of the COMPANY that the BORROWERS will obtain

additional loans or credit accommodations from certain other banking or
financial institutions in accordance with arrangements made by the
BORROWERS with the CREDITORS.

ALL OBLIGATIONS covered by this INDENTURE shall be evidenced

by a Mortgage Participation Certificate in the form of Schedule II
hereof, the issuance of which by the TRUSTEE to the participating
CREDITOR/S shall be in accordance with Section 7 of this INDENTURE,
provided the aggregate LOAN VALUES of the COLLATERAL, based on the
latest appraisal thereof, are not exceeded. (Emphasis supplied.)

Section 1.11 of the MTI defines a Mortgage Participation Certificate (MPC) as a

certificate issued by the trustee to a creditor pursuant to the MTI, representing an aliquot

interest in the mortgage created by the MTI. The face amount of the MPC is the value in

money of its holders participation or interest in the mortgaged property.

To address the gaps in the facts as presented by the parties and by the lower courts,

we issued a Resolution[31] on 5 September 2011. We required petitioner to submit, among

others, all amendments to the MTI and all the MPCs issued. Petitioner failed to comply

with this directive. For one reason or another, instead of submitting MPCs evidencing its

interest in the MTI, it submitted to this Court documents referring to different

instruments altogether.[32] Petitioner should have been more careful in complying with

this Courts Orders.

More glaring is the fact that the assailed MTI is not even referred to in the

Promissory Notes executed by petitioner in favor of San Carlos, evidencing the loans

extended by the latter to the former. This omission violated Section 1.13 of the MTI, which

requires that a promissory note must be covered by an outstanding MPC and secured by

the lien of the MTI. The Promissory Notes reveal the following:[33]

Promissory Note No. Date Amount Collateral

111333.69288.00.999 20 April 1998 ₱328,000,000 Others Not
specified
111333.70316.00.999 19 October 1998 ₱97,859,472.03 Unsecured
111333.70359.00.999 30 October 1998 ₱82,849,981.44 Others Not
specified
111333.70464.000.99 17 November 1998 ₱98,114,959.13 Others Not
specified
111333.70502.000.99 25 November 1998 ₱40,150,059.85 Others Not
specified
111333.70618.000.99 9 December 1998 ₱39,673,569.58 Others Not
specified
111333.70642.000.99 17 December 1998 ₱126,145,471.20 Others Not
specified

Petitioner thus miserably failed to prove that it was entitled to the benefits of the

MTI.

Even if we assume that petitioner was indeed a creditor protected by the MTI, we

find that, as trustee and as creditor, it failed to comply with the MTIs conditions for

granting additional loans to San Carlos additions that brought the total loan amount
to ₱1,178,961,181.45 when it did not amend the MTI to accommodate the additional loans

in excess of ₱144 million.

In its application for an extrajudicial foreclosure of Centros properties, petitioner

states:[34]

We have the honor to request your good Office to conduct/undertake

extrajudicial foreclosure sale proceedings under Act No. 3135, as amended, and
other applicable laws, on the properties covered by the Mortgage Trust
Indenture, dated March 21, 1990, as amended on March 31, 1993 and further
amended on July 28, 1994 executed by the Mortgagor, CENTRO
DEVELOPMENT CORPORATION, in favor of the Former Trustee, BANK OF
THE PHILIPPINE ISLANDS and Trust Indenture, dated September 27, 1994,
also executed by the Mortgagor, CENTRO DEVELOPMENT CORPORATION,
in favor of the Mortgagee/Trustee, METROPOLITAN BANK AND TRUST
COMPANY-TRUST BANKING GROUP, to secure among others, several
obligations of SAN CARLOS MILLING CO., INC. under various Promissory
Notes, with a total principal amount of EIGHT HUNDRED TWELVE
MILLION SEVEN HUNDRED NINETY-THREE THOUSAND FIVE
HUNDRED THIRTEEN PESOS AND TWENTY-THREE CENTAVOS
(₱812,793,513.23), for breach of the terms and conditions of the said Trust
Indenture. (Emphasis in the original.)

However, Section 9.4 of the 27 September 1994 MTI clearly states:[35]

The written consent of the COMPANY, the TRUSTEE and all the
CREDITORS shall be required for any amendment of the terms and
conditions of this INDENTURE. Additional loans which will be covered
by the INDENTURE shall require the written consent of the MAJORITY
CREDITORS and shall be within the loan value stipulated in Section
1.8[36] of this INDENTURE. (Emphasis supplied.)
 The fact that the foreclosure of the mortgaged property was undertaken pursuant to

the 27 September 1994 MTI is an indication that the parties had failed to amend it

accordingly.

Because the 27 September 1994 MTI was not amended to secure the loan granted to

the debtors, petitioner could not have applied for an extrajudicial foreclosure on the basis

of all the Promissory Notes granted to San Carlos. Instead, petitioner could have only

applied for the foreclosure of the property corresponding to ₱144 million, which was the

maximum amount embodied in the 27 September 1994 MTI. In other words, as an

accommodation debtor, Centros properties may not be liable for San Carlos debts beyond

this maximum amount, pursuant to the MTI executed with petitioner. In Caltex

Philippines v. Intermediate Appellate Court,[37] we likewise held that the value of the

mortgage should be limited only to the amount provided by the contract between the

parties.

Section 4 of Rule 68 of the Rules of Court provides:

Disposition of proceeds of sale - The amount realized from the foreclosure

sale of the mortgaged property shall, after deducting the costs of the sale, be
paid to the person foreclosing the mortgage, and when there shall be any
balance or residue, after paying off the mortgage debt due, the same shall be
paid to junior encumbrancers in the order of their priority, to be ascertained
by the court, or if there be no such encumbrancers or there be a balance or
residue after payment to them, then to the mortgagor or his duly authorized
agent, or to the person entitled to it.
 While it is true that some of the documents required by this Court to be submitted

by the parties were not presented at the trial stage, when the legal issues raised begs the

reception of that evidence especially considering that a case, like the present one has

been pending for more than a decade then the Court may require the parties to submit

such evidence in the interest of justice. This is clearly provided under Rule 45, Section 7 of

the Rules of Court.[38]

On a final note, Republic Act No. 8971, or the General Banking Law of 2000,

recognizes the vital role of banks in providing an environment conducive to the sustained

development of the national economy and the fiduciary nature of banking; thus, the

law requires banks to have high standards of integrity and performance. The fiduciary

nature of banking requires banks to assume a degree of diligence higher than that of a

good father of a family.[39] In the case at bar, petitioner itself was negligent in the conduct

of its business when it extended unsecured loans to the debtors. Worse, it was in serious

breach of its duty as the trustee of the MTI. It was not able to protect the interests of the

parties and was even instrumental in violating the terms of the MTI, to the detriment of

the parties thereto. Thus, petitioner has only itself to blame for being left with insufficient

recourse against petitioner under the assailed MTI.

WHEREFORE, in view of the foregoing, the Petition is hereby PARTLY GRANTED.

The Mortgage Trust Indenture is declared VALID. Nonetheless, for reasons stated herein,

the Decision of the Court of Appeals in CA-G.R. CV No. 80778, declaring the foreclosure

proceedings in Foreclosure No. S-04-011 over TCT Nos. 139880 and 139881 of no force and
effect, is AFFIRMED. Likewise, the cancellation of the Certificates of Title in the name of

petitioner Metropolitan Bank and Trust Company and the denial of the payment of

damages are also AFFIRMED.

SO ORDERED.

SOLIDBANK CORPORATION (now G.R. No. 159460

known as FIRST METRO INVESTMENT
CORPORATION),
Petitioner,

- versus -

ERNESTO U. GAMIER, ELENA R.

CONDEVILLAMAR, JANICE L.
ARRIOLA and OPHELIA C. DE
GUZMAN,
Respondents.

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

SOLIDBANK CORPORATION and/or G.R. No. 159461

its successor-in-interest, FIRST
METRO INVESTMENT Present:
CORPORATION, DEOGRACIAS
N. VISTAN AND CARPIO MORALES, J.,
EDGARDO MENDOZA, JR., Chairperson,
Petitioners, BRION,
BERSAMIN,
VILLARAMA, JR., and
- versus - SERENO, JJ.

SOLIDBANK UNION AND ITS

DISMISSED OFFICERS AND Promulgated:
MEMBERS, namely: EVANGELINE J.
GABRIEL, TERESITA C. LUALHATI,
ISAGANI P. MAKISIG, REY S. PASCUA, November 15, 2010
EVELYN A. SIA, MA. VICTORIA M.
VIDALLON, AUREY A. ALJIBE, REY
ANTHONY M. AMPARADO, JOSE A.
ANTENOR, AUGUSTO
D. ARANDIA, JR., JANICE L. ARRIOLA,
RUTH SHEILA MA. BAGADIONG,
STEVE D. BERING, ALAN ROY I.
BUYCO, MANALO T. CABRERA,
RACHE M. CASTILLO, VICTOR O.
CHUA, VIRGILIO Y. CO, JR.,
LEOPOLDO S. DABAY, ARMAND V.
DAYANG-HIRANG, HUBERT V.
DIMAGIBA, MA. LOURDES CECILIA B.
EMPARADOR, FELIX D. ESTACIO, JR.,
JULIETA T. ESTRADA, MARICEL G.
EVALLA, JOSE G. GUISADIO, JOSE
RAINARIO C. LAOANG, ALEXANDER
A. MARTINEZ, JUAN ALEX C.
NAMBONG, JOSEPHINE M. ONG,
ARMANDO B. OROZCO, ARLENE R.
RODRIGUEZ, NICOMEDES P. RUIZO,
JR., DON A. SANTANA, ERNESTO R.
SANTOS, JR., EDNA M. SARONG,
GREGORIO S. SECRETARIO, ELLEN M.
SORIANO, ROSIE C. UY, ARVIN
D.VALENCIA, FERMIN JOSSEPH B.
VENTURA, JR., EMMANUEL C.
YAPTANCO, ERNESTO C. ZUNIGA,
ARIEL S. ABENDAN, EMMA R.
ABENDAN, PAULA AGNES A.
ANGELES, JACQUILINE B. BAQUIRAN,
JENNIFER S. BARCENAS, ALVIN E.
BARICANOSA, GEORGE MAXIMO P.
BARQUEZ, MA. ELENA G. BELLO,
RODERICK M. BELLO, MICHAEL
MATTHEW B. BILLENA, LEOPE L.
CABENIAN, NEPTALI A. CADDARAO,
FERDINAND MEL S. CAPULING,
MARGARETTE B. CORDOVA, MA.
EDNA V. DATOR, RANIEL C.
DAYAO, RAGCY L. DE GUZMAN, LUIS
E. DELOS SANTOS, CARMINA
M. DEGALA, EPHRAIM RALPH A.
DELFIN, KAREN
M. DEOCERA, CAROLINA C. DIZON,
MARCHEL S. ESQUEJJO, JOCELYN
I.ESTROBO, MINERVA S. FALLARME,
HERNANE C.FERMOCIL, RACHEL B.
FETIZANAN, SAMUEL A.
FLORENTINO, MENCHIE
R.FRANCISCO, ERNESTO U. GAMIER,
MACARIO RODOLFO N. GARCIA,
JOEL S. GARMINO, LESTER MARK Z.
GATCHALIAN, MA. JINKY
P. GELERA, MA. TERESA G.
GONZALES, GONZALO G. GUINIT,
EMILY H. GUINO-O, FERDINAND S.
HABIJAN, JUN G.
HERNANDEZ, LOURDES D. IBEAS, MA.
ANGELA L. JALANDONI, JULIE T.
JORNACION, MANUEL C. LIM,
MA. LOURDES A. LIM, EMERSON V.
LUNA, NOLASCO
B. MACATANGAY, NORMAN C.
MANACO, CHERRY LOU B.
MANGROBANG, MARASIGAN G.
EDMUNDO, ALLEN M. MARTINEZ,
EMELITA C.MONTANO, ARLENE P.
NOBLE, SHIRLEY A. ONG, LOTIZ E.
ORTIZ LUIS, PABLITO M. PALO, MARY
JAINE D. PATINO, GEOFFREY T.
PRADO, OMEGA MELANIE M.
QUINTANO, ANES A. RAMIREZ,
RICARDO D. RAMIREZ, DANIEL O.
RAQUEL, RAMON B.
REYES, SALVACION N. ROGADO,
ELMOR R. ROMANA, JR., LOURDES U.
SALVADOR,ELMER S. SAYLON,
BENHARD E. SIMBULAN, MA. TERESA
S. SOLIS, MA. LOURDES ROCEL E.
SOLIVEN, EMILY C. SUY AT, EDGAR
ALLAN P. TACSUAN, RAYMOND N.
TANAY, JOCELYN Y. TAN,
CANDIDO G. TISON, MA. THERESA O.
TISON, EVELYN T. UYLANGCO,
CION E. YAP, MA. OPHELIA C.
DE GUZMAN, MA. HIDELISA P. IRA,
RAYMUND MARTIN A. ANGELES,
MERVIN S. BAUTISTA, ELENA R.
CONDEVILLAMAR, CHERRY T. CO,
LEOPOLDO V. DE LA ROSA,
DOROTEO S. FROILAN, EMMANUEL
B. GLORIA, JULIETEL JUBAC AND
ROSEMARIE L. TANG,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

VILLARAMA, JR., J.:

The consolidated petitions before us seek to reverse and set aside the
Decision[1] dated March 10, 2003 of the Court of Appeals (CA) in CA-G.R. SP Nos. 67730
and 70820 which denied the petitions for certiorari filed by Solidbank Corporation
(Solidbank) and ordered the reinstatement of the above-named individual respondents to
their former positions.

The Antecedents

Sometime in October 1999, petitioner Solidbank and respondent Solidbank

Employees Union (Union) were set to renegotiate the economic provisions of their 1997-
2001 Collective Bargaining Agreement (CBA) to cover the remaining two years
thereof. Negotiations commenced on November 17, 1999 but seeing that an agreement
was unlikely, the Union declared a deadlock on December 22, 1999 and filed a Notice of
Strike on December 29, 1999.[2] During the collective bargaining negotiations, some
Union members staged a series of mass actions.In view of the impending actual strike,
then Secretary of Labor and Employment Bienvenido E. Laguesma assumed jurisdiction
over the labor dispute, pursuant to Article 263 (g) of the Labor Code, as amended. The
assumption order dated January 18, 2000 directed the parties to cease and desist from
committing any and all acts that might exacerbate the situation.[3]

In his Order[4] dated March 24, 2000, Secretary Laguesma resolved all economic and non-
economic issues submitted by the parties, as follows:

WHEREFORE, premises considered, judgment is hereby issued:

a. Directing Solidbank Corporation and Solidbank Union to conclude

their Collective Bargaining Agreement for the years 2000 and
2001, incorporating the dispositions above set forth;
 b. Dismissing the unfair labor practice charge against Solidbank
Corporation;

c. Directing Solidbank to deduct or check-off from the employees

lump sum payment an amount equivalent to seven percent (7%)
of their economic benefits for the first (1st) year, inclusive of
signing bonuses, and to remit or turn over the said sum to the
Unions authorized representative, subject to the requirements of
check-off;

d. Directing Solidbank to recall the show-cause memos issued to

employees who participated in the mass actions if such memos
were in fact issued.

SO ORDERED.[5]

Dissatisfied with the Secretarys ruling, the Union officers and members decided to
protest the same by holding a rally infront of the Office of the Secretary of Labor and
Employment in Intramuros, Manila, simultaneous with the filing of their motion for
reconsideration of the March 24, 2000 Order. Thus, on April 3, 2000, an overwhelming
majority of employees, including the individual respondents, joined the mass leave and
protest action at the Department of Labor and Employment (DOLE) office while the
banks provincial branches in Cebu, Iloilo, Bacolod and Naga followed suit and boycotted
regular work.[6] The union members also picketed the banks Head Office in Binondo
on April 6, 2000, and Paseo de Roxas branch on April 7, 2000.

As a result of the employees concerted actions, Solidbanks business operations

were paralyzed. On the same day, then President of Solidbank, Deogracias N. Vistan,
issued a memorandum[7] addressed to all employees calling their absence from work and
demonstration infront of the DOLE office as an illegal act, and reminding them that they
have put their jobs at risk as they will be asked to show cause why they should not be
terminated for participating in the union-instigated concerted action. The employees
work abandonment/boycott lasted for three days, from April 3 to 5, 2000.

On the third day of the concerted work boycott (April 5, 2000), Vistan issued
another memorandum,[8] this time declaring that the bank is prepared to take back
employees who will report for work starting April 6, 2000 provided these employees
were/are not part of those who led or instigated or coerced their co-employees into
participating in this illegal act. Out of the 712 employees who took part in the three-day
work boycott, a total of 513 returned to work and were accepted by the bank. The
remaining 199 employees insisted on defying Vistans directive, which included herein
respondents Ernesto U. Gamier, Elena R. Condevillamar, Janice L. Arriola and Ophelia C.
De Guzman. For their failure to return to work, the said 199 employees were each issued a
show-cause memo directing them to submit a written explanation within twenty-four
(24) hours why they should not be dismissed for the illegal strike x x x in defiance of x x x
the Assumption Order of the Secretary of Labor x x x resulting [to] grave and irreparable
damage to the Bank, and placing them under preventive suspension.[9]

The herein 129 individual respondents were among the 199 employees who were
terminated for their participation in the three-day work boycott and protest action. On
various dates in June 2000, twenty-one (21) of the individual respondents executed
Release, Waiver and Quitclaim in favor of Solidbank.[10]

On May 8, 2000, Secretary Laguesma denied the motions for reconsideration filed
by Solidbank and the Union.[11]

The Union filed on May 11, 2000 a Motion for Clarification of certain portions of
the Order dated March 24, 2000, and on May 19, 2000 it filed a Motion to Resolve the
Supervening Issue of Termination of 129 Striking Employees. On May 26, 2000, Secretary
Laguesma granted the first motion by clarifying that the contract-signing bonus awarded
in the new CBA should likewise be based on the adjusted pay. However, the Unions
second motion was denied,[12] as follows:

This Office cannot give due course to the Unions second

motion. The labor dispute arising from the termination of the Bank
employees is an issue that ought to be entertained in a separate case.The
assumption order of January 18, 2000 covered only the bargaining deadlock
between the parties and the alleged violation of the CBA provision on
regularization. We have already resolved both the deadlock and the CBA
violation issues. The only motion pending before us is the motion for
clarification, which we have earlier disposed of in this Order. Thus, the only
option left is for the Union to file a separate case on the matter.[13]

In the meantime, the Monetary Board on July 28, 2000 approved the request of
Metropolitan Bank and Trust Company (Metrobank) to acquire the existing non-real
estate assets of Solidbank in consideration of assumption by Metrobank of the liabilities
of Solidbank, and to integrate the banking operations of Solidbank with
Metrobank. Subsequently, Solidbank was merged with First Metro Investment
Corporation, and Solidbank, the surviving corporation, was renamed the First Metro
Investment Corporation (FMIC).[14] By August 31, 2000, Solidbank ceased banking
operations after surrendering its expanded banking license to the Bangko Sentral ng
Pilipinas. Petitioners duly filed a Termination Report with the DOLE and granted
separation benefits to the banks employees.[15]
 Respondents Gamier, Condevillamar, Arriola and De Guzman filed separate
complaints for illegal dismissal, moral and exemplary damages and attorneys fees on April
28, May 15 and May 29, 2000, respectively (NLRC NCR Case Nos. [S]30-04-01891-00, 30-
05-03002-00 and 30-05-02253-00). The cases were consolidated before Labor Arbiter
Potenciano S. Caizares, Jr. Respondent Union joined by the 129 dismissed employees filed
a separate suit against petitioners for illegal dismissal, unfair labor practice and damages
(NLRC NCR Case No. 30-07-02920-00 assigned to Labor Arbiter Luis D. Flores).

Labor Arbiters Rulings

In his Decision dated November 14, 2000, Labor Arbiter Potenciano S. Caizares, Jr.
dismissed the complaints of Gamier, Condevillamar, Arriola and De Guzman. It was held
that their participation in the illegal strike violated the Secretary of Labors return to work
order upon the latters assumption of the labor dispute and after directing the parties to
execute their new CBA.[16]

On March 16, 2001, Labor Arbiter Luis D. Flores rendered a decision[17] in favor of
respondents Union and employees, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered

declaring complainants dismissal as illegal and unjustified and ordering the
respondents Solidbank Corporation and/or its successor-in-interest First
Metro Investment Corporation and/or Metropolitan Bank and Trust
Company and/or Deogracias Vistan and/or Edgardo Mendoza to reinstate
complainants to their former positions. Concomitantly, said respondents
are hereby ordered to jointly and severally pay the complainants their full
backwages and other employees benefits from the time of their dismissal up
to the date of their actual reinstatement; payment of ten (10%) percent
attorneys fees; payment of ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00) each as moral damages and ONE HUNDRED THOUSAND
PESOS (P100,000.00) each as exemplary damages which are computed, at
the date of this decision in the amount of THIRTY THREE MILLION
SEVEN HUNDRED NINETY FOUR THOUSAND TWO HUNDRED
TWENTY TWO PESOS and 80/100 (P33,794,222.80), by the Computation
and Examination Unit of this branch and becomes an integral part of this
Decision.

SO ORDERED. [18]

Respondents Gamier, Condevillamar, Arriola and De Guzman appealed the

decision of Labor Arbiter Caizares, Jr. to the National Labor Relations Commission (NLRC
NCR CA No 027342-01). Petitioners likewise appealed from the decision of Labor Arbiter
Flores (NLRC NCR CA No. 028510-01).

Rulings of the NLRC

On July 23, 2001, the NLRCs Second Division rendered a Decision[19] reversing the
decision of Labor Arbiter Flores, as follows:

WHEREFORE, premises considered, the decision of the Labor

Arbiter is hereby VACATED and SET ASIDE and a new one entered
dismissing the complaint for illegal dismissal and unfair labor practice for
lack of merit. As equitable relief, respondents are hereby ordered to pay
complainants separation benefits as provided under the CBA at least one (1)
month pay for every year of service whichever is higher.

SO ORDERED.[20]

The Second Division ruled that the mass action held by the bank employees on April 3,
2000 infront of the Office of the Secretary of Labor was not a legitimate exercise of the
employees freedom of speech and assembly. Such was a strike as defined under Article 212
(o) of the Labor Code, as amended, which does not distinguish as to whom the action of
the employees is directed against, nor the place/location where the concerted action of
the employees took place. Complainants Gamier, Condevillamar, Arriola and De Guzman
did not report for work and picketed the DOLE premises on April 3, 2000; they
continuously refused to report back to work until April 7, 2000 when they were issued a
Notice of Termination. It was stressed that the mass action of the bank employees was an
incident of a labor dispute, and hence the concerted work abandonment was a prohibited
activity contemplated under Article 264 (a) of the Labor Code, as amended, upon
assumption of jurisdiction by the Secretary of Labor. Citing this Courts ruling in the case
of Telefunken Semiconductors Employees Union-FFW v. Court of Appeals,[21] the Second
Division found there was just and valid cause for the dismissal of complainants.[22]

On the charge of forum shopping with respect to twenty-one (21) individual complainants
who have voluntarily settled their claims against Solidbank, the said cases not having
been dismissed by the Labor Arbiter despite proper motion,[23] the Second Division found
that complainants admitted in their Answer that the said employees preferred to pursue
their own independent action against the bank and their names were stricken out from
the original complaint; hence, the Labor Arbiter erred in granting relief to said
employees. Nevertheless, it held that the complaint will not be dismissed on this ground
as the issue of forum shopping should have been raised in the proceedings before the
Labor Arbiter.[24]
Respondents filed a motion for reconsideration while the petitioners filed a partial
motion for reconsideration. Both motions were denied under
[25]
Resolution dated September 28, 2001.

As to respondents appeal, the NLRCs Third Division by Decision[26] dated January 31,
2002, reversed the decision of Labor Arbiter Caizares, Jr., as follows:

WHEREFORE, the decision appealed from is hereby SET ASIDE and

a new one entered finding the respondent Solidbank Corporation liable for
the illegal dismissal of complainants Ernesto U. Gamier, Elena P.
Condevillamar, Janice L. Arriola and Maria Ophelia C. de Guzman, and
ordering the respondent bank to reinstate the complainants to their former
positions without loss of seniority rights and to pay full backwages
reckoned from the time of their illegal dismissal up to the time of their
actual/payroll reinstatement. Should reinstatement not be feasible,
respondent bank is further ordered to pay complainants their separation
pay in accordance with the provisions of the subsisting Collective
Bargaining Agreement.

All other claims are DISMISSED for lack of merit.

SO ORDERED.[27]

The Third Division held that the protest action staged by the banks employees
before the DOLE did not amount to a strike but rather an exercise of their right to express
frustration and dissatisfaction over the decision rendered by the Secretary of
Labor. Hence, it cannot be concluded that the activity is per se illegal or violative of the
assumption order considering that at the time, both parties had pending motions for
reconsideration of the Secretarys decision. Moreover, it was found that Gamier,
Condevillamar, Arriola and De Guzman were not fully investigated on the charge that
they had instigated or actively participated in an illegal activity; neither was it shown that
the explanations submitted by them were considered by the management. Since said
employees had presented evidence of plausible and acceptable reasons for their absence
at the workplace at the time of the protest action, their termination based on such alleged
participation in the protest action was unjustified.[28]

Respondents filed a partial motion while the petitioners filed a motion for
reconsideration of the Decision dated January 31, 2002. Both motions were denied under
Resolution[29]dated March 8, 2002.

On November 20, 2001, petitioners filed a petition for certiorari before the CA
assailing the July 23, 2001 Decision and Resolution dated September 28, 2001 of the NLRCs
Second Division insofar as it ordered the payment of separation benefits to the 129
terminated employees of Solidbank who participated in the mass action/strike (CA-G.R.
SP No. 67730).[30]

On May 23, 2002, petitioners filed a separate petition in the CA (CA-G.R. SP No.
70820) seeking the reversal of the January 31, 2002 Decision and Resolution dated March
8, 2002 of the NLRCs Third Division and praying for the following reliefs: (1) immediate
issuance of a TRO and writ of preliminary injunction to restrain/enjoin the NLRC from
issuing a writ of execution in NLRC CA No. 027342-01; (2) the petition be consolidated
with CA-G.R. SP No. 67730 before the Thirteenth Division and CA-G.R. SP No. 68054
before the Third Division, or if consolidation is no longer possible, that the petition be
resolved independently of the aforesaid cases; and (3) granting the petition by annulling
and setting aside the January 31, 2002 Decision of the NLRC, and reinstating the
November 14, 2000 Decision of Labor Arbiter Caizares, Jr.[31]

On August 9, 2002, petitioners filed a Manifestation before the Fifteenth Division

(CA-G.R. SP No. 67730) attaching thereto a copy of the Decision[32] (dated July 26, 2002)
rendered by the CAs Special Third Division in CA-G.R. SP No. 68998, a petition for
certiorari separately filed by Metrobank which also sought to annul and set aside the July
23, 2001 Decision of the NLRCs Second Division insofar as it ordered the payment of
separation benefits to the dismissed employees of Solidbank. In the said decision, the CAs
Fourteenth Division gave due course to the petition of Metrobank and affirmed the July
23, 2001 decision of the NLRC but reversed and set aside the portion of the decision
ordering the payment of separation benefits.[33]

On September 11, 2002, respondents filed an Omnibus Motion and Counter-

Manifestation arguing that petitioners Manifestation constitutes a judicial admission that
Metrobank engaged in forum shopping; it was thus prayed that CA-G.R. SP No. 68998 be
consolidated with CA-G.R. SP No. 67730, the latter having a lower case number. Further,
respondents attached a copy of the Decision[34] dated August 29, 2002 rendered by the
CAs Second Division in CA-G.R. SP No. 68054, the petition separately filed by the Union
and the 129 terminated employees of Solidbank from the July 23, 2001 Decision of the
NLRCs Second Division. The CAs Second Division granted the petition in CA-G.R. SP No.
68054 and reinstated the March 16, 2001 Decision of Labor Arbiter Flores.

CA-G.R. SP Nos. 67730 and 70820 were consolidated before the Twelfth Division.

Court of Appeals Ruling

On March 10, 2003, the CA rendered its Decision[35] the dispositive portion of which
reads:
 WHEREFORE, the twin petitions are hereby DENIED. The dismissal
of private respondents are hereby declared to be illegal. Consequently,
petitioner is ordered to reinstate private respondents to their former
position, consonant with the Decision of this Court in CA-G.R. SP No.
68054.

SO ORDERED.[36]

First, on the issue of forum shopping, the CA found that while there were indeed two
cases filed respecting the same matter of illegality of the dismissal of certain employees of
Solidbank, it appears that the individual complainants have no hand in initiating the case
before the Labor Arbiter for which the Union filed the complaint in behalf of its
members. Hence, the individual complainants cannot be said to have deliberately or
consciously sought two different fora for the same issues and causes of action. Petitioners,
moreover, failed to call the attention of the Labor Arbiter as to the fact of filing of similar
complaints by four employees.

As to the nature of the mass action resorted to by the employees of Solidbank, the
CA ruled that it was a legitimate exercise of their right to free expression, and not a strike
proscribed when the Secretary of Labor assumed jurisdiction over the impass between
Solidbank and the Union in the collective bargaining negotiations. The CA thus reasoned:

while conceding that the aggregated acts of the private respondents

may have resulted in a stoppage of work, such was the necessary result of
the exercise of a Constitutional right. It is beyond cavil that the mass
action was done, not to exert any undue pressure on the petitioner
with regard to wages or other economic demands, but to express
dissatisfaction over the decision of the Labor Secretary subsequent to
his assumption of jurisdiction. Surely, this is one course of action
that is not enjoined even when a labor dispute is placed under the
assumption of the said Labor Secretary. To allow an act of the Labor
Secretary one man in the Executive Department to whittle down a freedom
guaranteed by the Bill of Rights would be to place upon that freedom a
limitation never intended by the several framers of our Constitution. In
effect, it would make a right enshrined in the Fundamental Law that was
ratified by the Sovereign People, subordinate to a prerogative granted by
the Labor Code, a statutory enactment made by mere representatives of the
People. This anomaly We cannot allow.

xxxx

Was private respondents act of massing in front of

the DOLE Building calculated by them to cause work stoppage, or were
 they merely airing their grievance over the ruling of the Labor Secretary in
exercise of their civil liberties? Who can divine the motives of their
hearts? But when two different interpretations are possible, the courts must
lean towards that which gives meaning and vitality to the Bill of Rights. x x
x[37] (Emphasis supplied.)

On April 2, 2003, petitioners filed a motion for reconsideration but this was denied by the
CA in its Resolution[38] dated August 7, 2003.

The Petitions

G.R. No. 159460

Petitioners argued that the CA erred in holding that the mass action of April 3,
2000 infront of the Office of the Secretary of Labor was not a strike considering that it
had all the elements of a strike and the respondents judicially admitted that it was a
strike. The CA deemed the mass action as an exercise of the respondents freedom of
expression but such constitutional right is not absolute and subject to certain well-
defined exceptions. Moreover, a mass action of this nature is considered a strike and not
an exercise of ones freedom of expression, considering further that the Secretarys Order
dated January 18, 2000 is a valid exercise of police power.

Petitioners assail the CA in not considering the damage and prejudice caused to
the bank and its clients by respondents illegal acts. Respondents mass actions crippled
banking operations. Over-the-counter transactions were greatly undermined. Checks for
clearing were significantly delayed. On-line transactions were greatly hampered, causing
inestimable damage to the nationwide network of automated teller
machines. Respondent Unions actions clearly belie its allegation that its mass action was
merely intended to protest and express their dissatisfaction with the Secretarys Order
dated March 24, 2000.

In view of the illegal strike conducted in violation of the Secretarys assumption

order, petitioners maintain that the dismissal of respondents was not illegal, as
consistently ruled by this Court in many cases. Even granting arguendo that their
termination was illegal, the CA erred in ordering the reinstatement of respondents and
holding that Solidbank, FMIC and Metrobank are solidarily liable to the
respondents. Lastly, the CA erred in not finding that respondents were guilty of forum
shopping as respondents claim that they did not know the Union had filed a complaint
was unbelievable under the circumstances.[39]
G.R. No. 159461

Petitioners contend that the CA erred in ruling that the dismissal of respondents Gamier,
Condevillamar, Arriola and De Guzman was illegal, considering that this was not an issue
raised in the petition for certiorari before the appellate court. What was raised by
petitioners was only the propriety of the award of separation pay by the NLRC which in
fact declared their dismissal to be valid and legal.

Petitioners maintain that respondents are not entitled to separation pay even if the
dismissal was valid because they committed serious misconduct and/or illegal act in
defying the Secretarys assumption order. Moreover, the CA also erred in disregarding the
Release, Waiver and Quitclaim executed by twenty-one (21) individual respondents who
entered into a compromise agreement with Solidbank.[40]

Issues

The fundamental issues to be resolved in this controversy are: (1) whether the protest
rally and concerted work abandonment/boycott staged by the respondents violated the
Order dated January 18, 2000 of the Secretary of Labor; (2) whether the respondents were
validly terminated; and (3) whether the respondents are entitled to separation pay or
financial assistance.

Our Ruling

Article 212 of the Labor Code, as amended, defines strike as any temporary stoppage
of work by the concerted action of employees as a result of an industrial or labor
dispute. A labor dispute includes any controversy or matter concerning terms and
conditions of employment or the association or representation of persons in negotiating,
fixing, maintaining, changing or arranging the terms and conditions of employment,
regardless of whether or not the disputants stand in the proximate relation of employers
and employees.[41] The term strike shall comprise not only concerted work stoppages, but
also slowdowns, mass leaves, sitdowns, attempts to damage, destroy or sabotage plant
equipment and facilities and similar activities.[42]Thus, the fact that the conventional term
strike was not used by the striking employees to describe their common course of action
is inconsequential, since the substance of the situation, and not its appearance, will be
deemed to be controlling.[43]

After a thorough review of the records, we hold that the CA patently erred in concluding
that the concerted mass actions staged by respondents cannot be considered a strike but
a legitimate exercise of the respondents right to express their dissatisfaction with the
Secretarys resolution of the economic issues in the deadlocked CBA negotiations with
petitioners. It must be stressed that the concerted action of the respondents was not
limited to the protest rally infront of the DOLE Office on April 3,
2000. Respondent Union had also picketed the Head Office and Paseo de Roxas
Branch. About 712 employees, including those in the provincial branches, boycotted and
absented themselves from work in a concerted fashion for three continuous days that
virtually paralyzed the employers banking operations. Considering that these mass
actions stemmed from a bargaining deadlock and an order of assumption of jurisdiction
had already been issued by the Secretary of Labor to avert an impending strike, there is
no doubt that the concerted work abandonment/boycott was the result of a labor dispute.

In Toyota Motor Phils. Corp. Workers Association (TMPCWA) v. National Labor Relations
Commission,[44] petitioners union and members held similar protest rallies infront of the
offices of BLR and DOLE Secretary and at the company plants. We declared that said
mass actions constituted illegal strikes:

Petitioner Union contends that the protests or rallies conducted on

February 21 and 23, 2001 are not within the ambit of strikes as defined in the
Labor Code, since they were legitimate exercises of their right to peaceably
assemble and petition the government for redress of grievances. Mainly
relying on the doctrine laid down in the case of Philippine Blooming Mills
Employees Organization v. Philippine Blooming Mills Co., Inc., it argues that
the protest was not directed at Toyota but towards the Government (DOLE
and BLR). It explains that the protest is not a strike as contemplated in the
Labor Code. The Union points out that in Philippine Blooming Mills
Employees Organization, the mass action staged in Malacaang to petition
the Chief Executive against the abusive behavior of some police officers was
a proper exercise of the employees right to speak out and to peaceably
gather and ask government for redress of their grievances.

The Unions position fails to convince us.

While the facts in Philippine Blooming Mills Employees

Organization are similar in some respects to that of the present case,
the Union fails to realize one major difference: there was no labor dispute
in Philippine Blooming Mills Employees Organization. In the present case,
there was an on-going labor dispute arising from Toyotas refusal to
recognize and negotiate with the Union, which was the subject of the
notice of strike filed by the Union on January 16, 2001. Thus, the Unions
reliance on Philippine Blooming Mills Employees Organization is misplaced,
as it cannot be considered a precedent to the case at bar.

xxxx
 Applying pertinent legal provisions and jurisprudence, we rule that
the protest actions undertaken by the Union officials and members
on February 21 to 23, 2001 are not valid and proper exercises of their right to
assemble and ask government for redress of their complaints, but are illegal
strikes in breach of the Labor Code. The Unions position is weakened by
the lack of permit from the City of Manila to hold rallies. Shrouded as
demonstrations, they were in reality temporary stoppages of work
perpetrated through the concerted action of the employees who
deliberately failed to report for work on the convenient excuse that
they will hold a rally at the BLR and DOLE offices in Intramuros,
Manila, on February 21 to 23, 2001. x x x (Emphasis supplied.)

Moreover, it is explicit from the directive of the Secretary in his January 18, 2000 Order
that the Union and its members shall refrain from committing any and all acts that might
exacerbate the situation,[45] which certainly includes concerted actions. For all intents and
purposes, therefore, the respondents staged a strike ultimately aimed at realizing their
economic demands. Whether such pressure was directed against the petitioners or the
Secretary of Labor, or both, is of no moment. All the elements of strike are evident in the
Union-instigated mass actions.

The right to strike, while constitutionally recognized, is not without legal

constrictions.[46] Article 264 (a) of the Labor Code, as amended, provides:

Art. 264. Prohibited activities. (a) x x x

No strike or lockout shall be declared after assumption of

jurisdiction by the President or the Secretary or after certification or
submission of the dispute to compulsory or voluntary arbitrationor during
the pendency of cases involving the same grounds for the strike or
lockout.

x x x x (Emphasis supplied.)

The Court has consistently ruled that once the Secretary of Labor assumes jurisdiction
over a labor dispute, such jurisdiction should not be interfered with by the application of
the coercive processes of a strike or lockout.[47] A strike that is undertaken despite the
issuance by the Secretary of Labor of an assumption order and/or certification is a
prohibited activity and thus illegal.[48]

Article 264 (a) of the Labor Code, as amended, also considers it a prohibited
activity to declare a strike during the pendency of cases involving the same grounds for
the same strike.[49] There is no dispute that when respondents conducted their mass
actions on April 3 to 6, 2000, the proceedings before the Secretary of Labor were still
pending as both parties filed motions for reconsideration of the March 24, 2000
Order. Clearly, respondents knowingly violated the aforesaid provision by holding a strike
in the guise of mass demonstration simultaneous with concerted work
abandonment/boycott.

Notwithstanding the illegality of the strike, we cannot sanction petitioners act of

indiscriminately terminating the services of individual respondents who admitted joining
the mass actions and who have refused to comply with the offer of the management to
report back to work on April 6, 2000. The liabilities of individual respondents must be
determined under Article 264 (a) of the Labor Code, as amended:

Art. 264. Prohibited activities. x x x

xxxx

Any worker whose employment has been terminated as a

consequence of an unlawful lockout shall be entitled to reinstatement with
full back wages. Any union officer who knowingly participates in an
illegal strike and any worker or union officer who knowingly
participates in the commission of illegal acts during a strike may be
declared to have lost his employment status:Provided, That mere
participation of a worker in a lawful strike shall not constitute
sufficient ground for termination of his employment, even if a
replacement had been hired by the employer during such lawful strike.

xxxx

The foregoing shows that the law makes a distinction between union officers and
members. For knowingly participating in an illegal strike or participating in the
commission of illegal acts during a strike, the law provides that a union officer may be
terminated from employment. The law grants the employer the option of declaring a
union officer who participated in an illegal strike as having lost his employment. It
possesses the right and prerogative to terminate the union officers from service.[50]

However, a worker merely participating in an illegal strike may not be terminated from
employment. It is only when he commits illegal acts during a strike that he may be
declared to have lost employment
[51]
status. We have held that the responsibility of union officers, as main players in an
illegal strike, is greater than that of the members and, therefore, limiting the penalty of
dismissal only for the former for participation in an illegal strike is in order.[52] Hence,
with respect to respondents who are union officers, the validity of their termination by
petitioners cannot be questioned. Being fully aware that the proceedings before the
Secretary of Labor were still pending as in fact they filed a motion for reconsideration of
the March 24, 2000 Order, they cannot invoke good faith as a defense.[53]

For the rest of the individual respondents who are union members, the rule is that an
ordinary striking worker cannot be terminated for mere participation in an illegal
strike. There must be proof that he or she committed illegal acts during a strike. In all
cases, the striker must be identified. But proof beyond reasonable doubt is not required.
Substantial evidence available under the attendant circumstances, which may justify the
imposition of the penalty of dismissal, may suffice. Liability for prohibited acts is to be
determined on an individual basis.[54]

Petitioners have not adduced evidence on such illegal acts committed by each of the
individual respondents who are union members. Instead, petitioners simply point to their
admitted participation in the mass actions which they knew to be illegal, being in
violation of the Secretarys assumption order. However, the acts which were held to be
prohibited activities are the following:

where the strikers shouted slanderous and scurrilous words against

the owners of the vessels; where the strikers used unnecessary and obscene
language or epithets to prevent other laborers to go to work, and circulated
libelous statements against the employer which show actual malice; where
the protestors used abusive and threatening language towards the patrons
of a place of business or against co-employees, going beyond the mere
attempt to persuade customers to withdraw their patronage; where the
strikers formed a human cordon and blocked all the ways and approaches
to the launches and vessels of the vicinity of the workplace and perpetrated
acts of violence and coercion to prevent work from being performed; and
where the strikers shook their fists and threatened non-striking employees
with bodily harm if they persisted to proceed to the workplace. x x x[55]

The dismissal of herein respondent-union members are therefore unjustified in the

absence of a clear showing that they committed specific illegal acts during the mass
actions and concerted work boycott.

Are these dismissed employees entitled to backwages and separation pay?

The award of backwages is a legal consequence of a finding of illegal dismissal. Assuming

that respondent-union members have indeed reported back to work at the end of the
concerted mass actions, but were soon terminated by petitioners who found their
explanation unsatisfactory, they are not entitled to backwages in view of the illegality of
the said strike. Thus, we held in G & S Transport Corporation v. Infante[56]--
 It can now therefore be concluded that the acts of respondents do
not merit their dismissal from employment because it has not been
substantially proven that they committed any illegal act while participating
in the illegal strike. x x x

xxxx

With respect to backwages, the principle of a fair days wage for a fair
days labor remains as the basic factor in determining the award thereof. If
there is no work performed by the employee there can be no wage or
pay unless, of course, the laborer was able, willing and ready to work
but was illegally locked out, suspended or dismissed or otherwise
illegally prevented from working.While it was found that respondents
expressed their intention to report back to work, the latter exception
cannot apply in this case. In Philippine Marine Officers Guild v. Compaia
Maritima, as affirmed in Philippine Diamond Hotel and Resort v. Manila
Diamond Hotel Employees Union, the Court stressed that for this
exception to apply, it is required that the strike be legal, a situation
that does not obtain in the case at bar. (Emphasis supplied.)

Under the circumstances, respondents reinstatement without backwages suffices for the
appropriate relief. But since reinstatement is no longer possible, given the lapse of
considerable time from the occurrence of the strike, not to mention the fact that
Solidbank had long ceased its banking operations, the award of separation pay of one (1)
month salary for each year of service, in lieu of reinstatement, is in order. [57] For the
twenty-one (21) individual respondents who executed quitclaims in favor of the
petitioners, whatever amount they have already received from the employer shall be
deducted from their respective separation pay.

Petitioners contended that in view of the blatant violation of the Secretarys assumption
order by the striking employees, the award of separation pay is unjust and
unwarranted. That respondent-members themselves knowingly participated in the illegal
mass actions constitutes serious misconduct which is a just cause under Article 282 for
terminating an employee.

We are not persuaded.

As we stated earlier, the Labor Code protects an ordinary, rank-and-file union member
who participated in such a strike from losing his job, provided that he did not commit
an illegal actduring the strike.[58] Article 264 (e) of the Labor Code, as amended, provides
for such acts which are generally prohibited during concerted actions such as picketing:
 No person engaged in picketing shall commit any act of violence,
coercion or intimidation or obstruct the free ingress to or egress
from the employers premises for lawful purposes, or obstruct public
thoroughfares. (Emphasis supplied.)

Petitioners have not adduced substantial proof that respondent-union members

perpetrated any act of violence, intimidation, coercion or obstruction of company
premises and public thoroughfares. It did not submit in evidence photographs, police
reports, affidavits and other available evidence.

As to the issue of solidary liability, we hold that Metrobank cannot be held

solidarily liable with Solidbank for the claims of the latters dismissed employees. There is
no showing that Metrobank is the successor-in-interest of Solidbank. Based on petitioners
documentary evidence, Solidbank was merged with FMIC, with Solidbank as the
surviving corporation, and was later renamed as FMIC. While indeed Solidbanks banking
operations had been integrated with Metrobank, there is no showing that FMIC has
ceased business operations. FMIC as successor-in-interest of Solidbank remains solely
liable for the sums herein adjudged against Solidbank.

Neither should individual petitioners Vistan and Mendoza be held solidarily liable
for the claims adjudged against petitioner Solidbank. Article 212 (e)[59] does not state that
corporate officers are personally liable for the unpaid salaries or separation pay of
employees of the corporation. The liability of corporate officers for corporate debts
remains governed by Section 31[60] of the Corporation Code.

It is basic that a corporation is invested by law with a personality separate and

distinct from those of the persons composing it as well as from that of any other legal
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 of itself sufficient
ground for disregarding the separate corporate personality.[61] In labor cases, in particular,
the Court has held corporate directors and officers solidarily liable with the corporation
for the termination of employment of corporate employees done with malice or in bad
faith.[62] Bad faith is never presumed.[63] Bad faith does not simply connote bad judgment
or negligence -- it imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It means a breach of a known duty through some motive or interest or ill-
will that partakes of the nature of fraud.[64]

Respondents have not satisfactorily proven that Vistan and Mendoza acted with
malice, ill-will or bad faith. Hence, said individual petitioners are not liable for the
separation pay of herein respondents-union members.
 WHEREFORE, the petitions are PARTLY GRANTED. The Decision dated March
10, 2003 of the Court of Appeals in CA-G.R. SP Nos. 67730 and 70820 is hereby SET
ASIDE. Petitioner Solidbank Corporation (now FMIC) is hereby ORDERED to pay each
of the above-named individual respondents, except union officers who are hereby
declared validly dismissed, separation pay equivalent to one (1) month salary for every
year of service. Whatever sums already received from petitioners under any release,
waiver or quitclaim shall be deducted from the total separation pay due to each of them.

The NLRC is hereby directed to determine who among the individual respondents
are union members entitled to the separation pay herein awarded, and those union
officers who were validly dismissed and hence excluded from the said award.

No costs.

SO ORDERED.

PHILIPPINE COCONUT G.R. Nos. 177857-58

, PRODUCERS FEDERATION, INC.

(COCOFED), MANUEL V. DEL

ROSARIO, DOMINGO P. ESPINA,

SALVADOR P. BALLARES,

JOSELITO A. MORALEDA,

PAZ M. YASON,

VICENTE A. CADIZ,

CESARIA DE LUNA TITULAR, and

RAYMUNDO C. DE VILLA,

Petitioners,

- versus -

REPUBLIC OF THE PHILIPPINES,

Respondent,

WIGBERTO E. TAADA,

OSCAR F. SANTOS,

SURIGAO DEL SUR FEDERATION

OF AGRICULTURAL

COOPERATIVES (SUFAC) and

MORO FARMERS ASSOCIATION

OF ZAMBOANGA DEL SUR

(MOFAZS), represented by

ROMEO C. ROYANDOYAN,

Intervenors.

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

DANILO S. URSUA, G.R. No. 178193

Petitioner,

- versus -

REPUBLIC OF THE PHILIPPINES,

Respondent,

x------------------------------------------------x
Present:

CORONA, C.J.,

CARPIO,*

VELASCO, JR.,

LEONARDO-DE CASTRO,*

BRION,**

PERALTA,*

BERSAMIN,

DEL CASTILLO,

ABAD,

VILLARAMA, JR.,

PEREZ,

MENDOZA,

SERENO,

REYES, and

PERLAS-BERNABE, JJ.

Promulgated:

January 24, 2012

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

DECISION

VELASCO, JR., J.:

The Case

Cast against a similar backdrop, these consolidated petitions for review under Rule
45 of the Rules of Court assail and seek to annul certain issuances of the Sandiganbayan
in its Civil Case No. 0033-A entitled, Republic of the Philippines, Plaintiff, v. Eduardo M.
Cojuangco, Jr., et al., Defendants, COCOFED, et al., BALLARES, et al., Class Action
Movants, andCivil Case No. 0033-F entitled, Republic of the Philippines, Plaintiff, v.
Eduardo M. Cojuangco, Jr., et al., Defendants. Civil Case (CC) Nos. 0033-A and 0033-F are
the results of the splitting into eight (8) amended complaints of CC No. 0033
entitled, Republic of the Philippines v. Eduardo Cojuangco, Jr., et al., a suit for recovery of
ill-gotten wealth commenced by the Presidential Commission on Good Government
(PCGG), for the Republic of the Philippines (Republic), against Ferdinand E. Marcos and
several individuals, among them, Ma. Clara Lobregat (Lobregat) and petitioner Danilo S.
Ursua (Ursua). Lobregat and Ursua occupied, at one time or another, directorial or top
management positions in either the Philippine Coconut Producers Federation, Inc.
(COCOFED) or the Philippine Coconut Authority (PCA), or both.[1] Each of the eight (8)
subdivided complaints correspondingly impleaded as defendants only the alleged
participants in the transaction/s subject of the suit, or who are averred as owner/s of the
assets involved.
 The original complaint, CC No. 0033, as later amended to make the allegations
more specific, is described in Republic v. Sandiganbayan[2] (one of several ill-gotten suits
of the same title disposed of by the Court) as revolving around the provisional take over
by the PCGG of COCOFED, Cocomark, and Coconut Investment Company and their
assets and the sequestration of shares of stock in United Coconut Planters Bank (UCPB)
allegedly owned by, among others, over a million coconut farmers, and the six (6)
Coconut Industry Investment Fund (CIIF) corporations,[3] referred to in some pleadings
as CIIF oil mills and the fourteen (14) CIIF holding companies[4] (hereafter collectively
called CIIF companies), so-called for having been either organized, acquired and/or
funded as UCPB subsidiaries with the use of the CIIF levy. The basic complaint also
contained allegations about the alleged misuse of the coconut levy funds to buy out the
majority of the outstanding shares of stock of San Miguel Corporation (SMC).

More particularly, in G.R. Nos. 177857-58, class action petitioners COCOFED and a
group of purported coconut farmers and COCOFED members (hereinafter COCOFED et
al. collectively)[5] seek the reversal of the following judgments and resolutions of the anti-
graft court insofar as these issuances are adverse to their interests:

1) Partial Summary Judgment[6] dated July 11, 2003, as reiterated in a

resolution[7] of December 28, 2004, denying COCOFEDs motion for
reconsideration, and the May 11, 2007 resolution denying COCOFEDs
motion to set case for trial and declaring the partial summary judgment
final and appealable,[8] all issued in Civil Case No. 0033-A; and

2) Partial Summary Judgment[9] dated May 7, 2004, as also reiterated

in a resolution[10] of December 28, 2004, and the May 11,
[11]
2007 resolution issued in Civil Case No. 0033-F. The December 28,
2004 resolution denied COCOFEDs Class Action Omnibus Motion therein
praying to dismiss CC Case No. 0033-F on jurisdictional ground and
alternatively, reconsideration and to set case for trial. The May 11,
2007 resolution declared the judgment final and appealable.
 For convenience, the partial summary judgment (PSJ) rendered on July 11, 2003 in
CC No. 0033-A shall hereinafter be referred to as PSJ-A, and that issued on May 7, 2004
in CC 0033-F, as PSJ-F. PSJ-A and PSJ-F basically granted the Republics separate motions
for summary judgment.

On June 5, 2007, the court a quo issued a Resolution in CC No. 0033-A, which
modified PSJ-A by ruling that no further trial is needed on the issue of ownership of the
subject properties. Likewise, on May 11, 2007, the said court issued a Resolution in CC No.
0033-F amending PSJ-F in like manner.

On the other hand, petitioner Ursua, in G.R. No. 178193, limits his petition for
review on PSJ-A to the extent that it negates his claims over shares of stock in UCPB.

Taada, et al. have intervened[12] in G.R. Nos. 177857-58 in support of the

governments case.

Another petition was filed and docketed as G.R. No. 180705. It involves questions
relating to Eduardo M. Cojuangco, Jr.s (Cojuangco, Jr.s) ownership of the UCPB shares,
which he allegedly received as option shares, and which is one of the issues raised in PSJ-
A.[13] G.R. No. 180705 was consolidated with G.R. Nos. 177857-58 and
178193. On September 28, 2011, respondent Republic filed a Motion to Resolve G.R. Nos.
177857-58 and 178193.[14] On January 17, 2012, the Court issued a Resolution
deconsolidating G.R. Nos. 177857-58 and 178193 from G.R. No. 180705. This Decision is
therefore separate and distinct from the decision to be rendered in G.R. No. 180705.

The Facts
 The relevant facts, as culled from the records and as gathered from Decisions of
the Court in a batch of coco levy and illegal wealth cases, are:

In 1971, Republic Act No. (R.A.) 6260 was enacted creating the Coconut
Investment Company (CIC) to administer the Coconut Investment Fund (CIF), which,
under Section 8[15] thereof, was to be sourced from a PhP 0.55 levy on the sale of every 100
kg. of copra. Of the PhP 0.55 levy of which the copra seller was, or ought to be,
issued COCOFUNDreceipts, PhP 0.02 was placed at the disposition of COCOFED,
the national association of coconut producers declared by the Philippine Coconut
Administration (PHILCOA, now PCA[16]) as having the largest membership.[17]

The declaration of martial law in September 1972 saw the issuance of several
presidential decrees (P.Ds.) purportedly designed to improve the coconut industry
through the collection and use of the coconut levy fund. While coming generally from
impositions on the first sale of copra, the coconut levy fund came under various names,
the different establishing laws and the stated ostensible purpose for the exaction
explaining the differing denominations. Charged with the duty of collecting and
administering the Fund was PCA.[18] Like COCOFED with which it had a legal
linkage,[19] the PCA, by statutory provisions scattered in different coco levy decrees, had
its share of the coco levy.[20]

The following were some of the issuances on the coco levy, its collection and
utilization, how the proceeds of the levy will be managed and by whom, and the purpose
it was supposed to serve:

1. P.D. No. 276 established the Coconut Consumers Stabilization Fund (CCSF) and
declared the proceeds of the CCSF levy as trust fund,[21] to be utilized to subsidize the sale
of coconut-based products, thus stabilizing the price of edible oil.[22]

2. P.D. No. 582 created the Coconut Industry Development Fund (CIDF) to
finance the operation of a hybrid coconut seed farm.
 3. Then came P.D. No. 755 providing under its Section 1 the following:

It is hereby declared that the policy of the State is to provide readily

available credit facilities to the coconut farmers at a preferential rates; that
this policy can be expeditiously and efficiently realized by the
implementation of the Agreement for the Acquisition of a Commercial
Bank for the benefit of Coconut Farmers executed by the [PCA]; and that
the [PCA] is hereby authorized to distribute, for free, the shares of stock of
the bank it acquired to the coconut farmers.

Towards achieving the policy thus declared, P.D. No. 755, under its Section
2, authorized PCA to utilize the CCSF and the CIDF collections to acquire a commercial
bank and deposit the CCSF levy collections in said bank, interest free, the deposit
withdrawable only when the bank has attained a certain level of sufficiency in its equity
capital. The same section also decreed that all levies PCA is authorized to collect shall not
be considered as special and/or fiduciary funds or form part of the general funds of the
government within the contemplation of P.D. No. 711.[23]

4. P.D. No. 961 codified the various laws relating to the development of
coconut/palm oil industries.

5. The relevant provisions of P.D. No. 961, as later amended by P.D. No. 1468
(Revised Coconut Industry Code), read:

ARTICLE III

Levies

Section 1. Coconut Consumers Stabilization Fund Levy. The [PCA] is

hereby empowered to impose and collect the Coconut Consumers
Stabilization Fund Levy .
 .

Section 5. Exemption. The [CCSF] and the [CIDF] as well as all

disbursements as herein authorized, shall not be construed as special
and/or fiduciary funds, or as part of the general funds of the national
government within the contemplation of PD 711; the intention being that
said Fund and the disbursements thereof as herein authorized for the
benefit of the coconut farmers shall beowned by them in their private
capacities: . (Emphasis supplied.)

6. Letter of Instructions No. (LOI) 926, Series of 1979, made reference to the
creation, out of other coco levy funds, of the Coconut Industry Investment Fund (CIIF) in
P.D. No. 1468 and entrusted a portion of the CIIF levy to UCPB for investment, on behalf
of coconut farmers, in oil mills and other private corporations, with the following equity
ownership structure:[24]

Section 2. Organization of the Cooperative Endeavor. The [UCPB], in its

capacity as the investment arm of the coconut farmers thru the [CIIF] is
hereby directed to invest, on behalf of the coconut farmers, such portion of
the CIIF in private corporations under the following guidelines:

a) The coconut farmers shall own or control at least (50%) of the

outstanding voting capital stock of the private corporation [acquired] thru
the CIIF and/or corporation owned or controlled by the farmers thru the
CIIF . (Words in bracket added.)
 Through the years, a part of the coconut levy funds went directly or indirectly to
various projects and/or was converted into different assets or investments.[25] Of
particular relevance to this case was their use to acquire the First United Bank (FUB),
later renamed UCPB, and the acquisition by UCPB, through the CIIF companies, of a
large block of SMC shares. [26]

Apropos the intended acquisition of a commercial bank for the purpose stated
earlier, it would appear that FUB was the bank of choice which the Pedro Cojuangco
group (collectively, Pedro Cojuangco) had control of. The plan, then, was for PCA to buy
all of Pedro Cojuangcos shares in FUB. However, as later events unfolded, a simple direct
sale from the seller (Pedro) to PCA did not ensue as it was made to appear that
Cojuangco, Jr. had the exclusive option to acquire the formers FUB controlling interests.
Emerging from this elaborate, circuitous arrangement were two deeds; the first, simply
denominated as Agreement,[27] dated May 1975,[28] entered into by and between
Cojuangco, Jr., for and in his behalf and in behalf of certain other buyers, and Pedro
Cojuangco, purportedly accorded Cojuangco, Jr. the option to buy 72.2% of FUBs
outstanding capital stock, or 137,866 shares (the option shares, for brevity), at PhP 200
per share.

The second but related contract, dated May 25, 1975, was denominated
as Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut
Farmers of the Philippines.[29] It had PCA,[30] for itself and for the benefit of the coconut
farmers, purchase from Cojuangco, Jr. the shares of stock subject of the First Agreement
for PhP 200 per share. As additional consideration for PCAs buy-out of what Cojuangco,
Jr. would later claim to be his exclusive and personal option,[31] it was stipulated that,
from PCA, Cojuangco, Jr. shall receive equity in FUB amounting to 10%, or 7.22%, of the
72.2%, or fully paid shares.

Apart from the aforementioned 72.2%, PCA purchased from other FUB
shareholders 6,534 shares.
 While the 64.98% portion of the option shares (72.2% 7.22% = 64.98%) ostensibly
pertained to the farmers, the corresponding stock certificates supposedly representing the
farmers equity were in the name of and delivered to PCA.[32] There were, however, shares
forming part of the aforesaid 64.98% portion, which ended up in the hands of non-
farmers.[33] The remaining 27.8% of the FUB capital stock were not covered by any of the
agreements.

Under paragraph 8 of the second agreement, PCA agreed to expeditiously

distribute the FUB shares purchased to such coconut farmers holding registered
COCOFUND receipts on equitable basis.

As found by the Sandiganbayan, the PCA appropriated, out of its own fund, an
amount for the purchase of the said 72.2% equity, albeit it would later reimburse itself
from the coconut levy fund.[34]

As of June 30, 1975, the list of FUB stockholders shows PCA with 129,955 shares.[35]

Shortly after the execution of the PCA Cojuangco, Jr. Agreement, President Marcos
issued, on July 29, 1975, P.D. No. 755 directing, as earlier narrated, PCA to use the CCSF
and CIDF to acquire a commercial bank to provide coco farmers with readily available
credit facilities at preferential rate, and PCA to distribute, for free, the bank shares to
coconut farmers.

Then came the 1986 EDSA event. One of the priorities of then President Corazon
C. Aquinos revolutionary government was the recovery of ill-gotten wealth reportedly
amassed by the Marcos family and close relatives, their nominees and associates. Apropos
thereto, she issued Executive Order Nos. (E.Os.) 1, 2 and 14, as amended by E.O. 14-A, all
Series of 1986.E.O. 1 created the PCGG and provided it with the tools and processes it may
avail of in the recovery efforts;[36] E.O. No. 2 asserted that the ill-gotten assets and
properties come in the form of shares of stocks, etc.; while E.O. No. 14 conferred on the
Sandiganbayan exclusive and original jurisdiction over ill-gotten wealth cases, with the
proviso that technical rules of procedure and evidence shall not be applied strictly to the
civil cases filed under the E.O. Pursuant to these issuances, the PCGG issued numerous
orders of sequestration, among which were those handed out, as earlier mentioned,
against shares of stock in UCPB purportedly owned by or registered in the names of (a)
more than a million coconut farmers and (b) the CIIF companies, including the SMC
shares held by the CIIF companies. On July 31, 1987, the PCGG instituted before the
Sandiganbayan a recovery suit docketed thereat as CC No. 0033.

After the filing and subsequent amendments of the complaint in CC

0033, Lobregat, COCOFED et al., and Ballares et al., purportedly representing over a
million coconut farmers, sought and were allowed to intervene.[37] Meanwhile, the
following incidents/events transpired:

1. On the postulate, inter alia, that its coco-farmer members own at

least 51% of the outstanding capital stock of UCPB, the CIIF companies, etc.,
COCOFED et al., on November 29, 1989, filed Class Action Omnibus
Motion praying for the lifting of the orders of sequestration referred to
above and for a chance to present evidence to prove the coconut farmers
ownership of the UCPB and CIIF shares. The plea to present evidence was
denied;

2. Later, the Republic moved for and secured approval of a motion

for separate trial which paved the way for the subdivision of the causes of
action in CC 0033, each detailing how the assets subject thereof were
acquired and the key roles the principal played;

3. Civil Case 0033, pursuant to an order of the Sandiganbayan would

be subdivided into eight complaints, docketed as CC 0033-A to CC 0033-
H.[38]

Lobregat, Ballares et al., COCOFED, et al., on the strength of their

authority to intervene in CC 0033, continued to participate in CC 0033-A
where one of the issues raised was the misuse of the names/identities of the
over a million coconut farmers;[39]
 4. On February 23, 2001, Lobregat, COCOFED, Ballares et al., filed
a Class Action Omnibus Motion to enjoin the PCGG from voting the
sequestered UCPB shares and the SMC shares registered in the names of the
CIIF companies. The Sandiganbayan, by Order of February 28, 2001, granted
the motion, sending the Republic to come to this Court on certiorari,
docketed as G.R. Nos. 147062-64, to annul said order; and

5. By Decision of December 14, 2001, in G.R. Nos. 147062-

64 (Republic v. COCOFED), [40] the Court declared the coco levy funds
as prima facie public funds. And purchased as the sequestered UCPB shares
were by such funds, beneficial ownership thereon and the corollary voting
rights prima facie pertain, according to the Court, to the government.

The instant proceedings revolve around CC 0033-A (Re: Anomalous Purchase and
Use of [FUB] now [UCPB])[41] and CC 0033-F (Re: Acquisition of San Miguel Corporation
Shares of Stock), the first case pivoting mainly on the series of transactions culminating in
the alleged anomalous purchase of 72.2% of FUBs outstanding capital stock and the
transfer by PCA of a portion thereof to private individuals. COCOFED, et al. and
Ballares, et al. participated in CC No. 0033-A as class action movants.

Petitioners COCOFED et al.[42] and Ursua[43] narrate in their petitions how the
farmers UCPB shares in question ended up in the possession of those as hereunder
indicated:

1) The farmers UCPB shares were originally registered in the name of

PCA for the eventual free distribution thereof to and registration in the

individual names of the coconut farmers in accordance with PD 755 and the

IRR that PCA shall issue;

 2) Pursuant to the stock distribution procedures set out in PCA
Administrative Order No. 1, s. of 1975, (PCA AO 1),[44] farmers who had paid
to the CIF under RA 6260 and registered their COCOFUND (CIF) receipts
with PCA were given their corresponding UCPB stock certificates. As of June
1976, the cut-off date for the extended registration, only 16 million worth of
COCOFUND receipts were registered, leaving over 50 million shares
undistributed;

3) PCA would later pass Res. 074-78, s. of 1978, to allocate the 50

million undistributed shares to (a) farmers who were already recipients
thereof and (b) qualified farmers to be identified by COCOFED after a
national census.
4) As of May 1981, some 15.6 million shares were still held by and
registered in the name of COCOFED in behalf of coconut farmers for
distribution immediately after the completion of the national census, to all
those determined by the PCA to be bonafide coconut farmers, but who have
not received the bank shares;[45] and

5) Prior to June 1986, a large number of coconut farmers opted to sell

all/part of their UCPB shares below their par value. This prompted the
UCPB Board to authorize the CIIF companies to buy these shares. Some
40.34 million common voting shares of UCPB ended up with these
CIIF companies albeit initially registered in the name of UCPB.

On the other hand, the subject of CC 0033-F are two (2) blocks of SMC shares of
stock, the first referring to shares purchased through and registered in the name of the
CIIF holding companies. The purported ownership of the second block of SMC shares is
for the nonce irrelevant to the disposition of this case. During the time material, the CIIF
block of SMC shares represented 27% of the outstanding capital stock of SMC.

Civil Case No. 0033-A

 After the pre-trial, but before the Republic, as plaintiff a quo, could present, as it
committed to, a list of UCPB stockholders as of February 25, 1986,[46] among other
evidence, COCOFED, et al., on the premise that the sequestered farmers UCPB shares are
not unlawfully acquired assets, filed in April 2001 their Class Action Motion for a Separate
Summary Judgment. In it, they prayed for a judgment dismissing the complaint in CC
0033-A, for the reason that the over than a million unimpleaded coconut farmers own the
UCPB shares. In March 2002, they filed Class Action Motion for Partial Separate Trial on
the issue of whether said UCPB shares have legitimately become the private property of
the million coconut farmers.

Correlatively, the Republic, on the strength of the December 14, 2001 ruling
in Republic v. COCOFED[47] and on the argument, among others, that the claim of
COCOFED and Ballares et al. over the subject UCPB shares is based solely on the
supposed COCOFUND receipts issued for payment of the R.A. 6260 CIF levy, filed
a Motion for Partial Summary Judgment [RE: COCOFED, et al. and Ballares, et al.] dated
April 22, 2002, praying that a summary judgment be rendered declaring:

a. That Section 2 of [PD] 755, Section 5, Article III of P.D. 961 and
Section 5, Article III of P.D. No. 1468 are unconstitutional;

b. That (CIF) payments under (R.A.) No. 6260 are not valid and legal
bases for ownership claims over UCPB shares; and

c. That COCOFED, et al., and Ballares, et al. have not legally and validly
obtained title over the subject UCPB shares.

After an exchange of pleadings, the Republic filed its sur-rejoinder praying that it
be conclusively held to be the true and absolute owner of the coconut levy funds and the
UCPB shares acquired therefrom.[48]
 A joint hearing on the separate motions for summary judgment to determine what
material facts exist with or without controversy followed.[49] By Order[50] of March 11,
2003, the Sandiganbayan detailed, based on this Courts ruling in related cases, the parties
manifestations made in open court and the pleadings and evidence on record, the facts it
found to be without substantial controversy, together with the admissions and/or extent
of the admission made by the parties respecting relevant facts, as follows:

As culled from the exhaustive discussions and manifestations of the parties

in open court of their respective pleadings and evidence on record, the facts
which exist without any substantial controversy are set forth hereunder,
together with the admissions and/or the extent or scope of the admissions
made by the parties relating to the relevant facts:

1. The late President Ferdinand E. Marcos was President for two terms . . .
and, during the second term, declared Martial Law through Proclamation
No. 1081 dated September 21, 1972.

2. On January 17, 1973, [he] issued Proclamation No. 1102 announcing the
ratification of the 1973 Constitution.

3. From January 17, 1973 to April 7, 1981, [he] . . .exercised the powers and
prerogative of President under the 1935 Constitution and the powers and
prerogative of President . . . the 1973 Constitution.

[He] promulgated various [P.D.s], among which were P.D. No. 232, P.D. No.
276, P.D. No. 414, P.D. No. 755, P.D. No. 961 and P.D. No. 1468.
4. On April 17, 1981, amendments to the 1973 Constitution were effected
and, on June 30, 1981, [he], after being elected President, reassumed the title
and exercised the powers of the President until 25 February 1986.

5. Defendants Maria Clara Lobregat and Jose R. Eleazar, Jr. were [PCA]
Directors during the period 1970 to 1986.

6. Plaintiff admits the existence of the following agreements which are

attached as Annexes A and B to the Opposition dated October 10, 2002 of
defendant Eduardo M. Cojuangco, Jr. to the above-cited Motion for Partial
Summary Judgment:

a) Agreement made and entered into this ______ day of May,

1975 at Makati, Rizal, Philippines, by and between:

PEDRO COJUANGCO, Filipino, x x x, for and in his

own behalf and in behalf of certain other stockholders of First
United Bank listed in Annex A attached hereto (hereinafter
collectively called the SELLERS);

and

EDUARDO COJUANGCO, JR., Filipino, x x x,

represented in this act by his duly authorized attorney-in-fact,
EDGARDO J. ANGARA, for and in his own behalf and in
behalf of certain other buyers, (hereinafter collectively called
the BUYERS);

WITNESSETH: That
 WHEREAS, the SELLERS own of record and beneficially
a total of 137,866 shares of stock, with a par value of P100.00
each, of the common stock of the First United Bank (the
Bank), a commercial banking corporation existing under the
laws of the Philippines;

WHEREAS, the BUYERS desire to purchase, and the

SELLERS are willing to sell, the aforementioned shares of
stock totaling 137,866 shares (hereinafter called the Contract
Shares) owned by the SELLERS due to their special
relationship to EDUARDO COJUANGCO, JR.;

NOW, THEREFORE, for and in consideration of the

premises and the mutual covenants herein contained, the
parties agree as follows:

1. Sale and Purchase of Contract Shares

Subject to the terms and conditions of this Agreement,

the SELLERS hereby sell, assign, transfer and convey unto the
BUYERS, and the BUYERS hereby purchase and acquire, the
Contract Shares free and clear of all liens and encumbrances
thereon.

2. Contract Price

The purchase price per share of the Contract Shares

payable by the BUYERS is P200.00 or an aggregate price of
P27,573,200.00 (the Contract Price).
3. Delivery of, and payment for, stock certificates

Upon the execution of this Agreement, (i) the

SELLERS shall deliver to the BUYERS the stock
certificates representing the Contract Shares, free and
clear of all liens, encumbrances, obligations, liabilities
and other burdens in favor of the Bank or third parties,
duly endorsed in blank or with stock powers sufficient to
transfer the shares to bearer; and (ii) BUYERS shall
deliver to the SELLERS P27,511,295.50 representing the
Contract Price less the amount of stock transfer taxes
payable by the SELLERS, which the BUYERS undertake to
remit to the appropriate authorities. (Emphasis added.)

4. Representation and Warranties of Sellers

The SELLERS respectively and independently of each

other represent and warrant that:

(a) The SELLERS are the lawful owners of, with good
marketable title to, the Contract Shares and that (i) the
certificates to be delivered pursuant thereto have been validly
issued and are fully paid and no-assessable; (ii) the Contract
Shares are free and clear of all liens, encumbrances,
obligations, liabilities and other burdens in favor of the Bank
or third parties

This representation shall survive the execution and

delivery of this Agreement and the consummation or transfer
hereby contemplated.
 (b) The execution, delivery and performance of this
Agreement by the SELLERS does not conflict with or
constitute any breach of any provision in any agreement to
which they are a party or by which they may be bound.

(c) They have complied with the condition set forth in

Article X of the Amended Articles of Incorporation of the
Bank.

5. Representation of BUYERS .

6. Implementation

The parties hereto hereby agree to execute or cause to

be executed such documents and instruments as may be
required in order to carry out the intent and purpose of this
Agreement.

7. Notices .

IN WITNESS WHEREOF, the parties hereto have hereunto set

their hands at the place and on the date first above written.

PEDRO COJUANGCO EDUARDO COJUANGCO, JR.

(on his own behalf and in (on his own behalf and in behalf
behalf of the other Sellers of the other Buyers)

listed in Annex A hereof) (BUYERS)

(SELLERS)

By:

EDGARDO J. ANGARA

Attorney-in-Fact

b) Agreement for the Acquisition of a Commercial Bank for

the Benefit of the Coconut Farmers of the Philippines, made
and entered into this 25th day of May 1975 at Makati, Rizal,
Philippines, by and between:

EDUARDO M. COJUANGCO, JR., x x x, hereinafter

referred to as the SELLER;

and

PHILIPPINE COCONUT AUTHORITY, a public

corporation created by Presidential Decree No. 232, as
amended, for itself and for the benefit of the coconut farmers
of the Philippines, (hereinafter called the BUYER)

WITNESSETH: That
 WHEREAS, on May 17, 1975, the Philippine Coconut
Producers Federation (PCPF), through its Board of Directors,
expressed the desire of the coconut farmers to own a
commercial bank which will be an effective instrument to
solve the perennial credit problems and, for that purpose,
passed a resolution requesting the PCA to negotiate with the
SELLER for the transfer to the coconut farmers of the SELLERs
option to buy the First United Bank (the Bank) under such
terms and conditions as BUYER may deem to be in the best
interest of the coconut farmers and instructed Mrs. Maria
Clara Lobregat to convey such request to the BUYER;

WHEREAS, the PCPF further instructed Mrs. Maria

Clara Lobregat to make representations with the BUYER to
utilize its funds to finance the purchase of the Bank;

WHEREAS, the SELLER has the exclusive and personal

option to buy 144,400 shares (the Option Shares) of the Bank,
constituting 72.2% of the present outstanding shares of stock
of the Bank, at the price of P200.00 per share, which option
only the SELLER can validly exercise;

WHEREAS, in response to the representations made by

the coconut farmers, the BUYER has requested the SELLER to
exercise his personal option for the benefit of the coconut
farmers;

WHEREAS, the SELLER is willing to transfer the

Option Shares to the BUYER at a price equal to his option
price of P200 per share;
 WHEREAS, recognizing that ownership by the coconut
farmers of a commercial bank is a permanent solution to their
perennial credit problems, that it will accelerate the growth
and development of the coconut industry and that the policy
of the state which the BUYER is required to implement is to
achieve vertical integration thereof so that coconut farmers
will become participants in, and beneficiaries of, the request of
PCPF that it acquire a commercial bank to be owned by the
coconut farmers and, appropriated, for that purpose, the sum
of P150 Million to enable the farmers to buy the Bank and
capitalize the Bank to such an extension as to be in a position
to adopt a credit policy for the coconut farmers at preferential
rates;

WHEREAS, x x x the BUYER is willing to subscribe to

additional shares (Subscribed Shares) and place the Bank in a
more favorable financial position to extend loans and credit
facilities to coconut farmers at preferential rates;

NOW, THEREFORE, for and in consideration of the

foregoing premises and the other terms and conditions
hereinafter contained, the parties hereby declare and affirm
that their principal contractual intent is (1) to ensure that the
coconut farmers own at least 60% of the outstanding capital
stock of the Bank; and (2) that the SELLER shall receive
compensation for exercising his personal and exclusive option
to acquire the Option Shares, for transferring such shares to
the coconut farmers at the option price of P200 per share, and
for performing the management services required of him
hereunder.

1. To ensure that the transfer to the coconut farmers of

the Option Shares is effected with the least possible delay and
to provide for the faithful performance of the obligations of
the parties hereunder, the parties hereby appoint the
Philippine National Bank as their escrow agent (the Escrow
Agent).

Upon execution of this Agreement, the BUYER shall

deposit with the Escrow Agent such amount as may be
necessary to implement the terms of this Agreement.

2. As promptly as practicable after execution of this

Agreement, the SELLER shall exercise his option to acquire
the Option Share and SELLER shall immediately thereafter
deliver and turn over to the Escrow Agent such stock
certificates as are herein provided to be received from the
existing stockholders of the Bank by virtue of the exercise on
the aforementioned option.

3. To ensure the stability of the Bank and continuity of

management and credit policies to be adopted for the benefit
of the coconut farmers, the parties undertake to cause the
stockholders and the Board of Directors of the Bank to
authorize and approve a management contract between the
Bank and the SELLER under the following terms:

(a) The management contract shall be for a period of

five (5) years, renewable for another five (5) years by
mutual agreement of the SELLER and the Bank;

(b) The SELLER shall be elected President and shall

hold office at the pleasure of the Board of
Directors. While serving in such capacity, he shall be
entitled to such salaries and emoluments as the Board
of Directors may determine;
 (c) The SELLER shall recruit and develop a professional
management team to manage and operate the Bank
under the control and supervision of the Board of
Directors of the Bank;

(d) The BUYER undertakes to cause three (3) persons

designated by the SELLER to be elected to the Board of
Directors of the Bank;

(e) The SELLER shall receive no compensation for

managing the Bank, other than such salaries or
emoluments to which he may be entitled by virtue of
the discharge of his function and duties as President,
provided and

(f) The management contract may be assigned to a

management company owned and controlled by the
SELLER.

4. As compensation for exercising his personal and

exclusive option to acquire the Option Shares and for
transferring such shares to the coconut farmers, as well as for
performing the management services required of him, SELLER
shall receive equity in the Bank amounting, in the aggregate,
to 95,304 fully paid shares in accordance with the procedure
set forth in paragraph 6 below;

5. In order to comply with the Central Bank program

for increased capitalization of banks and to ensure that the
Bank will be in a more favorable financial position to attain its
objective to extend to the coconut farmers loans and credit
facilities, the BUYER undertakes to subscribe to shares with an
aggregate par value of P80,864,000 (the Subscribed
Shares). The obligation of the BUYER with respect to the
Subscribed Shares shall be as follows:

(a) The BUYER undertakes to subscribe, for the benefit

of the coconut farmers, to shares with an aggregate par
value of P15,884,000 from the present authorized but
unissued shares of the Bank; and

(b) The BUYER undertakes to subscribe, for the benefit

of the coconut farmers, to shares with an aggregate par
value of P64,980,000 from the increased capital stock of
the Bank, which subscriptions shall be deemed made
upon the approval by the stockholders of the increase
of the authorized capital stock of the Bank from P50
Million to P140 Million.

The parties undertake to declare stock dividends of P8

Million out of the present authorized but unissued capital
stock of P30 Million.

6. To carry into effect the agreement of the parties that

the SELLER shall receive as his compensation 95,304 shares:

(a) .

(b) With respect to the Subscribed Shares, the BUYER

undertakes, in order to prevent the dilution of SELLERs
equity position, that it shall cede over to the SELLER
64,980 fully-paid shares out of the Subscribed
 Shares. Such undertaking shall be complied with in the
following manner: .

7. The parties further undertake that the Board of

Directors and management of the Bank shall establish and
implement a loan policy for the Bank of making available for
loans at preferential rates of interest to the coconut farmers .

8. The BUYER shall expeditiously distribute from time

to time the shares of the Bank, that shall be held by it for the
benefit of the coconut farmers of the Philippines under the
provisions of this Agreement, to such, coconut farmers
holding registered COCOFUND receipts on such equitable
basis as may be determine by the BUYER in its sound
discretion.

9. .

10. To ensure that not only existing but future coconut

farmers shall be participants in and beneficiaries of the credit
policies, and shall be entitled to the benefit of loans and credit
facilities to be extended by the Bank to coconut farmers at
preferential rates, the shares held by the coconut farmers shall
not be entitled to pre-emptive rights with respect to the
unissued portion of the authorized capital stock or any
increase thereof.

11. After the parties shall have acquired two-thirds (2/3)

of the outstanding shares of the Bank, the parties shall call a
special stockholders meeting of the Bank:
(a) To classify the present authorized capital stock of
P50,000,000 divided into 500,000 shares, with a par
value of P100.00 per share into: 361,000 Class A shares,
with an aggregate par value of P36,100,000 and 139,000
Class B shares, with an aggregate par value of
P13,900,000. All of the Option Shares constituting
72.2% of the outstanding shares, shall be classified as
Class A shares and the balance of the outstanding
shares, constituting 27.8% of the outstanding shares, as
Class B shares;

(b) To amend the articles of incorporation of the Bank

to effect the following changes:

(i) change of corporate name to First United

Coconut Bank;

(ii) replace the present provision restricting the

transferability of the shares with a limitation on
ownership by any individual or entity to not
more than 10% of the outstanding shares of the
Bank;

(iii) provide that the holders of Class A shares

shall not be entitled to pre-emptive rights with
respect to the unissued portion of the authorized
capital stock or any increase thereof; and

(iv) provide that the holders of Class B shares

shall be absolutely entitled to pre-emptive
rights, with respect to the unissued portion of
 Class B shares comprising part of the authorized
capital stock or any increase thereof, to
subscribe to Class B shares in proportion t the
subscriptions of Class A shares, and to pay for
their subscriptions to Class B shares within a
period of five (5) years from the call of the Board
of Directors.

(c) To increase the authorized capital stock of the Bank

from P50 Million to P140 Million.;

(d) To declare a stock dividend of P8 Million payable to

the SELLER, the BUYER and other stockholders of the
Bank out of the present authorized but unissued capital
stock of P30 Million;

(e) To amend the by-laws of the Bank accordingly; and

(f) To authorize and approve the management contract

provided in paragraph 2 above.

The parties agree that they shall vote their shares and
take all the necessary corporate action in order to carry into
effect the foregoing provisions of this paragraph 11 .

12. It is the contemplation of the parties that the Bank

shall achieve a financial and equity position to be able to lend
to the coconut farmers at preferential rates.
 In order to achieve such objective, the parties shall cause the
Bank to adopt a policy of reinvestment, by way of stock
dividends, of such percentage of the profits of the Bank as may
be necessary.

13. The parties agree to execute or cause to be executed

such documents and instruments as may be required in order
to carry out the intent and purpose of this Agreement.

IN WITNESS WHEREOF,

PHILIPPINE COCONUT AUTHORITY

(BUYER)

By:

EDUARDO COJUANGCO, JR. MARIA CLARA L. LOBREGAT

(SELLER)

7. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al.

admit that the (PCA) was the other buyers represented by . Cojuangco, Jr. in
the May 1975 Agreement entered into between Pedro Cojuangco (on his
own behalf and in behalf of other sellers listed in Annex A of the
agreement) and Cojuangco, Jr. (on his own behalf and in behalf of the other
buyers). Defendant Cojuangco insists he was the only buyer under the
aforesaid Agreement.
8. ..

9. Defendants Lobregat, et al., and COCOFED, et al., and Ballares, et al.

admit that in addition to the 137,866 FUB shares of Pedro Cojuangco, et al.
covered by the Agreement, other FUB stockholders sold their shares to PCA
such that the total number of FUB shares purchased by PCA increased from
137,866 shares to 144,400 shares, the OPTION SHARES referred to in the
Agreement of May 25, 1975. Defendant Cojuangco did not make said
admission as to the said 6,534 shares in excess of the 137,866 shares covered
by the Agreement with Pedro Cojuangco.

10. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et

al. admit that the Agreement, described in Section 1 of Presidential Decree
(P.D.) No. 755 dated July 29, 1975 as the Agreement for the Acquisition of a
Commercial Bank for the Benefit of Coconut Farmers executed by the
Philippine Coconut Authority and incorporated in Section 1 of P.D. No. 755
by reference, refers to the AGREEMENT FOR THE ACQUISITION OF A
COMMERCIAL BANK FOR THE BENEFIT OF THE COCONUT FARMERS
OF THE PHILIPPINES dated May 25, 1975 between defendant Eduardo M.
Cojuangco, Jr. and the [PCA] (Annex B for defendant Cojuangcos
OPPOSITION TO PLAINTIFFS MOTION FOR PARTIAL SUMMARY
JUDGMENT [RE: EDUARDO M. COJUANGCO, JR.] dated September 18,
2002).

Plaintiff refused to make the same admission.

11. the Court takes judicial notice that P.D. No. 755 was published [in]
volume 71 of the Official Gazette but the text of the agreement was not so
published with P.D. No. 755.

12. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et

al. admit that the PCA used public funds, in the total amount of P150
million, to purchase the FUB shares amounting to 72.2% of the authorized
capital stock of the FUB, although the PCA was later reimbursed from
the coconut levy funds and that the PCA subscription in the increased
capitalization of the FUB, which was later renamed the (UCPB), came from
the said coconut levy funds.

13. Pursuant to the May 25, 1975 Agreement, out of the 72.2% shares of the
authorized and the increased capital stock of the FUB (later UCPB), entirely
paid for by PCA, 64.98% of the shares were placed in the name of the PCA
for the benefit of the coconut farmers and 7,22% were given to defendant
Cojuangco. The remaining 27.8% shares of stock in the FUB which later
became the UCPB were not covered by the two (2) agreements referred to
in item no. 6, par. (a) and (b) above.

There were shares forming part of the aforementioned 64.98% which were
later sold or transferred to non-coconut farmers.

14. Under the May 27, 1975 Agreement, defendant Cojuangcos equity in the
FUB (now UCPB) was ten percent (10%) of the shares of stock acquired by
the PCA for the benefit of the coconut farmers.

15. That the fully paid 95.304 shares of the FUB, later the UCPB, acquired by
defendant Cojuangco, Jr. pursuant to the May 25, 1975 Agreement were paid
for by the PCA in accordance with the terms and conditions provided in the
said Agreement.

16. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et

al. admit that the affidavits of the coconut farmers (specifically, Exhibit 1-
Farmer to 70-Farmer) uniformly state that:

a. they are coconut farmers who sold coconut products;

b. in the sale thereof, they received COCOFUND receipts pursuant

to R.A. No. 6260;

c. they registered the said COCOFUND receipts; and

d. by virtue thereof, and under R.A. No. 6260, P.D. Nos. 755, 961 and
1468, they are allegedly entitled to the subject UCPB shares.
but subject to the following qualifications:

a. there were other coconut farmers who received UCPB shares

although they did not present said COCOFUND receipt
because the PCA distributed the unclaimed UCPB shares not
only to those who already received their UCPB shares in
exchange for their COCOFUND receipts but also to the
coconut farmers determined by a national census conducted
pursuant to PCA administrative issuances;

b. [t]here were other affidavits executed by Lobregat, Eleazar,

Ballares and Aldeguer relative to the said distribution of the
unclaimed UCPB shares; and

c. the coconut farmers claim the UCPB shares by virtue of their

compliance not only with the laws mentioned in item (d)
above but also with the relevant issuances of the PCA such as,
PCA Administrative Order No. 1, dated August 20, 1975 (Exh.
298-Farmer); PCA Resolution No. 033-78 dated February 16,
1978.

The plaintiff did not make any admission as to the foregoing qualifications.

17. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et

al. claim that the UCPB shares in question have legitimately become the
private properties of the 1,405,366 coconut farmers solely on the basis of
their having acquired said shares in compliance with R.A. No. 6260, P.D.
Nos. 755, 961 and 1468 and the administrative issuances of the PCA cited
above.
 18. ..

On July 11, 2003, the Sandiganbayan issued the assailed PSJ-A finding for the Republic, the
judgment accentuated by (a) the observation that COCOFED has all along manifested as
representing over a million coconut farmers and (b) a declaration on the issue of
ownership of UCPB shares and the unconstitutionality of certain provisions of P.D. No.
755 and its implementing regulations. On the matter of ownership in particular, the anti-
graft court declared that the 64.98% sequestered Farmers UCPB shares, plus other shares
paid by PCA are conclusively owned by the Republic. In its pertinent parts, PSJ-A,
resolving the separate motions for summary judgment in seriatim with separate
dispositive portions for each, reads:

WHEREFORE, in view of the foregoing, we rule as follows:

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY

JUDGMENT dated April 11, 2001 filed by Defendant Maria Clara L.
Lobregat, COCOFED, et al., and Ballares, et al.

The Class Action Motion for Separate Summary Judgment

dated April 11, 2001 filed by defendant Maria Clara L. Lobregat, COCOFED,
et al. and Ballares, et al., is hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE:

COCOFED, ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed
by Plaintiff.

1. a. Section 1 of P.D. No. 755, taken in relation to Section 2 of

the same P.D., is unconstitutional: (i) for having allowed the use
of the CCSF to benefit directly private interest by the outright
 and unconditional grant of absolute ownership of the FUB/UCPB
shares paid for by PCA entirely with the CCSF to the undefined
coconut farmers, which negated or circumvented the national
policy or public purpose declared by P.D. No. 755 to accelerate
the growth and development of the coconut industry and achieve
its vertical integration; and (ii) for having unduly delegated
legislative power to the PCA.

b. The implementing regulations issued by PCA, namely,

Administrative Order No. 1, Series of 1975 and Resolution No.
074-78 are likewise invalid for their failure to see to it that the
distribution of shares serve exclusively or at least primarily or
directly the aforementioned public purpose or national policy
declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy
funds shall not be considered special and/or fiduciary funds nor part
of the general funds of the national government and similar
provisions of Sec. 5, Art. III, P.D. No. 961 and Sec. 5, Art. III, P.D. No.
1468 contravene the provisions of the Constitution, particularly, Art.
IX (D), Sec. 2; and Article VI, Sec. 29 (3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and
validly obtained title of ownership over the subject UCPB shares by
virtue of P.D. No. 755, the Agreement dated May 25, 1975between the
PCA and defendant Cojuangco, and PCA implementing rules,
namely, Adm. Order No. 1, s. 1975 and Resolution No. 074-78.

4. The so-called Farmers UCPB shares covered by 64.98% of the

UCPB shares of stock, which formed part of the 72.2% of the shares
of stock of the former FUB and now of the UCPB, the entire
consideration of which was charged by PCA to the CCSF, are hereby
declared conclusively owned by, the Plaintiff Republic of the
Philippines.
C. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: EDUARDO
M. COJUANGCO, JR.) dated September 18, 2002 filed by Plaintiff.

1. Sec. 1 of P.D. No. 755 did not validate the Agreement between PCA
and defendant Eduardo M. Cojuangco, Jr. dated May 25, 1975 nor did
it give the Agreement the binding force of a law because of the non-
publication of the said Agreement.

2. Regarding the questioned transfer of the shares of stock of FUB

(later UCPB) by PCA to defendant Cojuangco or the so-called
Cojuangco UCPB shares which cost the PCA more than Ten Million
Pesos in CCSF in 1975, we declare, that the transfer of the following
FUB/UCPB shares to defendant Eduardo M. Cojuangco, Jr. was not
supported by valuable consideration, and therefore null and void:

a. The 14,400 shares from the Option Shares;

b. Additional Bank Shares Subscribed and Paid by PCA, consisting

of:

1. Fifteen Thousand Eight Hundred Eighty-Four (15,884)

shares out of the authorized but unissued shares of the
bank, subscribed and paid by PCA;

2. Sixty Four Thousand Nine Hundred Eighty (64,980) shares

of the increased capital stock subscribed and paid by PCA;
and
 3. Stock dividends declared pursuant to paragraph 5 and
paragraph 11 (iv) (d) of the Agreement.

3. The above-mentioned shares of stock of the FUB/UCPB transferred

to defendant Cojuangco are hereby declared conclusively owned by
the Republic of the Philippines.

4. The UCPB shares of stock of the alleged fronts, nominees and

dummies of defendant Eduardo M. Cojuangco, Jr. which form part of
the 72.2% shares of the FUB/UCPB paid for by the PCA with public
funds later charged to the coconut levy funds, particularly the CCSF,
belong to the plaintiff Republic of the Philippines as their true and
beneficial owner.

Let trial of this Civil Case proceed with respect to the issues which
have not been disposed of in this Partial Summary Judgment. For
this purpose, the plaintiffs Motion Ad Cautelam to Present
Additional Evidence dated March 28, 2001 is hereby GRANTED.

From PSJ-A, Lobregat moved for reconsideration which COCOFED, et al. and
Ballares, et al. adopted. All these motions were denied in the extended assailed
Resolution[51] of December 28, 2004.

Civil Case No. 0033-F

Here, the Republic, after filing its pre-trial brief, interposed a Motion for Judgment
on the Pleadings and/or for [PSJ] (Re: Defendants CIIF Companies, 14 Holding Companies
and COCOFED, et al.) praying that, in light of the parties submissions and the
supervening ruling in Republic v. COCOFED[52] which left certain facts beyond question, a
judgment issue:

1) Declaring Section 5 of Article III of P.D. No. 961 (Coconut Industry

Code) and Section 5 of Article III of P.D. No. 1468 (Revised Coconut
Industry Code) to be unconstitutional;

2) Declaring that CIF payments under RA No. 6260 are not valid and
legal bases for ownership claims over the CIIF companies and,
ultimately, the CIIF block of SMC shares; and

3) Ordering the reconveyance of the CIIF companies, the 14 holding

companies, and the 27% CIIF block of San Miguel Corporation shares of
stocks in favor of the government and declaring the ownership thereof
to belong to the government in trust for all the coconut farmers.

At this juncture, it may be stated that, vis--vis CC 0033-F, Gabay Foundation, Inc.
sought but was denied leave to intervene. But petitioners COCOFED, et al. moved and
were allowed to intervene[53] on the basis of their claim that COCOFED members
beneficially own the block of SMC shares held by the CIIF companies, at least 51% of
whose capitol stock such members own. The claim, as the OSG explained, arose from the
interplay of the following: (a) COCOFED et al.s alleged majority ownership of the CIIF
companies under Sections 9[54] and 10[55] of P.D. No. 1468, and (b) their alleged
entitlement to shares in the CIIF companies by virtue of their supposed registration of
COCOFUND receipts allegedly issued to COCOFED members upon payment of the R.A.
6260 CIF levy.[56]

Just as in CC No. 0033-A, the Sandiganbayan also conducted a hearing in CC No.

0033-F to determine facts that appeared without substantial controversy as culled from
the records and, by Order[57] of February 23, 2004, outlined those facts.
 On May 7, 2004, the Sandiganbayan, in light of its ruling in CC No. 0033-A and
disposing of the issue on ownership of the CIIF oil and holding companies and their
entire block of subject SMC shares, issued the assailed PSJ-F also finding for the Republic,
the fallo of which pertinently reading:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF

Companies, 14 Holding Companies and Cocofed et al.) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, namely:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;
 7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES

OF STOCK TOTALLING 33,133,266 SHARES AS OF 1983 ARE
DECLARED OWNED BY THE GOVERNMENT IN TRUST FOR ALL THE
COCONUT FARMERS GOVERNMENT AND ORDERDED RECONVEYED
TO THE GOVERNMENT.[58] (Emphasis and capitalization in the original;
underscoring added.)

Let the trial of this Civil Case proceed with respect to the issues which have
not been disposed of in this Partial Summary Judgment, including the
determination of whether the CIIF Block of SMC Shares adjudged to be
owned by the Government represents 27% of the issued and outstanding
capital stock of SMC according to plaintiff or to 31.3% of said capital stock
according to COCOFED, et al and Ballares, et al.

SO ORDERED.
 Expressly covered by the declaration and the reconveyance directive are all
dividends declared, paid and issued thereon as well as any increments thereto arising from,
but not limited to, exercise of pre-emptive rights.

On May 26, 2004, COCOFED et al., filed an omnibus motion (to dismiss for lack of
subject matter jurisdiction or alternatively for reconsideration and to set case for trial),
but this motion was denied per the Sandiganbayans Resolution[59] of December 28, 2004.

On May 11, 2007, in CC 0033-A, the Sandiganbayan issued a Resolution[60] denying

Lobregats and COCOFEDs separate motions to set the case for trial/hearing, noting that
there is no longer any point in proceeding to trial when the issue of their claim of
ownership of the sequestered UCPB shares and related sub-issues have already been
resolved in PSJ-A.

For ease of reference, PSJ-A and PSJ-F each originally decreed trial or further
hearing on issues yet to be disposed of. However, the Resolution[61] issued on June 5,
2007 in CC 0033-A and the Resolution[62] of May 11, 2007 rendered in CC 0033-F effectively
modified the underlying partial summary judgments by deleting that portions on the
necessity of further trial on the issue of ownership of (1) the sequestered UCPB
shares, (2) the CIIF block of SMC shares and (3) the CIIF companies. As the anti-
graft court stressed in both resolutions, the said issue of ownership has been finally
resolved in the corresponding PSJs.[63]

Hence, the instant petitions.

The Issues

COCOFED et al., in G.R. Nos. 177857-58, impute reversible error on the Sandiganbayan
for (a) assuming jurisdiction over CC Nos. 0033-A and 0033-F despite the Republics
failure to establish below the jurisdictional facts, i.e., that the sequestered assets sought
to be recovered are ill-gotten in the context of E.O. Nos. 1, 2, 14 and 14-A; (b) declaring
certain provisions of coco levy issuances unconstitutional; and (c) denying the petitioners
plea to prove that the sequestered assets belong to coconut farmers. Specifically,
petitioners aver:

I. The Sandiganbayan gravely erred when it refused to acknowledge that it

did not have subject matter jurisdiction over the ill-gotten wealth cases
because the respondent Republic failed to prove, and did not even attempt
to prove, the jurisdictional fact that the sequestered assets constitute ill-
gotten wealth of former President Marcos and Cojuangco. Being without
subject matter jurisdiction over the ill-gotten wealth cases, a defect
previously pointed out and repeatedly assailed by COCOFED, et al., the
assailed PSJs and the assailed Resolutions are all null and void.

A. Insofar as the ill-gotten wealth cases are concerned, the

Sandiganbayans subject matter jurisdiction is limited to the recovery
of ill-gotten wealth as defined in Eos 1, 2, 14 and 14-A. Consistent
with that jurisdiction, the subdivided complaints in the ill-gotten
wealth cases expressly alleged that the sequestered assets constitutes
ill-gotten wealth of former President Marcos and Cojuangco, having
been filed pursuant to, and in connection with, Eos 1, 2, 14 and 14-A,
the Sandiganbayan gravely erred, if not exceeded its jurisdiction,
when it refused to require the respondent Republic to prove the
aforesaid jurisdictional fact.

B. . Having no evidence on record to prove the said jurisdictional

fact, the Sandiganbayan gravely erred, if not grossly exceeded its
statutory jurisdiction, when it rendered the assailed PSJs instead of
dismissing the ill-gotten wealth cases.

C. Under Section 1 of Rule 9 of the Rules of Court, lack of jurisdiction

over the subject matter may be raised at any stage of the
proceedings. In any event, in pursuing its intervention in the ill-
gotten wealth cases, COCOFED, et al precisely questioned the
Sandiganbayans subject matter jurisdiction, asserted that the
jurisdictional fact does not exist, moved to dismiss the ill-gotten
wealth cases and even prayed that the writs of sequestration over the
sequestered assets be lifted. In concluding that those actions
constitute an invocation of its jurisdiction, the Sandiganbayan clearly
acted whimsically, capriciously and in grave abuse of its discretion.
II. Through the assailed PSJs and the assailed Resolutions, the
Sandiganbayan declared certain provisions of the coconut levy laws as well
as certain administrative issuances of the PCA as unconstitutional. In doing
so, the Sandiganbayan erroneously employed, if not grossly abused, its
power of judicial review.

A. the Sandiganbayan gravely erred, if not brazenly exceeded its

statutory jurisdiction and abused the judicial powers, when it
concluded that the public purpose of certain coconut levy laws was
not evident, when it thereupon formulated its own public policies
and purposes for the coconut levy laws and at the same time
disregarded the national policies specifically prescribed therein.

B. In ruling that it is not clear or evident how the means employed

by the [coconut levy] laws would serve the avowed purpose of the
law or can serve a public purpose, the Sandiganbayan erroneously
examined, determined and evaluated the wisdom of such laws, a
constitutional power within the exclusive province of the legislative
department.

C. The Sandiganbayan gravely erred in declaring Section 1 of PD 755,

PCA [AO] 1 and PCA Resolution No. 074-78 constitutionally infirm
by reason of alleged but unproven and unsubstantiated flaws in their
implementation.

D. The Sandiganbayan gravely erred in concluding that Section 1 of

PD 755 constitutes an undue delegation of legislative power insofar
as it authorizes the PCA to promulgate rules and regulations
governing the distribution of the UCPB shares to the coconut
farmers. Rather, taken in their proper context, Section 1 of PD 755
was complete in itself, [and] prescribed sufficient standards that
circumscribed the discretion of the PCA.
 More importantly, this Honorable Court has, on three (3)
separate occasions, rejected respondent Republics motion to
declare the coconut levy laws unconstitutional. The
Sandiganbayan gravely erred, if not acted in excess of its jurisdiction,
when it ignored the settled doctrines of law of the case and/or stare
decisis and granted respondent Republics fourth attempt to declare
the coconut levy laws unconstitutional, despite fact that such
declaration of unconstitutionality was not necessary to resolve the
ultimate issue of ownership involved in the ill-gotten wealth cases.

III. In rendering the assailed PSJs and thereafter refusing to proceed to trial
on the merits, on the mere say-so of the respondent Republic, the
Sandiganbayan committed gross and irreversible error, gravely abused its
judicial discretion and flagrantly exceeded its jurisdiction as it effectively
sanctioned the taking of COCOFED, et al.s property by the respondent
Republic without due process of law and through retroactive application of
the declaration of unconstitutionality of the coconut levy laws, an act that is
not only illegal and violative of the settled Operative Fact Doctrine but,
more importantly, inequitable to the coconut farmers whose only possible
mistake, offense or misfortune was to follow the law.

A. .

1. In the course of the almost twenty (20) years that the ill-gotten
wealth cases were pending, COCOFED, et al. repeatedly asked to
be allowed to present evidence to prove that the true, actual and
beneficial owners of the sequestered assets are the coconut
farmers and not Cojuangco, an alleged crony of former President
Marcos. The Sandiganbayan grievously erred and clearly abused
its judicial discretion when it repeatedly and continuously denied
COCOFED, et al. the opportunity to present their evidence to
disprove the baseless allegations of the Ill-Gotten Wealth Cases
that the sequestered assets constitute ill-gotten wealth of
Cojuangco and of former President Marcos, an error that
 undeniably and illegally deprived COCOFED, et al of their
constitutional right to be heard.

2. The Sandiganbayan erroneously concluded that the Assailed

PSJs and Assailed Resolutions settled the ultimate issue of
ownership of the Sequestered Assets and, more importantly,
resolved all factual and legal issues involved in the ill-gotten
wealth cases. Rather, as there are triable issues still to be
resolved, it was incumbent upon the Sandiganbayan to receive
evidence thereon and conduct trial on the merits.

3. Having expressly ordered the parties to proceed to trial and

thereafter decreeing that trial is unnecessary as the Assailed PSJs
were final and appealable judgments, the Sandiganbayan acted
whimsically, capriciously and contrary to the Rules of Court,
treated the parties in the ill-gotten wealth cases unfairly,
disobeyed the dictate of this Honorable Court and, worse,
violated COCOFED, et als right to due process and equal
protection of the laws.

B. The Sandiganbayan gravely erred if not grossly abused its

discretion when it repeatedly disregarded, and outrightly refused to
recognize, the operative facts that existed as well as the rights that
vested from the time the coconut levy laws were enacted until their
declaration of unconstitutionality in the assailed PSJs. As a result,
the assailed PSJs constitute a proscribed retroactive application of
the declaration of unconstitutionality, a taking of private property,
and an impairment of vested rights of ownership, all without due
process of law.[64] Otherwise stated, the assailed PSJs and the assailed
Resolutions effectively penalized the coconut farmers whose only
possible mistake, offense or misfortune was to follow the laws that
were then legal, valid and constitutional.
 IV. The voluminous records of these ill-gotten wealth cases readily reveal
the various dilatory tactics respondent Republic resorted to. As a result,
despite the lapse of almost twenty (20) years of litigation, the
respondent Republic has not been required to, and has not even attempted
to prove, the bases of its perjurious claim that the sequestered assets
constitute ill-gotten wealth of former President Marcos and his crony,
Cojuangco. In tolerating respondent Republics antics for almost twenty (20)
years, the Sandiganbayan so glaringly departed from procedure and thereby
flagrantly violated COCOFED, et al.s right to speedy trial.

In G.R. No. 178193, petitioner Ursua virtually imputes to the Sandiganbayan the
same errors attributed to it by petitioners in G.R. Nos. 177857-58.[65] He replicates as
follows:

The Sandiganbayan decided in a manner not in accord with the Rules of

Court and settled jurisprudence in rendering the questioned PSJ as final and
appealable thereafter taking the sequestered assets from their owners or
record without presentation of any evidence, thus, the questioned PSJ and
the questioned Resolutions are all null and void.

A. The Sandiganbayans jurisdiction insofar as the ill-gotten

wealth cases are concerned, is limited to the recovery of ill-
gotten wealth as defined in Executive Orders No. 1, 2, 14 and
14-A.

B. The Sandiganbayan should have decided to dismiss the

case or continue to receive evidence instead of ruling against
the constitutionality of some coconut levy laws and PCA
issuances because it could decide on other grounds available
to it.

II

The Sandiganbayan gravely erred when it declared PD. 755, Section 1 and 2,
Section 5, Article 1 of PD 961, and Section 5 of Art. III of PD 1468 as well as
 administrative issuances of the PCA as unconstitutional in effect, it abused
it power of judicial review.

A. The Sandiganbayan gravely erred in concluding that the

purpose of PD 755 Section 1 and 2, Section 5, Article 1 of PD
961, and Section 5 of Art. III of PD 1468 is not evident. It then
proceeded to formulated its own purpose thereby intruding
into the wisdom of the legislature in enacting [t]he law.

B. The Sandiganbayan gravely erred in declaring Section 1 of

PD 755, PCA [AO] No. 1 and PCA Resolution No. 074-78
unconstitutional due to alleged flaws in their implementation.

C. The Sandiganbayan gravely erred in concluding that

Section 1 of PD No. 755 constitutes an undue delegation of
legislative power insofar as it authorizes the PCA to
promulgate rules and regulations governing the distribution
of the UCPB shares to the coconut farmers. Section 1 of PD
755 was complete in itself, prescribed sufficient standards that
circumscribed the discretion of the PCA and merely
authorized the PCA to fill matters of detail an execution
through promulgated rules and regulations.

III

The coconut levy laws, insofar as they allowed the PCA to promulgate rules
and regulations governing the distribution of the UCPB to the coconut
farmers, do not constitute an undue delegation of legislative power as they
were complete in themselves and prescribed sufficient standards that
circumscribed the discretion of the PCA.

IV

Assuming ex-gratia argumenti that the coconut levy laws are

unconstitutional, still, the owners thereof cannot be deprived of their
property without due process of law considering that they have in good
faith acquired vested rights over the sequestered assets.
In sum, the instant petitions seek to question the decisions of the Sandiganbayan
in both CC Nos. 0033-A and 0033-F, along with the preliminary issues of objection. We
shall address at the outset, (1) the common preliminary questions, including
jurisdictional issue, followed by (2) the common primary contentious issues
(i.e. constitutional questions), and (3) the issues particular to each case.
 The Courts Ruling

The Sandiganbayan has jurisdiction over the subject

matter ofthe subdivided amended complaints.

The primary issue, as petitioners COCOFED, et al. and Ursua put forward, boils down to
the Sandiganbayans alleged lack of jurisdiction over the subject matter of the amended
complaints. Petitioners maintain that the jurisdictional facts necessary to acquire
jurisdiction over the subject matter in CC No. 0033-A have yet to be established. In fine,
the Republic, so petitioners claim, has failed to prove the ill-gotten nature of the
sequestered coconut farmers UCPB shares. Accordingly, the controversy is removed from
the subject matter jurisdiction of the Sandiganbayan and necessarily any decision
rendered on the merits, such as PSJ-A and PSJ-F, is void.

To petitioners, it behooves the Republic to prove the jurisdictional facts

warranting the Sandiganbayans continued exercise of jurisdiction over ill-gotten wealth
cases. Citing Manila Electric Company [Meralco] v. Ortaez,[66] petitioners argue that the
jurisdiction of an adjudicatory tribunal exercising limited jurisdiction, like the
Sandiganbayan, depends upon the facts of the case as proved at the trial and not merely
upon the allegation in the complaint.[67] Cited too is PCGG v. Nepumuceno,[68] where the
Court held:

The determinations made by the PCGG at the time of issuing

sequestration orders cannot be considered as final determinations; that the
properties or entities sequestered or taken-over in fact constitute ill-gotten
wealth according to [E.O.] No. 1 is a question which can be finally
determined only by a court the Sandiganbayan. The PCGG has the burden
of proving before the Sandiganbayan that the assets it has sequestered or
business entity it has provisionally taken-over constitutes ill-gotten wealth
within the meaning of [E.O.] No. 1 and Article No. XVIII (26) of the 1987
Constitution.

Petitioners above posture is without merit.

Justice Florenz D. Regalado explicates subject matter jurisdiction:

 16. Basic is the doctrine that the jurisdiction of a court over the subject-
matter of an action is conferred only by the Constitution or the law and that
the Rules of Court yield to substantive law, in this case, the Judiciary Act
and B.P. Blg. 129, both as amended, and of which jurisdiction is only a part.
Jurisdiction cannot be acquired through, or waived, enlarged or diminished
by, any act or omission of the parties; neither can it be conferred by the
acquiescence of the court. Jurisdiction must exist as a matter of law.
Consequently, questions of jurisdiction may be raised for the first time on
appeal even if such issue was not raised in the lower court.

17. Nevertheless, in some case, the principle of estoppel by laches has been
availed to bar attacks on jurisdiction.[69]

It is, therefore, clear that jurisdiction over the subject matter is conferred by law. In turn,
the question on whether a given suit comes within the pale of a statutory conferment is
determined by the allegations in the complaint, regardless of whether or not the plaintiff
will be entitled at the end to recover upon all or some of the claims asserted
therein.[70] We said as much in Magay v. Estiandan:[71]

[J]urisdiction over the subject matter is determined by the allegations of the

complaint, irrespective of whether or not the plaintiff is entitled to recover
upon all or some of the claims asserted therein-a matter that can be
resolved only after and as a result of the trial. Nor may the jurisdiction of
the court be made to depend upon the defenses set up in the answer or
upon the motion to dismiss, for, were we to be governed by such rule, the
question of jurisdiction could depend almost entirely upon the defendant.

Of the same tenor was what the Court wrote in Allied Domecq Philippines, Inc. v.
Villon:[72]

Jurisdiction over the subject matter is the power to hear and

determine the general class to which the proceedings in question belong.
Jurisdiction over the subject matter is conferred by law and not by the
consent or acquiescence of any or all of the parties or by erroneous belief of
the court that it exists. Basic is the rule that jurisdiction over the subject
matter is determined by the cause or causes of action as alleged in the
complaint.
The material averments in subdivided CC No. 0033-A and CC No. 0033-F included the
following:
12. Defendant Eduardo Cojuangco, Jr served as a public officer during the
Marcos administration.

13. Defendant Eduardo Cojuangco, Jr., taking advantage of his

association, influence and connection, acting in unlawful concert with the
[Marcoses] and the individual defendants, embarked upon devices, schemes
and stratagems, including the use of defendant corporations as fronts, to
unjustly enrich themselves as the expense of the Plaintiff and the Filipino
people, such as when he

a) manipulated, beginning the year 1975 with the active collaboration

of Defendants , Marai Clara Lobregat, Danilo Ursua [etc.], the purchase by
the (PCA) of 72.2% of the outstanding capital stock of the (FUB) which was
subsequently converted into a universal bank named (UCPB) through the
use of (CCSF) in a manner contrary to law and to the specific purposes for
which said coconut levy funds were imposed and collected under P.D. 276
and under anomalous and sinister designs and circumstances, to wit:

(i) Defendant Eduardo Cojuangco, Jr. coveted the coconut levy

funds as a cheap, lucrative and risk-free source of funds with
which to exercise his private option to buy the controlling
interest in FUB.
(ii) to legitimize a posteriori his highly anomalous and irregular
use and diversion of government funds to advance his own
private and commercial interests Defendant Eduardo Cojuangco,
Jr. caused the issuance of PD 755 (a) declaring that the coconut
levy funds shall not be considered special and fiduciary and trust
funds conveniently repealing for that purpose a series of previous
decrees establishing the character of the coconut levy funds as
special, fiduciary, trust and governments; (b) confirming the
agreement between Cojuangco and PCA on the purchase of FUB
by incorporating by reference said private commercial agreement
in PD 755;
(iii) .
(iv) To perpetuate his opportunity to build his economic empire,
Cojuangco caused the issuance of an unconstitutional decree (PD
1468) requiring the deposit of all coconut levy funds with UCPB
interest free to the prejudice of the government and finally
(v) Having fully established himself as the undisputed coconut
king with unlimited powers to deal with the coconut levy funds,
the stage was now set for Defendant Eduardo Cojuangco, Jr. to
 launch his predatory forays into almost all aspects of Philippine
activity namely . oil mills.
(vi) In gross violation of their fiduciary positions and in
contravention of the goal to create a bank for coconut farmers of
the country, the capital stock of UCPB as of February 25, 1986 was
actually held by the defendants, their lawyers, factotum and
business associates, thereby finally gaining control of the UCPB
by misusing the names and identities of the so-called more than
one million coconut farmers.

(b) created and/or funded with the use of coconut levy funds various
corporations, such as (COCOFED) with the active collaboration and
participation of Defendants Juan Ponce Enrile, Maria Clara Lobregat most
of whom comprised the interlocking officers and directors of said
companies; dissipated, misused and/or misappropriated a substantial part
of said coco levy funds FINALLY GAIN OWNERSHIP AND CONTROL OF
THE UNITED COCONUT PLANTERS BANK BY MISUSING THE NAMES
AND/OR IDENTIFIES OF THE SO-CALLLED MORE THAN ONE MILLION
COCONUT FARNMERS;

(c) misappropriated, misused and dissipated P840 million of the

(CIDF) levy funds deposited with the National Development Corporation
(NIDC) as administrator trustee of said funds and later with UCPB, of which
Defendant Eduardo Cojuangco, Jr. was the Chief Executive Officer.

(d) established and caused to be funded with coconut levy fundfs,

with the active collaboration of Defendants Ferdinand E. Marcos through
the issuance of LOI 926 and of [other] defendants the United Coconut Oil
Mills, Inc., a corporation controlled by Defendant Eduardo Cojuangco, Jr.
and bought sixteen (16) certain competing oil mills at exorbitant prices then
mothballed them.

(i) misused coconut levy funds to buy majority of the outstanding

shares of stock of San Miguel Corporation.

14. Defendants Eduardo Cojuangco, Jr. of the Angara Concepcion

Cruz Regala and Abello law offices (ACCRA) plotted, devised, schemed,
conspired and confederated with each other in setting up, through the use
of the coconut levy funds the financial and corporate structures that led to
the establishment of UCPB UNICOM [etc.] and more than twenty other
coconut levy funded corporations including the acquisition of [SMC]
shares and its institutionalization through presidential directives of the
coconut monopoly.

16. The acts of Defendants, singly or collectively, and /or in unlawful

concert with one another, constitute gross abuse of official position and
authority, flagrant breach of public trust and fiduciary obligations, brazen
abuse of right and power, unjust enrichment, violation of the Constitution
and laws to the grave and irreparable damage of the Plaintiff and the
Filipino people.

CC No. 0033-F

12. Defendant Eduardo Cojuangco, Jr., served as a public officer

during the Marcos administration.

13. Having fully established himself as the undisputed coconut king

with unlimited powers to deal with the coconut levy funds, the stage was
now set for Cojuangco, Jr. to launch his predatory forays into almost all
aspects of Philippine economic activity namely oil mills .

14. Defendant Eduardo Cojuangco, Jr., taking undue advantage of his

association, influence, and connection, acting in unlawful concert with
Defendants Ferdinand E. Marcos and Imelda R. Marcos, and the individual
defendants, embarked upon devices, schemes and stratagems, including the
use of defendant corporations as fronts, to unjustly enrich themselves at the
expense of Plaintiff and the Filipino people.

(a) Having control over the coconut levy, Defendant Eduardo M.

Cojuangco invested the funds in diverse activities, such as the
various businesses SMC was engaged in.;

(c) Later that year [1983], Cojuangco also acquired the Soriano
stocks through a series of complicated and secret agreements, a
key feature of which was a voting trust agreement that stipulated
that Andres, Jr. or his heir would proxy over the vote of the
shares owned by Soriano and Cojuangco.

(g) All together, Cojuangco purchased 33 million shares of the SMC

through the 14 holding companies
 3.1. The same fourteen companies were in turn owned by the six
(6) so-called CIIF Companies.

(h) Defendant Corporations are but shell corporations owned by

interlocking shareholders who have previously admitted that
they are just nominee stockholders who do not have any
proprietary interest over the shares in their names. [L]awyers of
the Angara Abello Concepcion Regala & Cruz (ACCRA) Law
offices, the previous counsel who incorporated said corporations,
prove that they were merely nominee stockholders thereof.

(l) These companies, which ACCRA Law Offices organized for

Defendant Cojuangco to be able to control more than 60% of
SMC shares, were funded by institutions which depended upon
the coconut levy such as the UCPB, UNICOM, (COCOLIFE),
among others. Cojuangco and his ACCRA lawyers used the funds
from 6 large coconut oil mills and 10 copra trading companies to
borrow money from the UCPB and purchase these holding
companies and the SMC stocks. Cojuangco used $ 150 million
from the coconut levy, broken down as follows:

Amount Source Purpose

(in million)

$ 22.26 Oil Mills equity in holding

Companies

$ 65.6 Oil Mills loan to holding

Companies

$ 61.2 UCPB loan to holding

Companies [164]

The entire amount, therefore, came from the coconut levy, some
passing through the Unicom Oil mills, others directly from the
UCPB.

(m) With his entry into the said Company, it began to get favors
from the Marcos government, significantly the lowering of the
excise taxes on beer, one of the main products of SMC.
 15. Defendants plotted, devised, schemed, conspired and
confederated with each other in setting up, through the use of coconut levy
funds, the financial and corporate framework and structures that led to the
establishment of UCPB, [etc.], and more than twenty other coconut levy-
funded corporations, including the acquisition of [SMC] shares and its
institutionalization through presidential directives of the coconut
monopoly.

16. The acts of Defendants, singly or collectively, and/or in unlawful

concert with one another, constitute gross abuse of official position and
authority, flagrant breach of public trust and fiduciary obligations, brazen
abuse of right and power, unjust enrichment, violation of the constitution
and laws of the Republic of the Philippines, to the grave and irreparable
damage of Plaintiff and the Filipino people.[73]

Judging from the allegations of the defendants illegal acts thereat made, it is fairly
obvious that both CC Nos. 0033-A and CC 0033-F partake, in the context of EO Nos. 1, 2
and 14, series of 1986, the nature of ill-gotten wealth suits. Both deal with the recovery of
sequestered shares, property or business enterprises claimed, as alleged in the
corresponding basic complaints, to be ill-gotten assets of President Marcos, his cronies
and nominees and acquired by taking undue advantage of relationships or influence
and/or through or as a result of improper use, conversion or diversion of government
funds or property. Recovery of these assetsdetermined as shall hereinafter be discussed
as prima facie ill-gottenfalls within the unquestionable jurisdiction of the
Sandiganbayan.[74]

P.D. No. 1606, as amended by R.A. 7975 and E.O. No. 14, Series of 1986, vests the
Sandiganbayan with, among others, original jurisdiction over civil and criminal cases
instituted pursuant to and in connection with E.O. Nos. 1, 2, 14 and 14-A. Correlatively,
the PCGG Rules and Regulations defines the term Ill-Gotten Wealth as any asset, property,
business enterprise or material possession of persons within the purview of [E.O.] Nos. 1 and
2, acquired by them directly, or indirectly thru dummies, nominees, agents,
subordinates and/or business associates by any of the following means or similar
schemes:

(1) Through misappropriation, conversion, misuse or

malversation of public funds or raids on the public treasury;
 (2) .;

(3) By the illegal or fraudulent conveyance or disposition of assets

belonging to the government or any of its subdivisions, agencies or
instrumentalities or government-owned or controlled corporations;
(4) By obtaining, receiving or accepting directly or indirectly any
shares of stock, equity or any other form of interest or participation
in any business enterprise or undertaking;

(5) Through the establishment of agricultural, industrial or

commercial monopolies or other combination and/or by the
issuance, promulgation and/or implementation of decrees and
orders intended to benefit particular persons or special interests; and

(6) By taking undue advantage of official position, authority,

relationship or influence for personal gain or benefit.[75] (Emphasis
supplied)

Section 2(a) of E.O. No. 1 charged the PCGG with the task of assisting the President
in [T]he recovery of all ill-gotten wealth accumulated by former [President] Marcos, his
immediate family, relatives, subordinates and close associates 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. Complementing the aforesaid Section 2(a) is Section 1 of E.O. No. 2
decreeing the freezing of all assets in which the [Marcoses] their close relatives,
subordinates, business associates, dummies, agents or nominees have any interest or
participation.

The Republics averments in the amended complaints, particularly those detailing the
alleged wrongful acts of the defendants, sufficiently reveal that the subject matter thereof
comprises the recovery by the Government of ill-gotten wealth acquired by then
President Marcos, his cronies or their associates and dummies through the unlawful,
improper utilization or diversion of coconut levy funds aided by P.D. No. 755 and other
sister decrees. President Marcos himself issued these decrees in a brazen bid to legalize
what amounts to private taking of the said public funds.
Petitioners COCOFED et al. and Ursua, however, would insist that the Republic has failed
to prove the jurisdiction facts: that the sequestered assets indeed constitute ill-gotten
wealth as averred in the amended subdivided complaints.

This contention is incorrect.

There was no actual need for Republic, as plaintiff a quo, to adduce evidence to
show that the Sandiganbayan has jurisdiction over the subject matter of the complaints as
it leaned on the averments in the initiatory pleadings to make visible the jurisdiction of
the Sandiganbayan over the ill-gotten wealth complaints. As previously discussed, a
perusal of the allegations easily reveals the sufficiency of the statement of matters
disclosing the claim of the government against the coco levy funds and the assets
acquired directly or indirectly through said funds as ill-gotten wealth. Moreover, the
Court finds no rule that directs the plaintiff to first prove the subject matter jurisdiction
of the court before which the complaint is filed. Rather, such burden falls on the
shoulders of defendant in the hearing of a motion to dismiss anchored on said ground or
a preliminary hearing thereon when such ground is alleged in the answer.

COCOFED et al. and Ursuas reliance on Manila Electric Company [Meralco] v.

Ortanez[76] is misplaced, there being a total factual dissimilarity between that and the
case at bar.Meralco involved a labor dispute before the Court of Industrial Relations (CIR)
requiring the interpretation of a collective bargaining agreement to determine which
between a regular court and CIR has jurisdiction. There, it was held that in case of doubt,
the case may not be dismissed for failure to state a cause of action as jurisdiction of CIR is
not merely based on the allegations of the complaint but must be proved during the trial
of the case. The factual milieu of Meralco shows that the said procedural holding is
peculiar to the CIR. Thus, it is not and could not be a precedent to the cases at bar.

Even PCGG v. Nepomuceno[77] is not on all fours with the cases at bench, the issue therein
being whether the regional trial court has jurisdiction over the PCGG and sequestered
properties, vis--vis the present cases, which involve an issue concerning the
Sandiganbayans jurisdiction. Like in Meralco, the holding in Nepomuceno is not
determinative of the outcome of the cases at bar.

While the 1964 Meralco and the Nepomuceno cases are inapplicable, the Courts ruling
in Tijam v. Sibonhonoy[78] is the leading case on estoppel relating to jurisdiction. In Tijam,
the Court expressed displeasure on the undesirable practice of a party submitting his case
for decision and then accepting judgment, only if favorable, and then attacking it for lack
of jurisdiction, when adverse.

Considering the antecedents of CC Nos. 0033-A and 0033-F, COCOFED, Lobregat,

Ballares, et al. and Ursua are already precluded from assailing the jurisdiction of the
Sandiganbayan.Remember that the COCOFED and the Lobregat group were not
originally impleaded as defendants in CC No. 0033. They later asked and were allowed by
the Sandiganbayan to intervene. If they really believe then that the Sandiganbayan is
without jurisdiction over the subject matter of the complaint in question, then why
intervene in the first place? They could have sat idly by and let the proceedings continue
and would not have been affected by the outcome of the case as they can challenge the
jurisdiction of the Sandiganbayan when the time for implementation of the flawed
decision comes. More importantly, the decision in the case will have no effect on them
since they were not impleaded as indispensable parties. After all, the joinder of all
indispensable parties to a suit is not only mandatory, but jurisdictional as well. [79] By their
intervention, which the Sandiganbayan allowed per its resolution dated September 30,
1991, COCOFED and Ursua have clearly manifested their desire to submit to the
jurisdiction of the Sandiganbayan and seek relief from said court. Thereafter, they filed
numerous pleadings in the subdivided complaints seeking relief and actively participated
in numerous proceedings. Among the pleadings thus filed are the Oppositions to the
Motion for Interventioninterposed by the Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagawa sa Niyogan and Gabay ng Mundo sa Kaunlaran Foundation,
Inc., a Class Action Omnibus Motionto enjoin the PCGG from voting the SMC shares
dated February 23, 2001 (granted by Sandiganbayan) and the Class Action Motion for a
Separate Summary Judgment dated April 11, 2001. By these acts, COCOFED et al. are now
legally estopped from asserting the Sandiganbayns want of jurisdiction, if that be the case,
over the subject matter of the complaint as they have voluntarily yielded to the
jurisdiction of the Sandiganbayan. Estoppel has now barred the challenge on
Sandiganbayans jurisdiction.

The ensuing excerpts from Macahilig v. Heirs of Magalit[80] are instructive:

We cannot allow her to attack its jurisdiction simply because it rendered a

Decision prejudicial to her position. Participation in all stages of a case
before a trial court effectively estops a party from challenging its
 jurisdiction. One cannot belatedly reject or repudiate its decision after
voluntarily submitting to its jurisdiction, just to secure affirmative relief
against ones opponent or after failing to obtain such relief. If, by deed or
conduct, a party has induced another to act in a particular manner, estoppel
effectively bars the former from adopting an inconsistent position, attitude
or course of conduct that thereby causes loss or injury to the latter.

Lest it be overlooked, this Court has already decided that the sequestered shares
are prima facie ill-gotten wealth rendering the issue of the validity of their sequestration
and of the jurisdiction of the Sandiganbayan over the case beyond doubt. In the case
of COCOFED v. PCGG,[81] We stated that:

It is of course not for this Court to pass upon the factual issues thus
raised. That function pertains to the Sandiganbayan in the first instance.
For purposes of this proceeding, all that the Court needs to determine is
whether or not there is prima facie justification for the sequestration
ordered by the PCGG. The Court is satisfied that there is. The cited
incidents, given the public character of the coconut levy funds, place
petitioners COCOFED and its leaders and officials, at least prima
facie, squarely within the purview of Executive Orders Nos. 1, 2 and
14, as construed and applied inBASECO, to wit:

1. that ill-gotten properties (were) amassed by the leaders and

supporters of the previous regime;

a. more particularly, that (i)ll-gotten wealth was accumulated by

Marcos, his immediate family, relatives, subordinates and close associates, .
(and) business enterprises and entities (came to be) owned or controlled by
them, during (the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and using their powers,
authority, influence, connections or relationships;

b. otherwise stated, that there are assets and properties purportedly

pertaining to [the Marcoses], their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were acquired by
them directly or indirectly, through or as a result of the improper or illegal
use of funds or properties owned by the Government or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of their office, authority, influence, connections or
relationship, resulting in their unjust enrichment .;
 2. The petitioners claim that the assets acquired with the coconut
levy funds are privately owned by the coconut farmers is founded on certain
provisions of law, to wit [Sec. 7, RA 6260 and Sec. 5, Art. III, PD 1468]
(Words in bracket added; italics in the original).

In their attempt to dismiss the amended complaints in question, petitioners

asseverate that (1) the coconut farmers cannot be considered as subordinates, close
and/or business associates, dummies, agents and nominees of Cojuangco, Jr. or the
Marcoses, and (2) the sequestered shares were not illegally acquired nor acquired through
or as result of improper or illegal use or conversion of funds belonging to the
Government. While not saying so explicitly, petitioners are doubtless conveying the idea
that wealth, however acquired, would not be considered ill-gotten in the context of EO 1,
2 and 14, s. of 1986, absent proof that the recipient or end possessor thereof is outside the
Marcos circle of friends, associates, cronies or nominees.

We are not convinced.

As may be noted, E.O. 1 and 2 advert to President Marcos, or his associates

nominees. In its most common signification, the term nominee refers to one who is
designated to act for another usually in a limited way; [82] a person in whose name a stock
or bond certificate is registered but who is not the actual owner thereof is considered a
nominee.[83] Corpus Juris Secundum describes a nominee as one:

designated to act for another as his representative in a rather limited

sense. It has no connotation, however, other than that of acting for another,
in representation of another or as the grantee of another. In its commonly
accepted meaning the term connoted the delegation of authority to the
nominee in a representative or nominal capacity only, and does not connote
the transfer or assignment to the nominee of any property in, or ownership
of, the rights of the person nominating him.[84]

So, the next question that comes to the fore is: would the term nominee include
the more than one million coconut farmers alleged to be the recipients of the UCPB
shares?

Guided by the foregoing definitions, the query must be answered in the affirmative
if only to give life to those executive issuances aimed at ensuring the recovery of ill-gotten
wealth. It is basic, almost elementary, that:
 Laws must receive a sensible interpretation to promote the ends for
which they are enacted. They should be so given reasonable and practical
construction as will give life to them, if it can be done without doing
violence to reason. Conversely, a law should not be so construed as to allow
the doing of an act which is prohibited by law, not so interpreted as to
afford an opportunity to defeat compliance with its terms, create an
inconsistency, or contravene the plain words of the law. Interpretatio fienda
est ut res magis valeat quam pereat or that interpretation as will give the
thing efficacy is to be adopted.[85]

E.O. 1, 2, 14 and 14-A, it bears to stress, were issued precisely to effect the recovery
of ill-gotten assets amassed by the Marcoses, their associates, subordinates and cronies,
or through their nominees. Be that as it may, it stands to reason that persons listed as
associated with the Marcoses[86] refer to those in possession of such ill-gotten wealth but
holding the same in behalf of the actual, albeit undisclosed owner, to prevent discovery
and consequently recovery. Certainly, it is well-nigh inconceivable that ill-gotten assets
would be distributed to and left in the hands of individuals or entities with obvious
traceable connections to Mr. Marcos and his cronies. The Court can take, as it has in fact
taken, judicial notice of schemes and machinations that have been put in place to keep
ill-gotten assets under wraps. These would include the setting up of layers after layers of
shell or dummy, but controlled, corporations[87]or manipulated instruments calculated to
confuse if not altogether mislead would-be investigators from recovering wealth
deceitfully amassed at the expense of the people or simply the fruits thereof. Transferring
the illegal assets to third parties not readily perceived as Marcos cronies would be
another. So it was that in PCGG v. Pena, the Court, describing the rule of Marcos as a well
entrenched plundering regime of twenty years, noted the magnitude of the past regimes
organized pillage and the ingenuity of the plunderers and pillagers with the assistance of
experts and the best legal minds in the market.[88]

Hence, to give full effect to E.O. 1, 2 and 14, s. of 1986, the term nominee, as used in
the above issuances, must be taken to mean to include any person or group of persons,
natural or juridical, in whose name government funds or assets were transferred to by
Pres. Marcos, his cronies or his associates. To this characterization must include what the
Sandiganbayan considered the unidentified coconut farmers, more than a million of
faceless and nameless coconut farmers, the alleged beneficiaries of the distributed
UCPB shares, who, under the terms of Sec. 10 of PCA A.O. No. 1, s. of 1975, were
required, upon the delivery of their respective stock certificates, to execute an
irrevocable proxy in favor of the Banks manager. There is thus ample truth to the
observations - [That] the PCA provided this condition only indicates that the PCA had no
intention to constitute the coconut farmer UCPB stockholder as a bona fide stockholder;
that the 1.5 million registered farmer-stockholders were mere nominal stockholders.[89]

From the foregoing, the challenge on the Sandiganbayans subject matter jurisdiction at
bar must fail.

II

Petitioners COCOFED et al. were not

deprived of their right to be heard.

As a procedural issue, COCOFED, et al. and Ursua next contend that in the course of
almost 20 years that the cases have been with the anti-graft court, they have repeatedly
sought leave to adduce evidence (prior to respondents complete presentation of
evidence) to prove the coco farmers actual and beneficial ownership of the sequestered
shares. The Sandiganbayan, however, had repeatedly and continuously disallowed such
requests, thus depriving them of their constitutional right to be heard.

This contention is untenable, their demand to adduce evidence being disallowable on the
ground of prematurity.

The records reveal that the Republic, after adducing its evidence in CC No. 0033-A,
subsequently filed a Motion Ad Cautelam for Leave to Present Additional
Evidence dated March 28, 2001. This motion remained unresolved at the time the
Republic interposed its Motion for Partial Summary Judgment. The Sandiganbayan
granted the later motion and accordingly rendered the Partial Summary Judgment,
effectively preempting the presentation of evidence by the defendants in said case (herein
petitioners COCOFED and Ursua).

Section 5, Rule 30 the Rules of Court clearly sets out the order of presenting evidence:
 SEC. 5. Order of trial.Subject to the provisions of section 2 of Rule 31,
and unless the court for special reasons otherwise directs, the trial shall be
limited to the issues stated in the pre-trial order and shall proceed as
follows:

(a) The plaintiff shall adduce evidence in support of his

complaint;

(b) The defendant shall then adduce evidence in support

of his defense, counterclaim, cross-claim and third-party
complaint;

(g) Upon admission of the evidence, the case shall be deemed

submitted for decision, unless the court directs the parties to argue
or to submit their respective memoranda or any further pleadings.

If several defendants or third-party defendants, and so forth. having

separate defenses appear by different counsel, the court shall determine the
relative order of presentation of their evidence. (Emphasis supplied.)

Evidently, for the orderly administration of justice, the plaintiff shall first adduce
evidence in support of his complaint and after the formal offer of evidence and the ruling
thereon, then comes the turn of defendant under Section 3 (b) to adduce evidence in
support of his defense, counterclaim, cross-claim and third party complaint, if
any. Deviation from such order of trial is purely discretionary upon the trial court, in this
case, the Sandiganbayan, which cannot be questioned by the parties unless the vitiating
element of grave abuse of discretion supervenes.Thus, the right of COCOFED to present
evidence on the main case had not yet ripened. And the rendition of the partial summary
judgments overtook their right to present evidence on their defenses.
 It cannot be stressed enough that the Republic as well as herein petitioners were
well within their rights to move, as they in fact separately did, for a partial summary
judgment. Summary judgment may be allowed where, save for the amount of damages,
there is, as shown by affidavits and like evidentiary documents, no genuine issue as to any
material fact and the moving party is entitled to a judgment as a matter of law. A genuine
issue, as distinguished from one that is fictitious, contrived and set up in bad faith, means
an issue of fact that calls for the presentation of evidence.[90] Summary or accelerated
judgment, therefore, is a procedural technique aimed at weeding out sham claims or
defenses at an early stage of the litigation.[91] Sections 1, 2 and 4 of Rule 35 of the Rules of
Court on Summary Judgment, respectively provide:

SECTION 1. Summary judgment for claimant.A party seeking to

recover upon a claim, counterclaim, or cross-claim may, at any time after
the pleading in answer thereto has been served, move with supporting
affidavits, depositions or admissions for a summary judgment in his favor
upon all or any part thereof.

SEC. 2. Summary judgment for defending party.A party against whom

a claim, counterclaim or cross-claim is asserted is sought may, at any time,
move with supporting affidavits, depositions or admissions for a summary
judgment in his favor as to all or any part thereof.

SEC. 4. Case not fully adjudicated on motion.If on motion under this

Rule, judgment is not rendered upon the whole case or for all the reliefs
sought and a trial is necessary, the court at the hearing of the motion, by
examining the pleadings and the evidence before it and by interrogating
counsel shall ascertain what material facts exist without substantial
controversy and what are actually and in good faith controverted. It shall
thereupon make an order specifying the facts that appear without
substantial controversy, including the extent to which the amount of
damages or other relief is not in controversy, and directing such further
proceedings in the action as are just. The facts so specified shall be deemed
established, and the trial shall be conducted on the controverted facts
accordingly.

Clearly, petitioner COCOFEDs right to be heard had not been violated by the mere
issuance of PSJ-A and PSJ-F before they can adduce their evidence.
As it were, petitioners COCOFED et al. were able to present documentary evidence in
conjunction with its Class Action Omnibus Motion dated February 23, 2001 where they
appended around four hundred (400) documents including affidavits of alleged farmers.
These petitioners manifested that said documents comprise their evidence to prove the
farmers ownership of the UCPB shares, which were distributed in accordance with valid
and existing laws.[92]

Lastly, COCOFED et al. even filed their own Motion for Separate Summary Judgment, an
event reflective of their admission that there are no more factual issues left to be
determined at the level of the Sandiganbayan. This act of filing a motion for summary
judgment is a judicial admission against COCOFED under Section 26, Rule 130 which
declares that the act, declaration or omission of a party as to a relevant fact may be given
in evidence against him.

Viewed in this light, the Court has to reject petitioners self-serving allegations about
being deprived the right to adduce evidence.

III

The right to speedy trial was not violated.

This brings to the fore the alleged violation of petitioners right to a speedy trial and
speedy disposition of the case. In support of their contention, petitioners cite Licaros v.
Sandiganbayan,[93] where the Court dismissed the case pending before the Sandiganbayan
for violation of the accuseds right to a speedy trial.

It must be clarified right off that the right to a speedy disposition of case and the
accuseds right to a speedy trial are distinct, albeit kindred, guarantees, the most obvious
difference being that a speedy disposition of cases, as provided in Article III, Section 16 of
the Constitution, obtains regardless of the nature of the case:

Section 16. All persons shall have the right to a speedy disposition of
their cases before all judicial, quasi-judicial, or administrative bodies.

In fine, the right to a speedy trial is available only to an accused and is a peculiarly
criminal law concept, while the broader right to a speedy disposition of cases may be
tapped in any proceedings conducted by state agencies. Thus, in Licaros the Court
dismissed the criminal case against the accused due to the palpable transgression of his
right to a speedy trial.

In the instant case, the appropriate right involved is the right to a speedy disposition of
cases, the recovery of ill-gotten wealth being a civil suit.

Nonetheless, the Court has had the occasion to dismiss several cases owing to the
infringement of a partys right to a speedy disposition of cases.[94] Dismissal of the case for
violation of this right is the general rule. Bernat v. The Honorable Sandiganbayan
(5th Division)[95] expounds on the extent of the right to a speedy disposition of cases as
follows:

Section 16 of Article III of the Constitution guarantees the right of all

persons to a speedy disposition of their cases. Nevertheless, this right is
deemed violated only when the proceedings are attended by vexatious,
capricious and oppressive delays. Moreover, the determination of whether
the delays are of said nature is relative and cannot be based on a mere
mathematical reckoning of time. Particular regard must be taken of the
facts and circumstances peculiar to each case. As a guideline, the Court in
Dela Pea v. Sandiganbayan mentioned certain factors that should be
considered and balanced, namely: 1) length of delay; 2) reasons for the
delay; 3) assertion or failure to assert such right by the accused; and 4)
prejudice caused by the delay.

While this Court recognizes the right to speedy disposition quite

distinctly from the right to a speedy trial, and although this Court has
always zealously espoused protection from oppressive and vexatious delays
not attributable to the party involved, at the same time, we hold that a
partys individual rights should not work against and preclude the peoples
equally important right to public justice. In the instant case, three people
died as a result of the crash of the airplane that the accused was flying. It
appears to us that the delay in the disposition of the case prejudiced not
just the accused but the people as well. Since the accused has completely
failed to assert his right seasonably and inasmuch as the respondent judge
was not in a position to dispose of the case on the merits we hold it proper
and equitable to give the parties fair opportunity to obtain substantial
justice in the premises.
The more recent case of Tello v. People[96] laid stress to the restrictive dimension to the
right to speedy disposition of cases, i.e., it is lost unless seasonably invoked:

In Bernat , the Court denied petitioners claim of denial of his right to

a speedy disposition of cases considering that [he] chose to remain silent for
eight years before complaining of the delay in the disposition of his case.
The Court ruled that petitioner failed to seasonably assert his right and he
merely sat and waited from the time his case was submitted for resolution.
In this case, petitioner similarly failed to assert his right to a speedy
disposition of his case. He only invoked his right to a speedy disposition of
cases after [his conviction]. Petitioners silence may be considered as a
waiver of his right.

An examination of the petitioners arguments and the cited indicia of delay would reveal
the absence of any allegation that petitioners moved before the Sandiganbayan for the
dismissal of the case on account of vexatious, capricious and oppressive delays that
attended the proceedings. Following Tello, petitioners are deemed to have waived their
right to a speedy disposition of the case. Moreover, delays, if any, prejudiced the Republic
as well. What is more, the alleged breach of the right in question was not raised below. As
a matter of settled jurisprudence, but subject to equally settled exception, an issue not
raised before the trial court cannot be raised for the first time on appeal.[97] The sporting
idea forbidding one from pulling surprises underpins this rule. For these reasons, the
instant case cannot be dismissed for the alleged violation of petitioners right to a speedy
disposition of the case.

IV
Sections 1 and 2 of P.D. No. 755, Article III, Section 5 of P.D. No. 961 and Article III,
Section 5 of P.D. No. 1468, are unconstitutional.

The Court may pass upon the constitutionality of

P.D. Nos. 755, 961 and 1468.

Petitioners COCOFED et al. and Ursua uniformly scored the Sandiganbayan for
abusing its power of judicial review and wrongly encroaching into the exclusive domain
of Congresswhen it declared certain provisions of the coconut levy laws and PCA
administrative issuances as unconstitutional.

We are not persuaded.

 It is basic that courts will not delve into matters of constitutionality unless
unavoidable, when the question of constitutionality is the very lis mota of the case,
meaning, that the case cannot be legally resolved unless the constitutional issue raised is
determined. This rule finds anchorage on the presumptive constitutionality of every
enactment. Withal, to justify the nullification of a statute, there must be a clear and
unequivocal breach of the Constitution. A doubtful or speculative infringement would
simply not suffice.[98]

Just as basic is the precept that lower courts are not precluded from resolving, whenever
warranted, constitutional questions, subject only to review by this Court.

To Us, the present controversy cannot be peremptorily resolved without going into the
constitutionality of P.D. Nos. 755, 961 and 1468 in particular. For petitioners COCOFED et
al. and Ballares et al. predicate their claim over the sequestered shares and necessarily
their cause on laws and martial law issuances assailed by the Republic on constitutional
grounds. Indeed, as aptly observed by the Solicitor General, this case is for the recovery of
shares grounded on the invalidity of certain enactments, which in turn is rooted in the
shares being public in character, purchased as they were by funds raised by the taxing
and/or a mix of taxing and police powers of the state.[99] As may be recalled, P.D. No. 755,
under the policy-declaring provision, authorized the distribution of UCPB shares of stock
free to coconut farmers. On the other hand, Section 2 of P.D. No. 755, hereunder quoted
below, effectively authorized the PCA to utilize portions of the CCSF to pay the financial
commitment of the farmers to acquire UCPB and to deposit portions of the CCSF levies
with UCPB interest free. And as there also provided, the CCSF, CIDF and like levies that
PCA is authorized to collect shall be considered as non-special or fiduciary funds to be
transferred to the general fund of the Government, meaning they shall be deemed private
funds.

Section 2 of P.D. No. 755 reads:

Section 2. Financial Assistance. To enable the coconut farmers to

comply with their contractual obligations under the aforesaid
Agreement, the [PCA] is hereby directed to draw and utilize the
collections under the [CCSF] authorized to be levied by [PD] No. 232,
as amended, to pay for the financial commitments of the coconut
 farmers under the said agreement and, except for [PCAs]budgetary
requirements , all collections under the [CCSF] Levy and (50%) of the
collections under the [CIDF] shall be deposited, interest free, with the said
bank of the coconut farmers and such deposits shall not be withdrawn until
the the bank has sufficient equity capital ; and since the operations, and
activities of the [PCA] are all in accord with the present social economic
plans and programs of the Government, all collections and levies which
the [PCA] is authorized to levy and collect such as but not limited to
the [CCS Levy] and the [CIDF] shall not be considered or construed,
under any law or regulation, special and/or fiduciary funds and do
not form part of the general funds of the national government within
the contemplation of [P.D.] No. 711. (Emphasis supplied)

A similar provision can also be found in Article III, Section 5 of P.D. No. 961 and Article
III, Section 5 of P.D. No. 1468, which We shall later discuss in turn:

P.D. No. 961

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and

the Coconut Industry Development Fund as well as all disbursements
of said funds for the benefit of the coconut farmers as herein
authorized shall not be construed or interpreted, under any law or
regulation, as special and/or fiduciary funds, or as part of the general
funds of the national government within the contemplation of P.D. No.
711; nor as a subsidy, donation, levy, government funded investment, or
government share within the contemplation of P.D. 898, the intention
being that said Fund and the disbursements thereof as herein
authorized for the benefit of the coconut farmers shall be owned by
them in their own private capacities.[100] (Emphasis Ours)

P.D. No. 1468

Section 5. Exemptions. The [CCSF] and the [CIDF] as well as all

disbursement as herein authorized, shall not be construed or
interpreted, under nay law or regulation, as special and/or fiduciary
funds, or as part of the general funds of the national
government within the contemplation of PD 711; nor as subsidy, donation,
levy government funded investment, or government share within the
 contemplation of PD 898, the intention being that said Fund and the
disbursements thereof as herein authorized for the benefit of the
coconut farmers shall be owned by them in their private
capacities.[101] (Emphasis Ours.)

In other words, the relevant provisions of P.D. Nos. 755, as well as those of P.D.
Nos. 961 and 1468, could have been the only plausible means by which close to a
purported million and a half coconut farmers could have acquired the said shares of
stock. It has, therefore, become necessary to determine the validity of the authorizing
law, which made the stock transfer and acquisitions possible.

To reiterate, it is of crucial importance to determine the validity of P.D. Nos. 755, 961 and
1468 in light of the constitutional proscription against the use of special funds save for the
purpose it was established. Otherwise, petitioners claim of legitimate private
ownership over UCPB shares and indirectly over SMC shares held by UCPBs subsidiaries
will have no leg to stand on, P.D. No. 755 being the only law authorizing the distribution
of the SMC and UCPB shares of stock to coconut farmers, and with the aforementioned
provisions actually stating and holding that the coco levy fund shall not be considered as
a special not even general fund, but shall be owned by the farmers in their private
capacities.[102]

The Sandiganbayans ensuing ratiocination on the need to pass upon constitutional issues
the Republic raised below commends itself for concurrence:

This Court is convinced of the imperative need to pass upon the issues of
constitutionality raised by Plaintiff. The issue of constitutionality of the
provisions of P.D. No. 755 and the laws related thereto goes to the
very core of Plaintiffs causes of action and defenses thereto. It will
serve the best interest of justice to define this early the legal framework
within which this case shall be heard and tried, taking into account the
admission of the parties and the established facts, particularly those
relating to the main substance of the defense of Lobregat, COCOFED, et
al. and Ballares, et al., which is anchored on the laws being assailed
by Plaintiff on constitutional grounds.

The Court is also mindful that lower courts are admonished

to observe a becoming modesty in examining constitutional
 questions, but that they are nonetheless not prevented from
resolving the same whenever warranted, subject only to
review by the highest tribunal (Ynot v. Intermediate Appellate
Court).

It is true that, as a general rule, the question of constitutionality

must be raised at the earliest opportunity. The Honorable Supreme Court
has clearly stated that the general rule admits of exceptions, thus:

For courts will pass upon a constitutional question only when

presented before it in bona fide cases for determination, and
the fact that the question has not been raised before is not a
valid reason for refusing to allow it to be raised later. It has
been held that the determination of a constitutional question
is necessary whenever it is essential to the decision of the case
as where the right of a party is founded solely on a statute, the
validity of which is attacked.

In the case now before us, the allegations of the Subdivided Complaint are
consistent with those in the subject Motion, and they sufficiently raise the
issue of constitutionality of the provisions of laws in question. The Third
Amended Complaint (Subdivided) states:

(ii) to legitimize a posteriori his highly anomalous and

irregular use and diversion of government funds to advance
his own private and commercial interests, Cojuangco, Jr.
caused the issuance of PD 755 (a) declaring that the coconut
levy funds shall not be considered special and fiduciary and
trusts funds and do not form part of the general funds of the
National Government, conveniently repealing for that
purpose a series of coconut levy funds as special, fiduciary,
trust and government funds.

(iv) To perpetuate his opportunity to deal with and make use

the coconut levy funds to build his economic empire,
Cojuangco, Jr. caused the issuance by Defendant Ferdinand E.
Marcos of an unconstitutional decree (PD 1468) requiring the
deposit of all coconut levy funds with UCPB, interest free, to
the prejudice of the government.
The above-quoted allegations in the Third Amended Complaint
(Subdivided) already question the legitimacy of the exercise by former
President Marcos of his legislative authority when he issued P.D. Nos. 755
and 1468. The provision of Sec. 5, Art. III of P.D. 961 is substantially similar
to the provisions of the aforesaid two [PDs]. P.D. No. 755 allegedly
legitimized the highly anomalous and irregular use and diversion of
government funds to advance his [defendant Cojuangcos] own private and
commercial interest. The issuance of the said [PD] which has the force and
effect of a law can only be assailed on constitutional grounds. The merits of
the grounds adverted to in the allegations of the Third Amended Complaint
(Subdivided) can only be resolved by this Court by testing the questioned
[PDs], which are considered part of the laws of the land.

As early as June 20, 1989, this Court in its Resolution expressed this Courts
understanding of the import of the allegations of the complaint, as follows:

It is likewise alleged in the Complaint that in order to

legitimize the diversion of funds, defendant Ferdinand E.
Marcos issued the Presidential Decrees referred to by the
movants. This is then the core of Plaintiffs
complaint: that, insofar as the coconut levy is concerned,
these decrees had been enacted as tools for the
acquisition of ill-gotten wealth for specific favored
individuals.

Even if Plaintiff may not have said so effectively, the

complaint in fact disputes the legitimacy, and, if one pleases,
the constitutionality of such enactments.

The issue is validly raised on the face of the complaint and

defendants must respond to it.

Since the question of constitutionality may be raised even on appeal if the

determination of such a question is essential to the decision of the case, we
find more reason to resolve this constitutional question at this stage of the
proceedings, where the defense is grounded solely on the very laws the
constitutionality of which are being questioned and where the
evidence of the defendants would seek mainly to prove their faithful and
good faith compliance with the said laws and their implementing rules and
regulations.[103] (Emphasis added.)
The Courts rulings in COCOFED v. PCGG and
Republic v. Sandiganbayan, as law of the case, are
speciously invoked.

To thwart the ruling on the constitutionality of P.D. Nos. 755, 961 and 1468, petitioners
would sneak in the argument that the Court has, in three separate instances, upheld the
validity, and thumbed down the Republics challenge to the constitutionality, of said laws
imposing the different coconut levies and prescribing the uses of the fund collected. The
separate actions of the Court, petitioners add, would conclude the Sandiganbayan on the
issue of constitutionality of said issuances, following the law-of-the-case principle.
Petitioners allege:

Otherwise stated, the decision of this Honorable Court in the COCOFED

Case overruling the strict public fund theory espoused by
the Respondent Republic, upholding the propriety of the laws imposing the
collections of the different Coconut Levies and expressly allowing
COCOFED, et al., to prove that the Sequestered Assets have legitimately
become their private properties had become final and immutable.[104]

Petitioners are mistaken.

Yu v. Yu,[105] as effectively reiterated in Vios v. Pantangco,[106] defines and explains the

ramifications of the law of the case principle as follows:

Law of the case has been defined as the opinion delivered on a

former appeal. It is a term applied to an established rule that when an
appellate court passes on a question and remands the case to the lower
court for further proceedings, the question there settled becomes the law of
the case upon subsequent appeal. It means that whatever is once
irrevocably established as the controlling legal rule or decision between the
same parties in the same case continues to be the law of the case, so long as
the facts on which such decision was predicated continue to be the facts of
the case before the court.

Otherwise put, the principle means that questions of law that have been previously raised
and disposed of in the proceedings shall be controlling in succeeding instances where the
same legal question is raised, provided that the facts on which the legal issue was
predicated continue to be the facts of the case before the court. Guided by this definition,
the law of the case principle cannot provide petitioners any comfort. We shall explain
why.

In the first instance, petitioners cite COCOFED v. PCGG.[107] There, respondent PCGG
questioned the validity of the coconut levy laws based on the limits of the states taxing
and police power, as may be deduced from the ensuing observations of the Court:

. Indeed, the Solicitor General suggests quite strongly that the laws
operating or purporting to convert the coconut levy funds into private
funds, are a transgression of the basic limitations for the licit exercise of the
state's taxing and police powers, and that certain provisions of said laws are
merely clever stratagems to keep away government audit in order to
facilitate misappropriation of the funds in question.

The utilization and proper management of the coconut levy funds,

[to acquire shares of stocks for coconut farmers and workers] raised as they
were by the States police and taxing power are certainly the concern of the
Government. The coconut levy funds are clearly affected with public
interest. Until it is demonstrated satisfactorily that they have legitimately
become private funds, they must prima facie be accounted subject to
measures prescribed in EO Nos. 1, 2, and 14 to prevent their concealment,
dissipation, etc.[108] [Words in bracket added.]

The issue, therefore, in COCOFED v. PCGG turns on the legality of the transfer of the
shares of stock bought with the coconut levy funds to coconut farmers. This must be
distinguished with the issues in the instant case of whether P.D. No. 755 violated Section
29, paragraph 3 of Article VI of the 1987 Constitution as well as to whether P.D. No. 755
constitutes undue delegation of legislative power. Clearly, the issues in both sets of cases
are so different as to preclude the application of the law of the case rule.
The second and third instances that petitioners draw attention to refer to the rulings
in Republic v. Sandiganbayan, where the Court by Resolution of December 13, 1994, as
reiterated in another resolution dated March 26, 1996, resolved to deny the separate
motions of the Republic to resolve legal questions on the character of the coconut levy
funds, more particularly to declare as unconstitutional (a) coconut levies collected
pursuant to various issuances as public funds and (b) Article III, Section 5 of P.D. No.
1468.
Prescinding from the foregoing considerations, petitioners would state: Having filed at
least three (3) motions seeking, among others, to declare certain provisions of the
Coconut Levy Laws unconstitutional and having been rebuffed all three times by this
Court, the Republic - and necessarily Sandiganbayan should have followed as [they were]
legally bound by this Courts prior determination on that above issue of constitutionality
under the doctrine of Law of the Case.

Petitioners are wrong. The Court merely declined to pass upon the
constitutionality of the coconut levy laws or some of their provisions. It did not declare
that the UCPB shares acquired with the use of coconut levy funds have legitimately
become private.

The coconut levy funds are in the nature of taxes

and can only be used for public
purpose. Consequently, they cannot be used to
purchase shares of stocks to be given for free to
private individuals.
Indeed, We have hitherto discussed, the coconut levy was imposed in the exercise of the
States inherent power of taxation. As We wrote in Republic v. COCOFED:[109]

Indeed, coconut levy funds partake of the nature of taxes, which, in

general, are enforced proportional contributions from persons and
properties, exacted by the State by virtue of its sovereignty for the support
of government and for all public needs.

Based on its definition, a tax has three elements, namely: a) it is an enforced

proportional contribution from persons and properties; b) it is imposed by
the State by virtue of its sovereignty; and c) it is levied for the support of the
government. The coconut levy funds fall squarely into these elements for
the following reasons:

(a) They were generated by virtue of statutory enactments imposed on the

coconut farmers requiring the payment of prescribed amounts. Thus, PD
No. 276, which created the Coconut Consumer[s] Stabilization Fund
(CCSF), mandated the following:

a. A levy, initially, of P15.00 per 100 kilograms of copra

resecada or its equivalent in other coconut products, shall be
imposed on every first sale, in accordance with the mechanics
 established under RA 6260, effective at the start of business
hours on August 10, 1973.

The proceeds from the levy shall be deposited with the

Philippine National Bank or any other government bank to the
account of the Coconut Consumers Stabilization Fund, as a
separate trust fund which shall not form part of the general
fund of the government.

The coco levies were further clarified in amendatory laws, specifically

PD No. 961 and PD No. 1468 in this wise:

The Authority (PCA) is hereby empowered to impose

and collect a levy, to be known as the Coconut Consumers
Stabilization Fund Levy, on every one hundred kilos of copra
resecada, or its equivalent delivered to, and/or purchased by,
copra exporters, oil millers, desiccators and other end-users of
copra or its equivalent in other coconut products. The levy
shall be paid by such copra exporters, oil millers,
desiccators and other end-users of copra or its equivalent
in other coconut products under such rules and regulations
as the Authority may prescribe. Until otherwise prescribed by
the Authority, the current levy being collected shall be
continued.

Like other tax measures, they were not voluntary payments or

donations by the people. They were enforced contributions exacted on pain
of penal sanctions, as provided under PD No. 276:

3. Any person or firm who violates any provision of this

Decree or the rules and regulations promulgated thereunder,
shall, in addition to penalties already prescribed under
existing administrative and special law, pay a fine of not less
than P2,500 or more than P10,000, or suffer cancellation of
licenses to operate, or both, at the discretion of the Court.

Such penalties were later amended thus: .

(b) The coconut levies were imposed pursuant to the laws enacted by
the proper legislative authorities of the State. Indeed, the CCSF was
collected under PD No. 276.
 (c) They were clearly imposed for a public purpose. There is
absolutely no question that they were collected to advance the
governments avowed policy of protecting the coconut industry.This
Court takes judicial notice of the fact that the coconut industry is one of
the great economic pillars of our nation, and coconuts and their byproducts
occupy a leading position among the countrys export products.

Taxation is done not merely to raise revenues to support the

government, but also to provide means for the rehabilitation and the
stabilization of a threatened industry, which is so affected with public
interest as to be within the police power of the State.

Even if the money is allocated for a special purpose and raised by

special means, it is still public in character. In Cocofed v. PCGG, the Court
observed that certain agencies or enterprises were organized and financed
with revenues derived from coconut levies imposed under a succession of
law of the late dictatorship with deposed Ferdinand Marcos and his cronies
as the suspected authors and chief beneficiaries of the resulting coconut
industry monopoly. The Court continued: . It cannot be denied that the
coconut industry is one of the major industries supporting the
national economy. It is, therefore, the States concern to make it a strong
and secure source not only of the livelihood of a significant segment of the
population, but also of export earnings the sustained growth of which
is one of the imperatives of economic stability.[110] (Emphasis Ours)

We have ruled time and again that taxes are imposed only for a public
purpose.[111] They cannot be used for purely private purposes or for the exclusive benefit of
private persons.[112] When a law imposes taxes or levies from the public, with the intent to
give undue benefit or advantage to private persons, or the promotion of private
enterprises, that law cannot be said to satisfy the requirement of public
purpose.[113] In Gaston v. Republic Planters Bank, the petitioning sugar producers,
sugarcane planters and millers sought the distribution of the shares of stock of the
Republic Planters Bank, alleging that they are the true beneficial owners thereof.[114] In
that case, the investment, i.e., the purchase of the said bank, was funded by the deduction
of PhP 1.00 per picul from the sugar proceeds of the sugar producers pursuant to P.D. No.
388.[115] In ruling against the petitioners, the Court held that to rule in their favor would
contravene the general principle that revenues received from the imposition of taxes or
levies cannot be used for purely private purposes or for the exclusive benefit of private
persons.[116] The Court amply reasoned that the Stabilization Fund must be utilized for the
benefit of the entire sugar industry, and all its components, stabilization of the
domestic market including foreign market, the industry being of vital importance
to the countrys economy and to national interest.[117]

Similarly in this case, the coconut levy funds were sourced from forced exactions
decreed under P.D. Nos. 232, 276 and 582, among others,[118] with the end-goal of
developing the entire coconut industry.[119] Clearly, to hold therefore, even by law, that
the revenues received from the imposition of the coconut levies be used purely for private
purposes to be owned by private individuals in their private capacity and for their benefit,
would contravene the rationale behind the imposition of taxes or levies.

Needless to stress, courts do not, as they cannot, allow by judicial fiat the
conversion of special funds into a private fund for the benefit of private individuals. In the
same vein, We cannot subscribe to the idea of what appears to be an indirect if not
exactly direct conversion of special funds into private funds, i.e., by using special funds to
purchase shares of stocks, which in turn would be distributed for free to private
individuals. Even if these private individuals belong to, or are a part of the coconut
industry, the free distribution of shares of stocks purchased with special public funds to
them, nevertheless cannot be justified. The ratio in Gaston,[120] as expressed below,
applies mutatis mutandis to this case:

The stabilization fees in question are levied by the State for a special
purpose that of financing the growth and development of the sugar industry
and all its components, stabilization of the domestic market including the
foreign market. The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them as state funds even
though they are held for a special purpose.

That the fees were collected from sugar producers,[etc.], and

that the funds were channeled to the purchase of shares of stock in
respondent Bank do not convert the funds into a trust fund for their
benefit nor make them the beneficial owners of the shares so
purchased. It is but rational that the fees be collected from them since
it is also they who are benefited from the expenditure of the funds
derived from it. .[121] (Emphasis Ours.)
 In this case, the coconut levy funds were being exacted from copra exporters, oil
millers, desiccators and other end-users of copra or its equivalent in other coconut
products.[122]Likewise so, the funds here were channeled to the purchase of the shares of
stock in UCPB. Drawing a clear parallelism between Gaston and this case, the fact that
the coconut levy funds were collected from the persons or entities in the coconut
industry, among others, does not and cannot entitle them to be beneficial owners of the
subject funds or more bluntly, owners thereof in their private capacity. Parenthetically,
the said private individuals cannot own the UCPB shares of stocks so purchased using the
said special funds of the government.[123]

Coconut levy funds are special public funds of the

government.

Plainly enough, the coconut levy funds are public funds. We have ruled in Republic
v. COCOFED that the coconut levy funds are not only affected with public interest; they
are prima facie public funds.[124] In fact, this pronouncement that the levies are
government funds was admitted and recognized by respondents, COCOFED, et al., in
G.R. No. 147062-64.[125] And more importantly, in the same decision, We clearly explained
exactly what kind of government fund the coconut levies are. We were categorical in
saying that coconut levies are treated as special funds by the very laws which created
them:

Finally and tellingly, the very laws governing the coconut levies
recognize their public character. Thus, the third Whereas clause of PD
No. 276 treats them as special funds for a specific public
purpose. Furthermore, PD No. 711 transferred to the general funds of
the State all existing special and fiduciary funds including the
CCSF. On the other hand, PD No. 1234 specifically declared the CCSF as
a special fund for a special purpose, which should be treated as
a special account in the National Treasury.[126] (Emphasis Ours.)

If only to stress the point, P.D. No. 1234 expressly stated that coconut levies are
special funds to be remitted to the Treasury in the General Fund of the State, but treated
as Special Accounts:
 Section 1. All income and collections for Special or Fiduciary
Funds authorized by law shall be remitted to the Treasury and treated as
Special Accounts in the General Fund, including the following:

(a) [PCA] Development Fund, including all income derived therefrom

under Sections 13 and 14 of [RA] No. 1145; Coconut Investments Fund under
Section 8 of [RA] No. 6260, including earnings, profits, proceeds and interests
derived therefrom; Coconut Consumers Stabilization Funds under Section 3-A
of PD No. 232, as inserted by Section 3 of P.D. No. 232, as inserted by Section 2
of P.D. No. 583; and all other fees accruing to the [PCA] under the provisions
of Section 19 of [RA] No. 1365, in accordance with Section 2 of P.D. No. 755
and all other income accruing to the [PCA] under existing laws.[127] (Emphasis
Ours)

Moreover, the Court, in Gaston, stated the observation that the character of a
stabilization fund as a special fund is emphasized by the fact that the funds are deposited
in the Philippine National Bank [PNB] and not in the Philippine Treasury, moneys from
which may be paid out only in pursuance of an appropriation made by law.[128] Similarly in
this case, Sec.1 (a) of P.D. No. 276 states that the proceeds from the coconut levy shall be
deposited with the PNB, then a government bank, or any other government bank under
the account of the CCSF, as a separate trust fund, which shall not form part of the
governments general fund.[129] And even assuming arguendo that the coconut levy funds
were transferred to the general fund pursuant to P.D. No. 1234, it was with the specific
directive that the same be treated as special accounts in the general fund.[130]

The coconut levy funds can only be used for the

special purpose and the balance thereof should
revert back to the general fund. Consequently,
their subsequent reclassification as a private fund
to be owned by private individuals in their private
capacities under P.D. Nos. 755, 961 and 1468 are
unconstitutional.

To recapitulate, Article VI, Section 29 (3) of the 1987 Constitution, restating a

general principle on taxation, enjoins the disbursement of a special fund in accordance
with the special purpose for which it was collected, the balance, if there be any, after the
purpose has been fulfilled or is no longer forthcoming, to be transferred to the general
funds of the government, thus:

Section 29(3).

(3) All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the
purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of
the Government. (Emphasis Ours)

Correlatively, Section 2 of P.D. No. 755 clearly states that:

Section 2. Financial Assistance. To enable the coconut farmers to

comply with their contractual obligations under the aforesaid Agreement,
the [PCA] is hereby directed to draw and utilize the collections under
the Coconut Consumers Stabilization Fund [CCSF] authorized to be
levied by [P.D.] 232, as amended, to pay for the financial commitments of
the coconut farmers under the said agreement. and the Coconut Industry
Development Fund as prescribed by Presidential Decree No. 582 shall not
be considered or construed, under any law or regulation, special
and/or fiduciary funds and do not form part of the general funds of
the national government within the contemplation of Presidential Decree
No. 711. (Emphasis Ours)

Likewise, as discussed supra, Article III, Section 5 of both P.D. Nos. 961 and 1468 provides
that the CCSF shall not be construed by any law as a special and/or trust fund, the stated
intention being that actual ownership of the said fund shall pertain to coconut farmers in
their private capacities.[131] Thus, in order to determine whether the relevant provisions of
P.D. Nos. 755, 961 and 1468 complied with Article VI, Section 29 (3) of the 1987
Constitution, a look at the public policy or the purpose for which the CCSF levy was
imposed is necessary.

The CCSF was established by virtue of P.D. No. 276 wherein it is stated that:

WHEREAS, an escalating crisis brought about by an abnormal

situation in the world market for fats and oils has resulted in supply and
 price dislocations in the domestic market for coconut-based goods, and
has created hardships for consumers thereof;

WHEREAS, the representatives of the coconut industry have

proposed the implementation of an industry-financed stabilization scheme
which will permit socialized pricing of coconut-based commodities;

WHEREAS, it is the policy of the State to promote the welfare and

economic well-being of the consuming public;

1. In addition to its powers granted under [P.D.] No. 232, the [PCA] is
hereby authorized to formulate and immediately implement a stabilization
scheme for coconut-based consumer goods, along the following general
guidelines:

(a) .The proceeds of the levy shall be deposited with the

Philippine National Bank or any other government bank to the
account of the CCSF as a separate trust fund.

(b) The Fund shall be utilized to subsidize the sale of

coconut-based products at prices set by the Price Control Council.:

As couched, P.D. No. 276 created and exacted the CCSF to advance the
governments avowed policy of protecting the coconut industry.[132] Evidently, the CCSF
was originally set up as a special fund to support consumer purchases of coconut
products. To put it a bit differently, the protection of the entire coconut industry, and
even more importantly, for the consuming public provides the rationale for the creation
of the coconut levy fund. There can be no quibbling then that the foregoing provisions of
P.D. No. 276 intended the fund created and set up therein not especially for the coconut
farmers but for the entire coconut industry, albeit the improvement of the industry would
doubtless redound to the benefit of the farmers.Upon the foregoing perspective, the
following provisions of P.D. Nos. 755, 961 and 1468 insofar as they declared, as the case
may be, that: [the coconut levy] fund and the disbursements thereof [shall be] authorized
for the benefit of the coconut farmers and shall be owned by them in their private
capacities;[133] or the coconut levy fund shall not be construed by any law to be a special
and/or fiduciary fund, and do not therefore form part of the general fund of the national
government later on;[134] or the UCPB shares acquired using the coconut levy fund shall be
distributed to the coconut farmers for free,[135] violated the special public purpose for
which the CCSF was established.

In sum, not only were the challenged presidential issuances unconstitutional for
decreeing the distribution of the shares of stock for free to the coconut farmers and,
therefore, negating the public purpose declared by P.D. No. 276, i.e., to stabilize the price
of edible oil[136] and to protect the coconut industry.[137] They likewise reclassified, nay
treated, the coconut levy fund as private fund to be disbursed and/or invested for the
benefit of private individuals in their private capacities, contrary to the original purpose
for which the fund was created. To compound the situation, the offending provisions
effectively removed the coconut levy fund away from the cavil of public funds which
normally can be paid out only pursuant to an appropriation made by law.[138] The
conversion of public funds into private assets was illegally allowed, in fact mandated, by
these provisions. Clearly therefore, the pertinent provisions of P.D. Nos. 755, 961 and 1468
are unconstitutional for violating Article VI, Section 29 (3) of the Constitution. In this
context, the distribution by PCA of the UCPB shares purchased by means of the coconut
levy fund a special fund of the government to the coconut farmers, is therefore void.

We quote with approval the Sandiganbayans reasons for declaring the provisions of P.D.
Nos. 755, 961 and 1468 as unconstitutional:

It is now settled, in view of the ruling in Republic v. COCOFED, et al., supra,

that Coconut levy funds are raised with the use of the police and taxing
powers of the State; that they are levies imposed by the State for the benefit
of the coconut industry and its farmers and that they were clearly imposed
for a public purpose. This public purpose is explained in the said case, as
follows:

. c) They were clearly imposed for a public purpose. There is

absolutely no question that they were colleted to advance the
governments avowed policy of protecting the coconut
industry.

Taxation is done not merely to raise revenues to support the

government, but also to provide means for the rehabilitation
and the stabilization of a threatened industry, which is so
affected with public interest as to be within the police power
 of the State, as held in Caltex Philippines v. COA and Osmea
v. Orbos.

The avowed public purpose for the disbursement of the CCSF is contained
in the perambulatory clauses and Section 1 of P.D. No. 755. The
imperativeness of enunciating the public purpose of the expenditure of
funds raised through taxation is underscored in the case of Pascual v. The
Secretary of Public Works and Communications, et al, supra, which held:

As regards the legal feasibility of appropriating public funds

for a private purpose the principle according to Ruling Case
Law, is this:

It is a general rule that the legislature is without power to

appropriate public revenue for anything but a public purpose
it is the essential character of the direct object of the
expenditure which must determine its validity as justifying a
tax, and not the magnitude of the interests to be affected nor
the degree to which the general advantage of the community,
and thus the public welfare may be ultimately benefited by
their promotion. Incidental advantage to the public or to the
state, which results from the promotion of private interests
and the prosperity of private enterprises or business, does not
justify their aid by the use of public money. 25 R.L.C. pp. 398-
400)

The rule is set forth in Corpus Juris Secundum in the

following language:

The test of the constitutionality of a statute requiring

the use of public funds is whether the statute is
designed to promote the public interests, as opposed
to the furtherance of the advantage of individuals,
although each advantage to individuals might
incidentally serve the public. (81 C.J.S. p. 1147)

Needless to say, this Court is fully in accord with the

foregoing views. Besides, reflecting as they do, the established
jurisprudence in the United States, after whose constitutional
system ours has been patterned, said views and jurisprudence
are, likewise, part and parcel of our own constitutional law.
 The gift of funds raised by the exercise of the taxing powers of the State
which were converted into shares of stock in a private corporation, slated
for free distribution to the coconut farmers, can only be accorded
constitutional sanction if it will directly serve the public purpose declared
by law.[139]

Section 1 of P.D. No. 755, as well as PCA

Administrative Order No. 1, Series of 1975 (PCA AO
1), and Resolution No. 074-75, are invalid
delegations of legislative power.

Petitioners argue that the anti-graft court erred in declaring Section 1 of PD 755,
PCA Administrative Order No. 1 and PCA Resolution No. 074-78 constitutionally infirm
by reason of alleged but unproven and unsubstantiated flaws in their
implementation. Additionally, they explain that said court erred in concluding that
Section 1 of PD No. 755 constitutes an undue delegation of legislative power insofar as it
authorizes the PCA to promulgate rules and regulations governing the distribution of the
UCPB shares to the farmers.

These propositions are meritless.

The assailed PSJ-A noted the operational distribution nightmare faced by PCA and the
mode of distribution of UCPB shares set in motion by that agency left much room for
diversion.Wrote the Sandiganbayan:

The actual distribution of the bank shares was admittedly an enormous

operational problem which resulted in the failure of the intended
beneficiaries to receive their shares of stocks in the bank, as shown by the
rules and regulations, issued by the PCA, without adequate guidelines being
provided to it by P.D. No. 755. PCA Administrative Order No. 1, Series of
1975 (August 20, 1975), Rules and Regulations Governing the Distribution of
Shares of Stock of the Bank Authorized to be Acquired Pursuant to PCA
Board Resolution No. 246-75, quoted hereunder discloses how the
undistributed shares of stocks due to anonymous coconut farmers or payors
of the coconut levy fees were authorized to be distributed to existing
shareholders of the Bank:
 Section 9. Fractional and Undistributed Shares
Fractional shares and shares which remain
undistributed shall be distributed to all the coconut
farmers who have qualified and received equity in the
Bank and shall be apportioned among them, as far as
practicable, in proportion to their equity in relation to
the number of undistributed equity and such further
rules and regulations as may hereafter be promulgated.

The foregoing PCA issuance was further amended by Resolution

No. 074-78, still citing the same problem of distribution of the
bank shares.:

Thus, when 51,200,806 shares in the bank remained undistributed,

the PCA deemed it proper to give a bonanza to coconut farmers who
already got their bank shares, by giving them an additional share for each
share owned by them and by converting their fractional shares into full
shares. The rest of the shares were then transferred to a private
organization, the COCOFED, for distribution to those determined to be
bona fide coconut farmers who had not received shares of stock of the
Bank. .

The PCA thus assumed, due to lack of adequate guidelines set by

P.D. No. 755, that it had complete authority to define who are the
coconut farmers and to decide as to who among the coconut farmers
shall be given the gift of bank shares; how many shares shall be given to
them, and what basis it shall use to determine the amount of shares to be
distributed for free to the coconut farmers. In other words, P.D. No. 755
fails the completeness test which renders it constitutionally infirm.

Regarding the second requisite of standard, it is settled that legislative

standard need not be expressed.

We observed, however, that the PCA [AO] No. 1, Series of 1975 and PCA
Rules and Regulations 074-78, did not take into consideration the
accomplishment of the public purpose or the national standard/policy of
P.D. No. 755 which is directly to accelerate the development and growth of
the coconut industry and as a consequence thereof, to make the coconut
farmers participants in and beneficiaries of such growth and development.
The said PCA issuances did nothing more than provide guidelines as to
whom the UCPB shares were to be distributed and how many bank shares
shall be allotted to the beneficiaries. There was no mention of how the
distributed shares shall be used to achieve exclusively or at least directly or
 primarily the aim or public purpose enunciated by P.D. No. 755.The
numerical or quantitative distribution of shares contemplated by the PCA
regulations which is a condition for the validly of said administrative
issuances. There was a reversal of priorities. The narrow private
interests prevailed over the laudable objectives of the law. However,
under the May 25, 1975 agreement implemented by the PCA issuances, the
PCA acquired only 64.98% of the shares of the bank and even the shares
covering the said 64.98% were later on transferred to non-coconut farmers.

The distribution for free of the shares of stock of the CIIF Companies
is tainted with the above-mentioned constitutional infirmities of the PCA
administrative issuances. In view of the foregoing, we cannot consider the
provision of P.D. No. 961 and P.D. No. 1468 and the implementing
regulations issued by the PCA as valid legal basis to hold that assets
acquired with public funds have legitimately become private
properties. [140] (Emphasis added.)

P.D. No. 755 involves an invalid delegation of legislative power, a concept

discussed in Soriano v. Laguardia,[141] citing the following excerpts from Edu v. Ericta:
It is a fundamental that Congress may not delegate its legislative
power. What cannot be delegated is the authority to make laws and to alter
and repeal them; the test is the completeness of the statute in all its term
and provisions when it leaves the hands of the legislature. To determine
whether or not there is an undue delegation of legislative power, the inquiry
must be directed to the scope and definiteness of the measure enacted. The
legislature does not abdicate its functions when it describes what job
must be done, who is to do it, and what is the scope of his authority.

To avoid the taint of unlawful delegation, there must be a standard,

which implies at the very least that the legislature itself determines matters
of principle and lays down fundamental policy. Otherwise, the charge of
complete abdication may be hard to repel. A standard thus defines
legislative policy, marks its limits, maps out its boundaries and
specifies the public agency to apply it. It indicates the circumstances
under which the legislative command is to be effected. It is the
criterion by which legislative purpose may be carried out. Thereafter, the
executive or administrative office designated may in pursuance of the above
guidelines promulgate supplemental rules and regulations.[142] (Emphasis
supplied)
Jurisprudence is consistent as regards the two tests, which must be complied with to
determine the existence of a valid delegation of legislative power. In Abakada Guro Party
List, et al. v. Purisima,[143] We reiterated the discussion, to wit:

Two tests determine the validity of delegation of legislative power:

(1) the completeness test and (2) the sufficient standard test. A law is
complete when it sets forth therein the policy to be executed, carried
out or implemented by the delegate. It lays down a sufficient standard
when it provides adequate guidelines or limitations in the law to map
out the boundaries of the delegates authority and prevent the
delegation from running riot. To be sufficient, the standard must
specify the limits of the delegates authority, announce the legislative
policy and identify the conditions under which it is to be
implemented.

In the instant case, the requisite standards or criteria are absent in P.D. No. 755. As
may be noted, the decree authorizes the PCA to distribute to coconut farmers, for free,
the shares of stocks of UCPB and to pay from the CCSF levy the financial commitments of
the coconut farmers under the Agreement for the acquisition of such bank. Yet, the
decree does not even state who are to be considered as coconut farmers. Would, say, one
who plants a single coconut tree be already considered a coconut farmer and, therefore,
entitled to own UCPB shares? If so, how many shares shall be given to him? The
definition of a coconut farmer and the basis as to the number of shares a farmer is
entitled to receive for free are important variables to be determined by law and cannot be
left to the discretion of the implementing agency.

Moreover, P.D. No. 755 did not identify or delineate any clear condition as to how
the disposition of the UCPB shares or their conversion into private ownership will
redound to the advancement of the national policy declared under it. To recall, P.D. No.
755 seeks to accelerate the growth and development of the coconut industry and achieve
a vertical integration thereof so that coconut farmers will become participants in, and
beneficiaries of, such growth and development.[144] The Sandiganbayan is correct in its
observation and ruling that the said law gratuitously gave away public funds to private
individuals, and converted them exclusively into private property without any restriction
as to its use that would reflect the avowed national policy or public purpose. Conversely,
the private individuals to whom the UCPB shares were transferred are free to dispose of
them by sale or any other mode from the moment of their acquisition. In fact and true
enough, the Sandiganbayan categorically stated in its Order dated March 11, 2003,[145] that
out of the 72.2% shares and increased capital stock of the FUB (later UCPB) allegedly
covered by the May 25, 1975 Agreement,[146] entirely paid for by PCA, 7.22% were given to
Cojuangco and the remaining 64.98%, which were originally held by PCA for the benefit
of the coconut farmers, were later sold or transferred to non-coconut farmers.[147] Even
the proposed rewording of the factual allegations of Lobregat, COCOFED, et al. and
Ballares, et al., reveals that indeed, P.D. No. 755 did not provide for any guideline,
standard, condition or restriction by which the said shares shall be distributed to the
coconut farmers that would ensure that the same will be undertaken to accelerate the
growth and development of the coconut industry pursuant to its national policy. The
proposed rewording of admissions reads:

There were shares forming part of the aforementioned 64.98% which

were, after their distribution, for free, to the coconut farmers as required by
P.D. No. 755, sold or transferred respectively by individual coconut farmers
who were then the registered stockholders of those UCPB shares to non-
coconut farmers.[148]

Clearly, P.D. No. 755, insofar as it grants PCA a veritable carte blanche to distribute to
coconut farmers UCPB shares at the level it may determine, as well as the full disposition
of such shares to private individuals in their private capacity without any conditions or
restrictions that would advance the laws national policy or public purpose, present a case
of undue delegation of legislative power. As such, there is even no need to discuss the
validity of the administrative orders and resolutions of PCA implementing P.D. No. 755.
Water cannot rise higher than its source.

Even so, PCA AO 1 and PCA Resolution No. 078-74, are in themselves, infirm
under the undue delegation of legislative powers. Particularly, Section 9 of PCA AO I
provides:

SECTION 9. Fractional and Undistributed Shares Fractional shares

and shares which remain undistributed as a consequence of the failure of
the coconut farmers to register their COCOFUND receipts or the
destruction of the COCOFUND receipts or the registration of COCOFUND
receipts in the name of an unqualified individual, after the final distribution
is made on the basis of the consolidated IBM registration Report as of
March 31, 1976 shall be distributed to all the coconut farmers who have
qualified and received equity in the Bank and shall be appointed among
 them, as far as practicable, in proportion to their equity in relation to the
number of undistributed equity and such further rules and regulations as
may hereafter be promulgated.

The foregoing provision directs and authorizes the distribution of fractional and
undistributed shares as a consequence of the failure of the coconut farmers with Coco
Fund receipts to register them, even without a clear mandate or instruction on the same
in any pertinent existing law. PCA Resolution No. 078-74 had a similar provision, albeit
providing more detailed information. The said Resolution identified 51,200,806 shares of
the bank that remained undistributed and PCA devised its own rules as to how these
undistributed and fractional shares shall be disposed of, notwithstanding the dearth as to
the standards or parameters in the laws which it sought to implement.

Eventually, what happened was that, as correctly pointed out by the

Sandiganbayan, the PCA gave a bonanza to supposed coconut farmers who already got
their bank shares, by giving them extra shares according to the rules established on its
own by the PCA under PCA AO 1 and Resolution No. 078-74. Because of the lack of
adequate guidelines under P.D. No. 755 as to how the shares were supposed to be
distributed to the coconut farmers, the PCA thus assumed that it could decide for itself
how these shares will be distributed. This obviously paved the way to playing favorites, if
not allowing outright shenanigans. In this regard, this poser raised in the Courts February
16, 1993 Resolution in G.R. No. 96073 is as relevant then as it is now: How is it that shares
of stocks in such entities which was organized and financed by revenues derived from
coconut levy funds which were imbued with public interest ended up in private hands who
are not farmers or beneficiaries; and whether or not the holders of said stock, who in one
way or another had had some part in the collection, administration, disbursement or other
disposition of the coconut levy funds were qualified to acquire stock in the corporations
formed and operated from these funds. [149]

Likewise, the said PCA issuances did not take note of the national policy or public
purpose for which the coconut levy funds were imposed under P.D. No. 755, i.e. the
acceleration of the growth and development of the entire coconut industry, and the
achievement of a vertical integration thereof that could make the coconut farmers
participants in, and beneficiaries of, such growth and development.[150] Instead, the PCA
prioritized the coconut farmers themselves by fully disposing of the bank shares, totally
disregarding the national policy for which the funds were created. This is clearly an
undue delegation of legislative powers.

With this pronouncement, there is hardly any need to establish that the sequestered
assets are ill-gotten wealth. The documentary evidence, the P.D.s and Agreements, prove
that the transfer of the shares to the more than one million of supposed coconut farmers
was tainted with illegality.

Article III, Section 5 of P.D. No. 961 and Article III,

Section 5 of P.D. No. 1468 violate Article IX (D) (2)
of the 1987 Constitution.

Article III, Section 5 of P.D. No. 961 explicitly takes away the coconut levy funds from the
coffer of the public funds, or, to be precise, privatized revenues derived from the coco
levy.Particularly, the aforesaid Section 5 provides:

Section 5. Exemptions. The Coconut Consumers Stabilization Fund

and the Coconut Industry Development fund as well as all disbursements of
said funds for the benefit of the coconut farmers as herein authorized shall
not be construed or interpreted, under any law or regulation, as
special and/or fiduciary funds, or as part of the general funds of the
national government within the contemplation of P.D. No. 711; nor as a
subsidy, donation, levy, government funded investment, or
government share within the contemplation of P.D. 898 the intention
being that said Fund and the disbursements thereof as herein
authorized for the benefit of the coconut farmers shall be owned in
their own private capacity.[151] (Emphasis Ours)

The same provision is carried over in Article III, Section 5 of P.D. No. 1468,
the Revised Coconut Industry Code:

These identical provisions of P.D. Nos. 961 and 1468 likewise violate Article IX (D),
Section 2(1) of the Constitution, defining the powers and functions of the Commission on
Audit (COA) as a constitutional commission:
 Sec. 2. (1) The Commission on Audit shall have the power,
authority, and duty to examine, audit, and settle all accounts
pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies, commissions
and offices that have been granted fiscal autonomy under this Constitution;
(b) autonomous state colleges and universities; (c) other government-
owned or controlled corporations and their subsidiaries;.[152] (Emphasis
Ours)

A similar provision was likewise previously found in Article XII (D), Section 2 (1) of the
1973 Constitution, thus:

Section 2. The Commission on Audit shall have the following powers and
functions:

(1) Examine, audit, and settle, in accordance with law and

regulations, all accounts pertaining to the revenues and
receipts of, and expenditures or uses of funds and property,
owned or held in trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations; keep the general
accounts of the government and, for such period as may be provided
by law, preserve the vouchers pertaining thereto; and promulgate
accounting and auditing rules and regulations including those for
the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or use of funds and property.[153] (Emphasis Ours)

The Constitution, by express provision, vests the COA with the responsibility for State
audit.[154] As an independent supreme State auditor, its audit jurisdiction cannot be
undermined by any law. Indeed, under Article IX (D), Section 3 of the 1987 Constitution,
[n]o law shall be passed exempting any entity of the Government or its subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the
Commission on Audit.[155] Following the mandate of the COA and the parameters set
forth by the foregoing provisions, it is clear that it has jurisdiction over the coconut levy
funds, being special public funds. Conversely, the COA has the power, authority and duty
to examine, audit and settle all accounts pertaining to the coconut levy funds and,
consequently, to the UCPB shares purchased using the said funds. However, declaring the
said funds as partaking the nature of private funds, ergo subject to private appropriation,
removes them from the coffer of the public funds of the government, and consequently
renders them impervious to the COA audit jurisdiction. Clearly, the pertinent provisions
of P.D. Nos. 961 and 1468 divest the COA of its constitutionally-mandated function and
undermine its constitutional independence.

The assailed purchase of UCPB shares of stocks using the coconut levy funds presents a
classic example of an investment of public funds. The conversion of these special public
funds into private funds by allowing private individuals to own them in their private
capacities is something else. It effectively deprives the COA of its constitutionally-
invested power to audit and settle such accounts. The conversion of the said shares
purchased using special public funds into pure and exclusive private ownership has taken,
or will completely take away the said funds from the boundaries with which the COA has
jurisdiction. Obviously, the COA is without audit jurisdiction over the receipt or
disbursement of private property. Accordingly, Article III, Section 5 of both P.D. Nos. 961
and 1468 must be struck down for being unconstitutional, be they assayed against Section
2(1), Article XII (D) of the 1973 Constitution or its counterpart provision in the 1987
Constitution.

The Court, however, takes note of the dispositive portion of PSJ-A, which states
that:[156]

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds
shall not be considered special and/or fiduciary funds nor part of the
general funds of the national government and similar provisions of Sec.
3, Art. III, P.D. 961 and Sec. 5, Art. III, P.D. 1468 contravene the
provisions of the Constitution, particularly, Art. IX (D), Sec. 2; and Article
VI, Sec. 29 (3). (Emphasis Ours)

However, a careful reading of the discussion in PSJ-A reveals that it is Section 5 of

Article III of P.D. No. 961 and not Section 3 of said decree, which is at issue, and which
was therefore held to be contrary to the Constitution. The dispositive portion of the said
PSJ should therefore be corrected to reflect the proper provision that was declared as
unconstitutional, which is Section 5 of Article III of P.D. No. 961 and not Section 3
thereof.

The CIIF Companies and the CIIF Block

of SMC shares are public funds/assets

From the foregoing discussions, it is fairly established that the coconut levy funds
are special public funds. Consequently, any property purchased by means of the coconut
levy funds should likewise be treated as public funds or public property, subject to
burdens and restrictions attached by law to such property.

In this case, the 6 CIIF Oil Mills were acquired by the UCPB using coconut levy
funds.[157] On the other hand, the 14 CIIF holding companies are wholly owned
subsidiaries of the CIIF Oil Mills.[158] Conversely, these companies were acquired using or
whose capitalization comes from the coconut levy funds. However, as in the case of
UCPB, UCPB itself distributed a part of its investments in the CIIF oil mills to coconut
farmers, and retained a part thereof as administrator.[159] The portion distributed to the
supposed coconut farmers followed the procedure outlined in PCA Resolution No. 033-
78.[160] And as the administrator of the CIIF holding companies, the UCPB authorized the
acquisition of the SMC shares.[161] In fact, these companies were formed or organized
solely for the purpose of holding the SMC shares.[162] As found by the Sandiganbayan, the
14 CIIF holding companies used borrowed funds from the UCPB to acquire the SMC
shares in the aggregate amount of P1.656 Billion.[163]

Since the CIIF companies and the CIIF block of SMC shares were acquired using
coconut levy funds funds, which have been established to be public in character it goes
without saying that these acquired corporations and assets ought to be regarded and
treated as government assets. Being government properties, they are accordingly owned
by the Government, for the coconut industry pursuant to currently existing laws.[164]

It may be conceded hypothetically, as COCOFED et al. urge, that the 14 CIIF

holding companies acquired the SMC shares in question using advances from the CIIF
companies and from UCPB loans. But there can be no gainsaying that the same advances
and UCPB loans are public in character, constituting as they do assets of the 14 holding
companies, which in turn are wholly-owned subsidiaries of the 6 CIIF Oil Mills. And these
oil mills were organized, capitalized and/or financed using coconut levy funds. In net
effect, the CIIF block of SMC shares are simply the fruits of the coconut levy funds
acquired at the expense of the coconut industry. In Republic v. COCOFED,[165] the en
banc Court, speaking through Justice (later Chief Justice) Artemio Panganiban,
stated: Because the subject UCPB shares were acquired with government funds, the
government becomes their prima facie beneficial and true owner.By parity of reasoning, the
adverted block of SMC shares, acquired as they were with government funds, belong to
the government as, at the very least, their beneficial and true owner.

We thus affirm the decision of the Sandiganbayan on this point. But as We have
earlier discussed, reiterating our holding in Republic v. COCOFED, the States avowed
policy or purpose in creating the coconut levy fund is for the development of the entire
coconut industry, which is one of the major industries that promotes sustained economic
stability, and not merely the livelihood of a significant segment of the
population.[166] Accordingly, We sustain the ruling of the Sandiganbayan in CC No. 0033-F
that the CIIF companies and the CIIF block of SMC shares are public funds necessary
owned by the Government. We, however, modify the same in the following wise: These
shares shall belong to the Government, which shall be used only for the benefit of the
coconut farmers and for the development of the coconut industry.

Sandiganbayan did not err in ruling that

PCA (AO) No. 1, Series of 1975 and
PCA rules and regulations 074-78 did
not comply with the national standard
or policy of P.D. No. 755.

According to the petitioners, the Sandiganbayan has identified the national policy
sought to be enhanced by and expressed under Section 1 in relation to Section 2 of P.D.
No. 755. Yet, so petitioners argue, that court, with grave abuse of discretion, disregarded
such policy and thereafter, ruled that Section 1 in relation to Section 2 of P.D. No. 755 is
unconstitutional as the decree failed to promote the purpose for which it was enacted in
the first place.
 We are not persuaded. The relevant assailed portion of PSJ-A states:

We observe, however, that the PCA [AO] No. 1, Series of 1975 and PCA
Rules and Regulations 074-78, did not take into consideration the
accomplishment of the public purpose or the national standard/policy of
P.D. No. 755 which is directly to accelerate the development and growth of
the coconut industry and as a consequence thereof, to make the coconut
farmers participants in and beneficiaries of such growth and development.

It is a basic legal precept that courts do not look into the wisdom of the laws
passed. The principle of separation of powers demands this hands-off attitude from the
judiciary.Saguiguit v. People[167] teaches why:

[W]hat the petitioner asks is for the Court to delve into the policy
behind or wisdom of a statute, which, under the doctrine of separation of
powers, it cannot do,. Even with the best of motives, the Court can only
interpret and apply the law and cannot, despite doubts about its wisdom,
amend or repeal it. Courts of justice have no right to encroach on the
prerogatives of lawmakers, as long as it has not been shown that they have
acted with grave abuse of discretion. And while the judiciary may interpret
laws and evaluate them for constitutional soundness and to strike them
down if they are proven to be infirm, this solemn power and duty do not
include the discretion to correct by reading into the law what is not written
therein.

We reproduce the policy-declaring provision of P.D. No. 755, thus:

Section 1. Declaration of National Policy. It is hereby declared

that the policy of the State is to provide readily available credit facilities to
the coconut farmers at preferential rates; that this policy can be efficiently
realized by the implementation of the Agreement for the Acquisition of a
Commercial Bank for the benefit of the Coconut Farmers executed by
the [PCA], the terms of which Agreement are hereby incorporated by
reference; and that the [PCA] is hereby authorized to distribute, for free,
the shares of stock of the bank it acquired to the coconut farmers under
such rules and regulations it may promulgate.
P.D. No. 755 having stated in no uncertain terms that the national policy of providing
cheap credit facilities to coconut farmers shall be achieved with the acquisition of a
commercial bank, the Court is without discretion to rule on the wisdom of such an
undertaking. It is abundantly clear, however, that the Sandiganbayan did not look into
the policy behind, or the wisdom of, P.D. No. 755. In context, it did no more than to
inquire whether the purpose defined in P.D. No. 755 and for which the coco levy fund was
established would be carried out, obviously having in mind the (a) dictum that the power
to tax should only be exercised for a public purpose and (b) command of Section 29,
paragraph 3 of Article VI of the 1987 Constitution that:
(3) All money collected on any tax levied for a special purpose shall
be treated as a special fund and paid out for such purpose only. If the
purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of
the Government. (Emphasis supplied)

For the above reason, the above-assailed action of the Sandiganbayan was well
within the scope of its sound discretion and mandate.
Moreover, petitioners impute on the anti-graft court the commission of grave abuse of
discretion for going into the validity of and in declaring the coco levy laws as
unconstitutional, when there were still factual issues to be resolved in a full blown trial as
directed by this Court.[168]

Petitioners COCOFED and the farmer representatives miss the point. They acknowledged
that their alleged ownership of the sequestered shares in UCPB and SMC is predicated on
the coco levy decrees. Thus, the legality and propriety of their ownership of these
valuable assets are directly related to and must be assayed against the constitutionality of
those presidential decrees. This is a primordial issue, which must be determined to
address the validity of the rest of petitioners claims of ownership. Verily, the
Sandiganbayan did not commit grave abuse of discretion, a phrase which, in the abstract,
denotes the idea of capricious or whimsical exercise of judgment or the exercise of power
in an arbitrary or despotic manner by reason of passion or personal hostility as to be
equivalent to having acted without jurisdiction.[169]

The Operative Fact Doctrine does not apply

Petitioners assert that the Sandiganbayans refusal to recognize the vested rights
purportedly created under the coconut levy laws constitutes taking of private property
without due process of law. They reason out that to accord retroactive application to a
declaration of unconstitutionality would be unfair inasmuch as such approach would
penalize the farmers who merely obeyed then valid laws.

This contention is specious.

In Yap v. Thenamaris Ships Management,[170] the Operative Fact Doctrine was

discussed in that:

As a general rule, an unconstitutional act is not a law; it confers no

rights; it imposes no duties; it affords no protection; it creates no office; it is
inoperative as if it has not been passed at all. The general rule is supported
by Article 7 of the Civil Code, which provides:

Art. 7. Laws are repealed only by subsequent ones, and their

violation or non-observance shall not be excused by disuse or
custom or practice to the contrary.

The doctrine of operative fact serves as an exception to the

aforementioned general rule. In Planters Products, Inc. v. Fertiphil
Corporation, we held:

The doctrine of operative fact, as an exception to the

general rule, only applies as a matter of equity and fair
play. It nullifies the effects of an unconstitutional law by
recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and
 may have consequences which cannot always be ignored. The
past cannot always be erased by a new judicial declaration.

The doctrine is applicable when a declaration of

unconstitutionality will impose an undue burden on those who
have relied on the invalid law. Thus, it was applied to a
criminal case when a declaration of unconstitutionality would
put the accused in double jeopardy or would put in limbo the
acts done by a municipality in reliance upon a law creating
it.[171]

In that case, this Court further held that the Operative Fact Doctrine will not be applied
as an exception when to rule otherwise would be iniquitous and would send a wrong
signal that an act may be justified when based on an unconstitutional provision of law.[172]

The Court had the following disquisition on the concept of the Operative Fact
Doctrine in the case of Chavez v. National Housing Authority:[173]

The operative fact doctrine is embodied in De Agbayani v. Court of Appeals,

wherein it is stated that a legislative or executive act, prior to its being
declared as unconstitutional by the courts, is valid and must be complied
with, thus:

As the new Civil Code puts it: When the courts declare a law
to be inconsistent with the Constitution, the former shall be
void and the latter shall govern. Administrative or executive
acts, orders and regulations shall be valid only when they are
not contrary to the laws of the Constitution. It is
understandable why it should be so, the Constitution being
supreme and paramount. Any legislative or executive act
contrary to its terms cannot survive.
Such a view has support in logic and possesses the merit of
simplicity. It may not however be sufficiently realistic. It does
not admit of doubt that prior to the declaration of nullity
such challenged legislative or executive act must have been in
force and had to be complied with. This is so as until after the
judiciary, in an appropriate case, declares its invalidity, it is
entitled to obedience and respect. Parties may have acted
under it and may have changed their positions. What could
be more fitting than that in a subsequent litigation regard be
had to what has been done while such legislative or executive
act was in operation and presumed to be valid in all
respects. It is now accepted as a doctrine that prior to its
being nullified, its existence as a fact must be reckoned
with. This is merely to reflect awareness that precisely
because the judiciary is the governmental organ which has the
final say on whether or not a legislative or executive measure
is valid, a period of time may have elapsed before it can
exercise the power of judicial review that may lead to a
declaration of nullity. It would be to deprive the law of its
quality of fairness and justice then, if there be no recognition
of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: The

actual existence of a statute, prior to such a determination [of
unconstitutionality], is an operative fact and may have
consequences which cannot justly be ignored.The past cannot
always be erased by a new judicial declaration. The effect of
the subsequent ruling as to invalidity may have to be
considered in various aspects, with respect to particular
relations, individual and corporate, and particular conduct,
private and official. This language has been quoted with
approval in a resolution in Araneta v. Hill and the decision in
Manila Motor Co., Inc. v. Flores. An even more recent
instance is the opinion of Justice Zaldivar speaking for the
Court in Fernandez v. Cuerva and Co. (Emphasis supplied.)
The principle was further explicated in the case of Rieta v. People of
the Philippines, thus:

In similar situations in the past this Court had taken

the pragmatic and realistic course set forth in Chicot County
Drainage District vs. Baxter Bank to wit:

The courts below have proceeded on the theory

that the Act of Congress, having been found to
be unconstitutional, was not a law; that it was
inoperative, conferring no rights and imposing
no duties, and hence affording no basis for the
challenged decree. It is quite clear, however,
that such broad statements as to the effect of a
determination of unconstitutionality must be
taken with qualifications. The actual existence
of a statute, prior to [the determination of its
invalidity], is an operative fact and may have
consequences which cannot justly be
ignored. The past cannot always be erased by a
new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to
be considered in various aspects with respect to
particular conduct, private and
official. Questions of rights claimed to have
become vested, of status, of prior
determinations deemed to have finality and
acted upon accordingly, of public policy in the
light of the nature both of the statute and of its
previous application, demand
examination. These questions are among the
most difficult of those which have engaged the
attention of courts, state and federal, and it is
 manifest from numerous decisions that an all-
inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.

Moreover, the Court ruled in Chavez that:

Furthermore, when petitioner filed the instant case against respondents on

August 5, 2004, the JVAs were already terminated by virtue of the MOA
between the NHA and RBI. The respondents had no reason to think that
their agreements were unconstitutional or even questionable, as in fact, the
concurrent acts of the executive department lent validity to the
implementation of the Project. The SMDRP agreements have produced
vested rights in favor of the slum dwellers, the buyers of reclaimed land who
were issued titles over said land, and the agencies and investors who made
investments in the project or who bought SMPPCs. These properties and
rights cannot be disturbed or questioned after the passage of around ten
(10) years from the start of the SMDRP implementation. Evidently, the
operative fact principle has set in. The titles to the lands in the hands of the
buyers can no longer be invalidated.[174]

In the case at bar, the Court rules that the dictates of justice, fairness and equity do not
support the claim of the alleged farmer-owners that their ownership of the UCPB shares
should be respected. Our reasons:

1. Said farmers or alleged claimants do not have any legal right to own the UCPB shares
distributed to them. It was not successfully refuted that said claimants were issued
receipts under R.A. 6260 for the payment of the levy that went into the Coconut
Investment Fund (CIF) upon which shares in the Coconut Investment Company will be
issued. The Court upholds the finding of the Sandiganbayan that said investment
company is a different corporate entity from the United Coconut Planters Bank. This was
in fact admitted by petitioners during the April 17, 2001 oral arguments in G.R. Nos.
147062-64.[175]
The payments under R.A. 6260 cannot be equated with the payments under P.D. No. 276,
the first having been made as contributions to the Coconut Investment Fund while the
payments under P.D. No. 276 constituted the Coconut Consumers Stabilization Fund
(CCSF). R.A. 6260 reads:

Section 2. Declaration of Policy. It is hereby declared to be the national

policy to accelerate the development of the coconut industry through the
provision of adequate medium and long-term financing for capital
investment in the industry, by instituting a Coconut Investment fund
capitalized and administered by coconut farmers through a Coconut
Investment Company.[176]

P.D. No. 276 provides:

1. In addition to its powers granted under Presidential Decree No. 232, the
Philippine Coconut Authority is hereby authorized to formulate
and immediately implement a stabilization scheme for coconut-based
consumer goods, along the following general guidelines:

(a) .

The proceeds from the levy shall be deposited with the Philippine
National Bank or any other government bank to the account of the
Coconut Consumers Stabilization Fund, as a separate trust fund
which shall not form part of the general fund of the government.

(b) The Fund shall be utilized to subsidize the sale of coconut-based

products at prices set by the Price Control Council, under rules and
regulations to be promulgated by the Philippine Consumers
Stabilization Committee.[177]

The PCA, via Resolution No. 045-75 dated May 21, 1975, clarified the distinction between
the CIF levy payments under R.A. 6260 and the CCSF levy paid pursuant to P.D. 276,
thusly:

It must be remembered that the receipts issued under R.A. No. 6260 were
to be registered in exchange for shares of stock in the Coconut Investment
Company (CIC), which obviously is a different corporate entity
 from UCPB. This fact was admitted by petitioners during the April 17, 2001
oral arguments in G.R. Nos. 147062-64.

In fact, while the CIF levy payments claimed to have been paid by
petitioners were meant for the CIC, the distribution of UCPB stock
certificates to the coconut farmers, if at all, were meant for the payors of the
CCSF in proportion to the coconut farmers CCSF contributions pursuant to
PCA Resolution No. 045-75 dated May 21, 1975:

RESOLVED, FURTHER, That the amount of ONE HUNDRED

FIFTY MILLION (P150,000,000.00) PESOS be appropriated
and set aside from available funds of the PCA to be utilized in
payment for the shares of stock of such existing commercial
bank and that the Treasurer be instructed to disburse the said
amount accordingly.

RESOLVED, FINALLY, That be directed to organize a team

which shall prepare a list of coconut farmers who have paid
the levy and contributed to the [CCSF] and to prepare a stock
distribution plan to the end that the aforesaid coconut
farmers shall receive certificates of stock of such commercial
bank in proportion to their contributions to the Fund.

Unfortunately, the said resolution was never complied with in the

distribution of the so-called farmers UCPB shares.

The payments therefore under R.A. 6260 are not the same as those under P.D. No.
276. The amounts of CIF contributions under R.A. 6260 which were collected starting 1971
are undeniably different from the CCSF levy under P.D. No. 276, which were collected
starting 1973. The two (2) groups of claimants differ not only in identity but also in the
levy paid, the amount of produce and the time the government started the collection.

Thus, petitioners and the alleged farmers claiming them pursuant to R.A. 6260 do not
have any legal basis to own the UCPB shares distributed to them, assuming for a
moment the legal feasibility of transferring these shares paid from the R.A. 6260 levy to
private individuals.

2. To grant all the UCPB shares to petitioners and its alleged members would be
iniquitous and prejudicial to the remaining 4.6 million farmers who have not received any
UCPB shares when in fact they also made payments to either the CIF or the CCSF but did
not receive any receipt or who was not able to register their receipts or misplaced them.

Section 1 of P.D. No. 755 which was declared unconstitutional cannot be considered to be
the legal basis for the transfer of the supposed private ownership of the UCPB shares to
petitioners who allegedly paid the same under R.A. 6260. The Solicitor General is correct
in concluding that such unauthorized grant to petitioners constitutes illegal deprivation
of property without due process of law. Due process of law would mean that the
distribution of the UCPB shares should be made only to farmers who have paid the
contribution to the CCSF pursuant to P.D. No. 276, and not to those who paid pursuant
to R.A. 6260. What would have been the appropriate distribution scheme was violated by
Section 1 of P.D. No. 755 when it required that the UCPB shares should be distributed to
coconut farmers without distinction in fact, giving the PCA limitless power and free hand,
to determine who these farmers are, or would be.

We cannot sanction the award of the UCPB shares to petitioners who appear to represent
only 1.4 million members without any legal basis to the extreme prejudice of the other 4.6
million coconut farmers (Executive Order No. 747 fixed the number of coconut farmers at
6 million in 1981). Indeed, petitioners constitute only a small percentage of the coconut
farmers in the Philippines. Thus, the Sandiganbayan correctly declared that the UCPB
shares are government assets in trust for the coconut farmers, which would be more
beneficial to all the coconut farmers instead of a very few dubious claimants;

3. The Sandiganbayan made the finding that due to enormous operational problems and
administrative complications, the intended beneficiaries of the UCPB shares were not
able to receive the shares due to them. To reiterate what the anti-graft court said:
The actual distribution of the bank shares was
admittedly an enormous operational problem which resulted
in the failure of the intended beneficiaries to receive their
shares of stocks in the bank, as shown by the rules and
regulations, issued by the PCA, without adequate guidelines
being provided to it by P.D. No. 755. PCA Administrative
Order No. 1, Series of 1975 (August 20, 1975), Rules and
Regulations Governing the Distribution of Shares of Stock of
the Bank Authorized to be Acquired Pursuant to PCA Board
Resolution No. 246-75, quoted hereunder discloses how the
undistributed shares of stocks due to anonymous coconut
farmers or payors of the coconut levy fees were authorized to
be distributed to existing shareholders of the Bank:

Section 9. Fractional and Undistributed Shares

Fractional shares and shares which remain
undistributed as a consequence of the failure of the
coconut farmers to register their COCOFUND
receipts or the destruction of the COCOFUND
receipts or the registration of the COCOFUND
receipts in the name of an unqualified individual,
after the final distribution is made on the basis of the
consolidated IBM registration Report as of March 31,
1976 shall be distributed to all the coconut farmers
who have qualified and received equity in the Bank
and shall be apportioned among them, as far as
practicable, in proportion to their equity in relation
to the number of undistributed equity and such
further rules and regulations as may hereafter be
promulgated.

The foregoing PCA issuance was further amended by

Resolution No. 074-78, still citing the same problem of
distribution of the bank shares. This latter Resolution is
quoted as follows:

RESOLUTION NO. 074-78

AMENDMENT OF ADMINISTRATIVE ORDER

NO. 1, SERIES OF 1975, GOVERNING THE
DISTRIBUTION OF SHARES

WHEREAS, pursuant to PCA Board Resolution No. 246-75,

the total par value of the shares of stock of the Bank
purchased by the PCA for the benefit of the coconut farmers
is P85,773,600.00 with a par value of P1.00 per share or
equivalent to 85,773.600 shares;

WHEREAS, out of the 85,773,600 shares, a total of 34,572,794

shares have already been distributed in accordance with
Administrative Order No. 1, Series of 1975, to wit:

First Distribution - 12,573,059

Second Distribution - 10,841,409
Third Distribution - 11,158,326
34,572,794

WHEREAS, there is, therefore, a total of 51,200,806 shares still

available for distribution among the coconut farmers;

WHEREAS, it was determined by the PCA Board, in

consonance with the policy of the state on the integration of
the coconut industry, that the Bank shares must be widely
distributed as possible among the coconut farmers, for which
purpose a national census of coconut farmers was made
through the Philippine Coconut Producers Federation
(COCOFED);

WHEREAS, to implement such determination of the PCA

Board, there is a need to accordingly amend Administrative
Order No. 1, Series of 1975;

NOW, THEREFORE, BE IT RESOLVED, AS IT IS HEREBY

RESOLVED, that the remaining 51,200,806 shares of stock of
the Bank authorized to be acquired pursuant to the PCA
Board Resolution No. 246-75 dated July 25, 1975 be distributed
as follows:

(1) All the coconut farmers who have received their shares
in the equity of the Bank on the basis of Section 8 of
Administrative Order No. 1, Series of 1975, shall receive
additional share for each share presently owned by them;

(2) Fractional shares shall be completed into full shares,

and such full shares shall be distributed among the
coconut farmers who qualified for the corresponding
fractional shares;

(3) The balance of the shares, after deducting those to be

distributed in accordance with (1) and (2) above, shall be
transferred to COCOFED for distribution, immediately
after completion of the national census of coconut farmers
prescribed under Resolution No. 033-78 of the PCA Board,
to all those who are determined by the PCA Board to be
bona fide coconut farmers and have not received shares of
stock of the Bank. The shares shall be equally determined
among them on the basis of per capita.
 RESOLVED, FURTHER, That the rules and regulations under
Administrative Order No. 1, Series of 1975, which are
inconsistent with this Administrative Order be, as they are
hereby, repealed and/or amended accordingly.

Thus, when 51,200,806 shares in the bank remained undistributed,

the PCA deemed it proper to give a bonanza to coconut farmers who
already got their bank shares, by giving them an additional share for each
share owned by them and by converting their fractional shares into full
shares. The rest of the shares were then transferred to a private
organization, the COCOFED, for distribution to those determined to be
bona fide coconut farmers who had not received shares of stock of the
Bank. The distribution to the latter was made on the basis of per capita,
meaning without regard to the COCOFUND receipts. The PCA considered
itself free to disregard the said receipts in the distribution of the shares
although they were considered by the May 25, 1975 Agreement between the
PCA and defendant Cojuangco (par. [8] of said Agreement) and by Sections
1, 3, 4, 6 and 9, PCA Administrative Order No. 1, Series of 1975 as the basis
for the distribution of shares.

The PCA thus assumed, due to lack of adequate guidelines set by

P.D. No. 755, that it had complete authority to define who are the coconut
farmers and to decide as to who among the coconut farmers shall be given
the gift of bank shares; how many shares shall be given to them, and what
basis it shall use to determine the amount of shares to be distributed for
free to the coconut farmers. In other words, P.D. No. 755 fails the
completeness test which renders it constitutionally infirm.

Due to numerous flaws in the distribution of the UCPB shares by PCA, it would be best
for the interest of all coconut farmers to revert the ownership of the UCBP shares to the
government for the entire coconut industry, which includes the farmers;

4. The Court also takes judicial cognizance of the fact that a number, if not all, of the
coconut farmers who sold copra did not get the receipts for the payment of the coconut
levy for the reason that the copra they produced were bought by traders or middlemen
who in turn sold the same to the coconut mills. The reality on the ground is that it was
these traders who got the receipts and the corresponding UCPB shares. In addition, some
uninformed coconut farmers who actually got the COCOFUND receipts, not appreciating
the importance and value of said receipts, have already sold said receipts to non-coconut
farmers, thereby depriving them of the benefits under the coconut levy laws. Ergo, the
coconut farmers are the ones who will not be benefited by the distribution of the UCPB
shares contrary to the policy behind the coconut levy laws. The nullification of the
distribution of the UCPB shares and their transfer to the government for the coconut
industry will, therefore, ensure that the benefits to be deprived from the UCPB shares will
actually accrue to the intended beneficiaries the genuine coconut farmers.

From the foregoing, it is highly inappropriate to apply the operative fact doctrine to the
UCPB shares. Public funds, which were supposedly given utmost safeguard, were
haphazardly distributed to private individuals based on statutory provisions that are
found to be constitutionally infirm on not only one but on a variety of grounds. Worse
still, the recipients of the UCPB shares may not actually be the intended beneficiaries of
said benefit. Clearly, applying the Operative Fact Doctrine would not only be iniquitous
but would also serve injustice to the Government, to the coconut industry, and to the
people, who, whether willingly or unwillingly, contributed to the public funds, and
therefore expect that their Government would take utmost care of them and that they
would be used no less, than for public purpose.

We clarify that PSJ-A is subject of another petition for review interposed by Eduardo
Cojuangco, Jr., in G.R. No. 180705 entitled, Eduardo M. Cojuangco, Jr. v. Republic of the
Philippines, which shall be decided separately by this Court. Said petition should
accordingly not be affected by this Decision save for determinatively legal issues directly
addressed herein.

WHEREFORE, the petitions in G.R. Nos. 177857-58 and 178793 are

hereby DENIED. The Partial Summary Judgment dated July 11, 2003 in Civil Case No.
0033-A as reiterated with modification in Resolution dated June 5, 2007, as well as the
Partial Summary Judgment dated May 7, 2004 in Civil Case No. 0033-F, which was
effectively amended in Resolution dated May 11, 2007, are AFFIRMED
with MODIFICATION, only with respect to those issues subject of the petitions in G.R.
Nos. 177857-58 and 178193. However, the issues raised in G.R. No. 180705 in relation to
Partial Summary Judgment dated July 11, 2003 and Resolution dated June 5, 2007 in Civil
Case No. 0033-A, shall be decided by this Court in a separate decision.

The Partial Summary Judgment in Civil Case No. 0033-A dated July 11, 2003, is
hereby MODIFIED, and shall read as follows:
 WHEREFORE, in view of the foregoing, We rule as follows:

SUMMARY OF THE COURTS RULING.

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY

JUDGMENT dated April 11, 2001 filed by Defendant Maria Clara L.
Lobregat, COCOFED, et al., and Ballares, et al.

The Class Action Motion for Separate Summary Judgment dated

April 11, 2001 filed by defendant Maria Clara L. Lobregat, COCOFED, et al.
and Ballares, et al., is hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE:

COCOFED, ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed
by Plaintiff.

1. a. The portion of Section 1 of P.D. No. 755, which reads:

and that the Philippine Coconut Authority is hereby

authorized to distribute, for free, the shares of stock of
the bank it acquired to the coconut farmers under such
rules and regulations it may promulgate.

taken in relation to Section 2 of the same P.D., is unconstitutional:

(i) for having allowed the use of the CCSF to benefit directly private
interest by the outright and unconditional grant of absolute
ownership of the FUB/UCPB shares paid for by PCA entirely with the
CCSF to the undefined coconut farmers, which negated or
circumvented the national policy or public purpose declared by P.D.
No. 755 to accelerate the growth and development of the coconut
industry and achieve its vertical integration; and (ii) for having
unduly delegated legislative power to the PCA.

b. The implementing regulations issued by PCA, namely,

Administrative Order No. 1, Series of 1975 and Resolution No.
 074-78 are likewise invalid for their failure to see to it that the
distribution of shares serve exclusively or at least primarily or
directly the aforementioned public purpose or national policy
declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy
funds shall not be considered special and/or fiduciary funds nor part
of the general funds of the national government and similar
provisions of Sec. 5, Art. III, P.D. No. 961 and Sec. 5, Art. III, P.D. No.
1468 contravene the provisions of the Constitution, particularly, Art.
IX (D), Sec. 2; and Article VI, Sec. 29 (3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and
validly obtained title of ownership over the subject UCPB shares by
virtue of P.D. No. 755, the Agreement dated May 25, 1975 between
the PCA and defendant Cojuangco, and PCA implementing rules,
namely, Adm. Order No. 1, s. 1975 and Resolution No. 074-78.

4. The so-called Farmers UCPB shares covered by 64.98% of the

UCPB shares of stock, which formed part of the 72.2% of the shares
of stock of the former FUB and now of the UCPB, the entire
consideration of which was charged by PCA to the CCSF, are hereby
declared conclusively owned by, the Plaintiff Republic of the
Philippines.

SO ORDERED.

The Partial Summary Judgment in Civil Case No. 0033-F dated May 7, 2004, is
hereby MODIFIED, and shall read as follows:

WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL

SUMMARY JUDGMENT (RE: CIIF BLOCK OF SMC SHARES OF
STOCK) dated August 8, 2005 of the plaintiff is hereby denied for lack of
merit. However, this Court orders the severance of this particular claim of
Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now
considered a separate final and appealable judgment with respect to the
said CIIF Block of SMC shares of stock.

The Partial Summary Judgment rendered on May 7, 2004 is modified

by deleting the last paragraph of the dispositive portion, which will now
read, as follows:

WHEREFORE, in view of the foregoing, we hold

that:

The Motion for Partial Summary Judgment (Re:

Defendants CIIF Companies, 14 Holding Companies and
Cocofed, et al) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF
COMPANIES, NAMELY:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);
4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp. (GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES,

NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;
3. Roxas Shares, Inc.;
4. Arc Investors; Inc.;
5. Toda Holdings, Inc.;
6. AP Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps, Inc.;
9. Te Deum Resources, Inc.;
10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
13. Valhalla Properties Ltd., Inc.; and
 14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION

(SMC) SHARES OF STOCK TOTALING 33,133,266 SHARES
AS OF 1983 TOGETHER WITH ALL DIVIDENDS
DECLARED, PAID AND ISSUED THEREON AS WELL AS
ANY INCREMENTS THERETO ARISING FROM, BUT NOT
LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE
DECLARED OWNED BY THE GOVERNMENT TO BE USED
ONLY FOR THE BENEFIT OF ALL COCONUT FARMERS
AND FOR THE DEVELOPMENT OF THE COCONUT
INDUSTRY, AND ORDERED RECONVEYED TO THE
GOVERNMENT.

THE COURT AFFIRMS THE RESOLUTIONS ISSUED BY

THE SANDIGANBAYAN ON JUNE 5, 2007 IN CIVIL CASE
NO. 0033-A AND ON MAY 11, 2007 IN CIVIL CASE NO.
0033-F, THAT THERE IS NO MORE NECESSITY OF
FURTHER TRIAL WITH RESPECT TO THE ISSUE OF
OWNERSHIP OF (1) THE SEQUESTERED UCPB SHARES,
(2) THE CIIF BLOCK OF SMC SHARES, AND (3) THE CIIF
COMPANIES. AS THEY HAVE FINALLY BEEN
ADJUDICATED IN THE AFOREMENTIONED PARTIAL
SUMMARY JUDGMENTS DATED JULY 11, 2003 AND MAY
7, 2004.

SO ORDERED.

G.R. No. 171132 August 15, 2012

MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of ARCAM &
COMPANY, INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION
VILLARAMA, JR., J.:

On appeal are the Resolutions dated April 14, 20051 and January 24, 20062 of the Court of
Appeals (CA) in CA-G.R. SP No. 88735. The CA dismissed petitioner's petition for review
of the January 4, 2005 Resolution3 and February 9, 2000 Order4 of the Securities and
Exchange Commission (SEC) for failure of petitioner to attach to the petition copies of
material portions of the records and other relevant or pertinent documents.

The facts follow:

ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in
Pampanga.5 Between 1991 and 1993, ARCAM applied for and was granted a loan by
respondent Philippine National Bank (PNB).6 To secure the loan, ARCAM executed a Real
Estate Mortgage over a 350,004-square meter parcel of land covered by TCT No. 340592-R
and a Chattel Mortgage over various personal properties consisting of machinery,
generators, field transportation and heavy equipment.

ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993,
pursuant to the provisions of the Real Estate Mortgage and Chattel Mortgage, PNB
initiated extrajudicial foreclosure proceedings in the Office of the Clerk of Court/Ex
Officio Sheriff of the Regional Trial

Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29,
1993 for the mortgaged real properties and December 8, 1993 for the mortgaged personal
properties.

On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a Management or Rehabilitation Committee, and Approval of
Rehabilitation Plan, with application for issuance of a temporary restraining order (TRO)
and writ of preliminary injunction. The SEC issued a TRO and subsequently a writ of
preliminary injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga
from proceeding with the foreclosure sale of the mortgaged properties.8 An interim
management committee was also created.

On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC
noted that the petition for suspension of payment was filed in December 1993 and six
years had passed but the potential white knight" investor had not infused the much
needed capital to bail out ARCAM from its financial difficulties.9 Thus, the SEC decreed
that ARCAM be dissolved and placed under liquidation.10 The SEC Hearing Panel also
granted PNB’s motion to dissolve the preliminary injunction and appointed Atty. Manuel
D. Yngson, Jr. & Associates as Liquidator for

ARCAM.11 With this development, PNB revived the foreclosure case and requested the
RTC Clerk of Court to re-schedule the sale at public auction of the mortgaged properties.
Contending that foreclosure during liquidation was improper, petitioner filed with the
SEC a Motion for the Issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction to enjoin the foreclosure sale of ARCAM’s assets. The SEC en banc
issued a TRO effective for seventy-two (72) hours, but said TRO lapsed without any writ
of preliminary injunction being issued by the SEC. Consequently, on July 28, 2000, PNB
resumed the proceedings for the extrajudicial foreclosure sale of the mortgaged
properties.12 PNB emerged as the highest winning bidder in the auction sale, and
certificates of sale were issued in its favor.

On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction
sale.13 Petitioner posited that all actions against companies which are under liquidation,
like ARCAM, are suspended because liquidation is a continuation of the petition for
suspension proceedings. Petitioner argued that the prohibition against foreclosure
subsisted during liquidation because payment of all of ARCAM’s obligations was
proscribed except those authorized by the Commission. Moreover, petitioner asserted
that the mortgaged assets should be included in the liquidation and the proceeds shared
with the unsecured creditors.

In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the
SEC rules prohibits secured creditors from foreclosing on their mortgages to satisfy the
mortgagor’s debt after the termination of the rehabilitation proceedings and during
liquidation proceedings.14

On January 4, 2005, the SEC issued a Resolution15 denying petitioner’s motion to nullify
the auction sale. It held that PNB was not legally barred from foreclosing on the
mortgages. Aggrieved, petitioner filed on February 28, 2005, a petition for review in the
CA questioning the January 4, 2005 Resolution of the SEC.16

By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that
petitioner failed to attach material portions of the record and other documents relevant
to the petition as required in Rule 46, Section 3 of the 1997 Rules of Civil Procedure, as
amended. The CA likewise denied ARCAM’s motion for reconsideration in its Resolution
dated January 24, 2006.

Hence this petition under Rule 45 arguing that:

4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE AND
PREFERENCE OF CREDITS UNDER THE CIVIL CODE AND JURISPRUDENCE WHEN
PD 902-A PROVIDES THAT THE SAME BE APPLIED IN INSTANCES WHEREBY AN
ENTITY IS ORDERED DISSOLVED AND PLACED UNDER LIQUIDATION ON
ACCOUNT OF FAILURE TO REHABILITATE DUE TO INSOLVENCY.17
4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB TO
FORECLOSE THE MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM
LIQUIDATOR TO

MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL PROPERTIES,

SINCE THE LIQUIDATOR HAD INITIALLY DETERMINED THAT ASIDE FROM PNB,
SOME ARCAM WORKERS MAY ALSO HAVE A LEGAL LIEN OVER THE SAID
PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID WAGES. THESE LIENS OVER
THE SAME MOVABLE OR REAL PROPERTY ARE TO BE SATISFIED PRO-RATA WITH
THE CONTRACTUAL LIENS PURSUANT TO 2247 AND 2249 OF THE CIVIL CODE, IN
RELATION TO 2241 TO 2242 RESPECTIVELY. ALSO, THERE MAY BE SOME TAX
ASSESSMENTS THAT THE LIQUIDATOR DOES NOT KNOW ABOUT, AND IF THERE
WERE, THESE COULD COMPRISE TAX LIENS, WHICH UNDER ARTICLE 2243 OF THE
CIVIL CODE ARE CLEARLY GIVEN PRIORITY OVER OTHER PREFERRED CLAIMS
SINCE SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS PROVIDED UNDER
ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS MORTGAGE LIENS.18

4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN
ENTITY IS DISSOLVED AND PLACED UNDER LIQUIDATION DUE TO INSOLVENCY,
SECURED CREDITORS ARE AUTOMATICALLY ALLOWED TO FORECLOSE OR
EXECUTE OR OTHERWISE MAKE GOOD ON THEIR CREDITS AGAINST THE
DEBTOR.19

4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SEC’S HOLDING THAT
THE FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING FOR THE SAKE OF
ARGUMENT THAT PNB IS THE SOLE AND ONLY LIEN HOLDER, IT STILL CANNOT
FORECLOSE UNLESS THE LIQUIDATOR AGREES TO SUCH OR THAT THE SEC GAVE
PNB PRIOR PERMISSION TO INSTITUTE THE SEPARATE FORECLOSURE
PROCEEDINGS.20

4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE REASON
THAT THE FORECLOSURE PROCEEDINGS WERE ATTENDED WITH BAD FAITH.21

The issues to be resolved are: (1) whether the CA correctly dismissed the petition for
failure to attach material documents referred to in the petition; and (2) whether PNB, as a
secured creditor, can foreclose on the mortgaged properties of a corporation under
liquidation without the knowledge and prior approval of the liquidator or the SEC.

On the procedural issue, the Court finds that the CA erred in dismissing the petition for
review before it on the ground of failure to attach material portions of the record and
other documents relevant to the petition. A perusal of the petition for review filed with
the CA, and as admitted by PNB,22 reveals that certified true copies of the assailed January
4, 2005 SEC Resolution and the February 9, 2000 SEC Order appointing petitioner Atty.
Manuel D. Yngson, Jr. as liquidator were annexed therein.
We find the foregoing attached documents sufficient for the appellate court to decide the
case at bar considering that the SEC resolution contains statements of the factual
antecedents material to the case. The Resolution also contains the SEC’s findings on the
legality of PNB’s foreclosure of the mortgages. The SEC held that when the rehabilitation
proceeding was terminated and the suspensive effect of the order staying the
enforcement of claims was lifted, PNB could already assert its preference over unsecured
creditors, and the secured asset and the proceeds need not be included in the liquidation
and shared with the unsecured creditors.23 Before the CA, petitioner raised only the same
legal questions as there was no controversy involving factual matters. Petitioner claimed
that the SEC erred in not applying the rules on concurrence and preference of credits, and
in denying its motion to nullify the auction sale of the secured properties.24 Therefore, the
assailed SEC Resolution is the only material portion of the record that should be annexed
with the petition for the CA to decide on the correctness of the SEC’s interpretation of the
law and jurisprudence on the matter before it.

Having so ruled, this Court would normally order the remand of the case to the CA for
resolution of the substantive issues. However, we find it more appropriate to decide the
merits of the case in the interest of speedy justice considering that the parties have
adequately argued all points and issues raised. It is the policy of the Court to strive to
settle an entire controversy in a single proceeding, and to leave no root or branch to bear
the seeds of future litigation.25 The ends of speedy justice would not be served by a
remand of this case to the CA especially since any ruling of the CA on the matter could
end up being appealed to this Court.

Did the SEC then err in ruling that PNB was not barred from foreclosing on the
mortgages? We answer in the negative.

In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved
factual antecedents similar to the present case, the court has already settled the above
question and upheld the right of the secured creditor to foreclose the mortgages in its
favor during the liquidation of a debtor corporation. In that case, Consuelo Metal
Corporation (CMC) filed with the SEC a petition to be declared in a state of suspension of
payment, for rehabilitation, and for the appointment of a rehabilitation receiver or
management committee under Section 5(d) of P.D. No. 902-A. On April 2, 1996, the SEC,
finding the petition sufficient in form and substance, declared that "all actions for claims
against CMC pending before any court, tribunal, office, board, body and/or commission
are deemed suspended immediately until further orders" from the SEC. Then on
November 29, 2000, upon the management committee’s recommendation, the SEC issued
an Omnibus Order directing the dissolution and liquidation of CMC. Thereafter,
respondent Planters Development Bank (Planters Bank), one of CMC’s creditors,
commenced the extrajudicial foreclosure of CMC’s real estate mortgage. Planters Bank
extrajudicially foreclosed on the real estate mortgage as CMC failed to secure a TRO.
CMC questioned the validity of the foreclosure because it was done without the
knowledge and approval of the liquidator. The Court ruled in favor of the respondent
bank, as follows:

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if

rehabilitation is no longer feasible and the assets of the corporation are finally liquidated,
secured creditors shall enjoy preference over unsecured creditors, subject only to the
provisions of the Civil Code on concurrence and preference of credits. Creditors of
secured obligations may pursue their security interest or lien, or they may choose to
abandon the preference and prove their credits as ordinary claims.

Moreover, Section 2248 of the Civil Code provides:

"Those credits which enjoy preference in relation to specific real property or real rights,
exclude all others to the extent of the value of the immovable or real right to which the
preference refers."

In this case, Planters Bank, as a secured creditor, enjoys preference over a specific
mortgaged property and has a right to foreclose the mortgage under Section 2248 of the
Civil Code. The creditor-mortgagee has the right to foreclose the mortgage over a specific
real property whether or not the debtor-mortgagor is under insolvency or liquidation
proceedings. The right to foreclose such mortgage is merely suspended upon the
appointment of a management committee or rehabilitation receiver or upon the issuance
of a stay order by the trial court. However, the creditor-mortgagee may exercise his right
to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon
the lifting of the stay order.27 (Emphasis supplied)

It is worth mentioning that under Republic Act No. 10142, otherwise known as the
Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor
to enforce his lien during liquidation proceedings is retained. Section 114 of said law thus
provides:

SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of
a secured creditor to enforce his lien in accordance with the applicable contract or law. A
secured creditor may:

(a) waive his rights under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or

(b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and
the liquidator.1âwphi1When the value of the property is less than the claim it secures, the
liquidator may convey the property to the secured creditor and the latter will be admitted
in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim
secured, the liquidator may convey the property to the creditor and waive the debtor’s
right of redemption upon receiving the excess from the creditor;

(2) the liquidator may sell the property and satisfy the secured creditor’s entire claim
from the proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws. (Emphasis supplied)

In this case, PNB elected to maintain its rights under the security or lien; hence, its right
to foreclose the mortgaged properties should be respected, in line with our
pronouncement in Consuelo Metal Corporation.

As to petitioner's argument on the right of first preference as regards unpaid wages, the
Court has elucidated in the case of Development Bank of the Philippines v. NLRC28 that a
distinction should be made between a preference of credit and a lien. A preference applies
only to claims which do not attach to specific properties. A lien creates a charge on a
particular property. The right of first preference as regards unpaid wages recognized by
Article 110 of the Labor Code, does not constitute a lien on the property of the insolvent
debtor in favor of workers. It is but a preference of credit in their favor, a preference in
application. It is a method adopted to determine and specify the order in which credits
should be paid in the final distribution of the proceeds of the insolvent's assets. It is a
right to a first preference in the discharge of the funds of the judgment debtor.
Consequently, the right of first preference for unpaid wages may not be invoked in this
case to nullify the foreclosure sales conducted pursuant to PNB 's right as a secured
creditor to enforce its lien on specific properties of its debtor, ARCAM.

WHEREFORE, the petition for review on certiorari is DENIED.

With costs against the petitioner.

SO ORDERED.

[G.R. No. 136456. October 24, 2000]

HEIRS OF RAMON DURANO, SR., RAMON DURANO III, AND

ELIZABETHHOTCHKISS DURANO, petitioners, vs. SPOUSES ANGELES
 SEPULVEDA UY ANDEMIGDIO BING SING UY, SPOUSES FAUSTINO
ALATAN AND VALERIANA GARRO, AURELIA MATA, SILVESTRE RAMOS,
HERMOGENES TITO, TEOTIMO GONZALES, PRIMITIVA GARRO, JULIAN
GARRO, ISMAEL GARRO, BIENVENIDO CASTRO, GLICERIO BARRIGA,
BEATRIZ CALZADA, ANDREA MATA DE BATULAN, TEOFISTA ALCALA,
FILEMON LAVADOR, CANDELARIO LUMANTAO, GAVINO QUIMBO,
JUSTINO TITO, MARCELINO GONZALES, SALVADOR DAYDAY,
VENANCIA REPASO, LEODEGARIO GONZALES, and RESTITUTA
GONZALES, respondents.

DECISION
GONZAGA-REYES, J.:

Petitioners seek the reversal of the decision of the First Division of the Court of
Appeals dated November 14, 1997 in CA-G.R. CV No. 27220, entitled Heirs of Ramon
Durano, Sr., et. al. versus Spouses Angeles Supelveda Uy, et. al., and the resolution of the
Court of Appeals dated October 29, 1998 which denied petitioners motion for
reconsideration.
The antecedents of this case may be traced as far back as August 1970; it involves a
128-hectare parcel of land located in the barrios of Dunga and Cahumayhumayan, Danao
City. On December 27, 1973, the late Congressman Ramon Durano, Sr., together with his
son Ramon Durano III, and the latters wife, Elizabeth Hotchkiss Durano (petitioners in
the herein case), instituted an action for damages against spouses Angeles Supelveda Uy
and Emigdio Bing Sing Uy, spouses Faustino Alatan and Valeriana Garro, spouses Rufino
Lavador and Aurelia Mata, Silvestre Ramos, Hermogenes Tito, Teotimo Gonzales,
Primitiva Garro, Julian Garro, Ismael Garro, Bienvenido Castro, Glicerio Barriga, Beatriz
Calzada, Andrea Mata de Batulan, Teofista Alcala, Filemon Lavador, Candelario
Lumantao, Gavino Quimbo, Justino Tito, Marcelino Gonzales, Salvador Dayday, Venancia
Repaso, Leodegario Gonzales, Jose de la Calzada, Restituta Gonzales, and Cosme Ramos
(herein respondents[1]) before Branch XVII of the then Court of First Instance of Cebu,
Danao City.
In that case, docketed as Civil Case No. DC-56, petitioners accused respondents of
officiating a hate campaign against them by lodging complaints in the Police Department
of Danao City in August 1970, over petitioners so-called invasion of respondents alleged
properties in Cahumayhumayan, Danao City. This was followed by another complaint
sent by respondents to the President of the Philippines in February 1971, which depicted
petitioners as oppressors, landgrabbers and usurpers of respondents alleged rights. Upon
the direction of the President, the Department of Justice through City Fiscal Jesus
Navarro and the Philippine Constabulary of Cebu simultaneously conducted
investigations on the matter. Respondents complaints were dismissed as baseless, and
they appealed the same to the Secretary of Justice, who called for another investigation to
be jointly conducted by the Special Prosecutor and the Office of the City Fiscal of Danao
City. During the course of said joint investigation, respondents Hermogenes Tito and
Salvador Dayday again lodged a complaint with the Office of the President, airing the
same charges of landgrabbing. The investigations on this new complaint, jointly
conducted by the 3rd Philippine Constabulary Zone and the Citizens Legal Assistance
Office resulted in the finding that (petitioners) should not be held answerable therefor.[2]
Petitioners further alleged in their complaint before the CFI that during the course of
the above investigations, respondents kept spreading false rumors and damaging tales
which put petitioners into public contempt and ridicule.[3]
In their Answer, respondents lodged their affirmative defenses, demanded the return
of their respective properties, and made counterclaims for actual, moral and exemplary
damages.Respondents stated that sometime in the early part of August 1970 and months
thereafter they received mimeographed notices dated August 2, 1970 and signed by the
late Ramon Durano, Sr., informing them that the lands which they are tilling and residing
in, formerly owned by the Cebu Portland Cement Company (hereafter, Cepoc), had been
purchased by Durano & Co., Inc. The notices also declared that the lands were needed by
Durano & Co. for planting to sugar and for roads or residences, and directed respondents
to immediately turn over the said lands to the representatives of the
company. Simultaneously, tall bamboo poles with pennants at the tops thereof were
planted in some areas of the lands and metal sheets bearing the initials RMD were nailed
to posts.
As early as the first week of August 1970, and even before many of the respondents
received notices to vacate, men who identified themselves as employees of Durano & Co.
proceeded to bulldoze the lands occupied by various respondents, destroying in their
wake the plantings and improvements made by the respondents therein. On some
occasions, respondents alleged, these men fired shots in the air, purportedly acting upon
the instructions of petitioner Ramon Durano III and/or Ramon Durano, Jr. On at least
one instance, petitioners Ramon Durano III and Elizabeth Hotchkiss Durano were seen
on the site of the bulldozing operations.
On September 15, 1970, Durano & Co. sold the disputed property to petitioner Ramon
Durano III, who procured the registration of these lands in his name under TCT No. T-103
and TCT No. T-104.
Respondents contended that the display of force and the known power and prestige
of petitioners and their family restrained them from directly resisting this wanton
depredation upon their property. During that time, the mayor of Danao City was Mrs.
Beatriz Durano, wife of Ramon Durano, Sr. and mother of petitioner Ramon Durano
III. Finding no relief from the local police, who respondents said merely laughed at them
for daring to complain against the Duranos, they organized themselves and sent a letter
to then President Ferdinand Marcos reporting dispossession of their properties and
seeking a determination of the ownership of the land. This notwithstanding, the
bulldozing operations continued until the City Fiscal was requested by the Department of
Justice to conduct an investigation on the matter. When, on July 27, 1971, the City Fiscal
announced that he would be unable to conduct a preliminary investigation, respondents
urged the Department of Justice to conduct the preliminary investigation. This was
granted, and the investigations which spanned the period March 1972 to April 1973 led to
the conclusion that respondents complaint was untenable.[4]
In their counterclaim, respondents alleged that petitioners acts deprived most of
them of their independent source of income and have made destitutes of some of
them. Also, petitioners have done serious violence to respondents spirit, as citizens and
human beings, to the extent that one of them had been widowed by the emotional shock
that the damage and dispossession has caused.[5] Thus, in addition to the dismissal of the
complaint, respondents demanded actual damages for the cost of the improvements they
made on the land, together with the damage arising from the dispossession itself; moral
damages for the anguish they underwent as a result of the high-handed display of power
by petitioners in depriving them of their possession and property; as well as exemplary
damages, attorneys fees and expenses of litigation.
Respondents respective counterclaims --- referring to the improvements destroyed,
their values, and the approximate areas of the properties they owned and occupied --- are
as follows:
a) TEOFISTA ALCALA - Tax Declaration No. 00223; .2400 ha.; bulldozed on
August, 10, 1970. Improvements destroyed consist of 47 trees, 10 bundles
beatilis firewood and 2 sacks of cassava, all valued at P5,437.00. (Exh. B,
including submarkings)
b) FAUSTINO ALATAN and VALERIANA GARRO - Tax Declaration No. 30758;
.2480 ha.; Tax Declaration No. 32974; .8944 ha.; Tax Declaration No. 38908;
.8000 ha.; Bulldozed on September 9, 1970; Improvements destroyed consist of
682 trees, a cornfield with one cavan per harvest 3 times a year, valued at
P71,770.00; Bulldozed on March 13, 1971; 753 trees, 1,000 bundles beatilis
firewood every year, valued at P29,100.00; Cut down in the later part of March,
1971 - 22 trees, 1,000 bundles beatilis firewood every year, 6 cavans corn harvest
per year, valued at P1,940.00 or a total value of P102,810.00. (Exh. C, including
submarkings)
c) ANDREA MATA DE BATULAN - Tax Declaration No. 33033; .4259 has.;
bulldozed on September 11, 1970. Improvements destroyed consist of 512 trees
and 15 sacks cassava all valued at P79,425.00.(Exh. D, including submarkings)
d) GLICERIO BARRIGA - Tax Declaration No. 32290; .4000 ha.; bulldozed on
September 10, 1990. Improvements destroyed consist of 354 trees, cassava field
if planted with corn good for one liter, 30 cavans harvest a year of corn, and
one resthouse, all valued at P35,500.00. (Exh. E, including submarkings)
e) BEATRIZ CALZADA - Tax Declaration No. 03449; .900 ha.; Bulldozed on June
16, 1971. Improvements destroyed consist of 2,864 trees, 1,600 bundles of
 beatilis firewood, 12 kerosene cans cassava every year and 48 cavans harvest a
year of corn all valued at P34,800.00. (Exh. F, including submarkings)
f) BIENVENIDO CASTRO - Tax Declaration No. 04883; .6000 ha.; bulldozed on
September 10, 1970. Improvements destroyed consist of 170 trees, 10 sacks
cassava every year, 500 bundles beatilis firewood every year, 60 cavans corn
harvest per year, all valued at (5,550.00. (Exh. G, including submarkings)
g) ISMAEL GARRO - Tax Declaration No. 7185; 2 has. Bulldozed in August,
1970. Improvements destroyed consist of 6 coconut trees valued at
P1,800.00. Bulldozed on February 3, 1971 - improvements destroyed consist of
607 trees, a corn field of 5 cavans produce per harvest thrice a year, all valued
at P67,890.00. (Exh. H, including submarkings)
h) JULIAN GARRO - Tax Declaration No. 28653; 1 ha.; Bulldozed in the latter
week of August, 1970. Improvements destroyed consist of 365 trees, 1 bamboo
grove, 1 tisa, 1,000 bundles of beatilis firewood, 24 cavans harvest a year of
corn, all valued at P46,060.00. (Exh. I, including submarkings)
i) PRIMITIVA GARRO - Tax Declaration No. 28651; .3000 ha.; Bulldozed on
September 7, 1970. Improvements destroyed consist of 183 trees, 10 pineapples,
a cassava field, area if planted with corn good for liter, sweet potato, area if
planted with corn good for liter all valued at P10,410.00. (Exh. J, including
submarkings)
j) TEOTIMO GONZALES - Tax Declaration No. 38159; .8644 ha.; Tax Declaration
No. 38158; .8000 ha.; Bulldozed on September 10, 1970 - improvements
destroyed consist of 460 trees valued at P20,000.00. Bulldozed on December
10, 1970 - Improvements destroyed consist of 254 trees valued at P65,600.00 -
or a total value of P85,600.00. (Exh. K, including submarkings)
k) LEODEGARIO GONZALES - Tax Declaration No. 36884; Bulldozed on
February 24, 1971. Improvements destroyed consist of 946 trees, 40 ubi, 15
cavans harvest a year of corn, all valued at P72,270.00.(Exh. L, including
submarkings)
l) FILEMON LAVADOR - Tax Declaration No. 14036; 1 ha.; Bulldozed on February
5, 1971. Improvements destroyed consist of 675 trees and 9 cavans harvest a
year of corn all valued at P63,935.00. (Exh. M, including submarkings)
m) CANDELARIO LUMANTAO - Tax Declaration No. 18791; 1.660 ha. Bulldozed
on the second week of August, 1970 - Improvements destroyed consist of 1,377
trees, a cornfield with 3 cavans per harvest thrice a year and a copra dryer all
valued at P193,960.00. Bulldozed on February 26, 1971 - Improvements
destroyed consist of 44 trees, one pig pen and the fence thereof and the
chicken roost all valued at P12,650.00. Tax Declaration No. 33159; 3.500
has. Bulldozed in the last week of March, 1971 - Improvements destroyed
consist of 13 trees valued at P1,550.00. Bulldozed in the latter part consist of 6
 Bamboo groves and Ipil-Ipil trees valued at P700.00 with total value of
P208,860.00. (Exh. N, including submarkings)
n) AURELIA MATA - Tax Declaration No. 38071; .3333 ha.; Bulldozed sometime in
the first week of March, 1971 - Improvements destroyed consist of 344 trees
and 45 cavans corn harvest per year valued at P30,965.00. (Exh. Q, including
submarkings)
o) GAVINO QUIMBO - Tax Declaration No. 33231; 2.0978 has.; Tax Declaration
No. 24377; .4960 ha. (.2480 ha. Belonging to your defendant) Bulldozed on
September 12, 1970 - Improvements destroyed consist of 200 coconut trees and
500 banana fruit trees valued at P68,500.00. Bulldozed on consist of 59 trees,
20 sacks cassava and 60 cavans harvest a year of corn valued at P9,660.00 or a
total value of P78,160.00. (Exh. R, including submarkings)
p) SILVESTRE RAMOS - Tax Declaration No. 24288; 1.5568 has.; Bulldozed on
February 23, 1971. - Improvements destroyed consist of 737 trees, a cornfield
with 3 cavans per harvest 3 times a year and 50 bundles of beatilis firewood, all
valued at P118,170.00. (Exh. S, including submarkings)
q) MARCELINO GONZALES - Tax Declaration No. 34057; .4049 ha. Bulldozed on
March 20, 1972 - Improvements destroyed consist of 5 coconut trees and 9
cavans harvest a year of corn valued at P1,860.00. Bulldozed on July 4, 1972 -
destroying 19 coconut trees valued at P5,700.00 or a total value of
P7,560.00. (Exh. U, including submarkings)
r) JUSTINO TITO -Tax Declaration No. 38072; .2000 has.; Bulldozed on February
25, 1971 - Improvements destroyed consist of 338 trees and 5 kamongay all
valued at P29,650.00. (Exh. T, including submarkings)
s) EMIGDIO BING SING UY and ANGELES SEPULVEDA UY - Transfer
Certificate of Title No. T-35 (Register of Deeds of Danao City); 140.4395
has.; Area bulldozed- 20.000 has. Bulldozed on August 5, 6 and 7, 1970 -
destroying 565 coconut trees, 2-1/2 yrs. old, 65,422 banana groves with 3,600
mango trees, 3 years old, grafted and about to bear fruit valued at
P212,260.00. Bulldozed on November 24, 1970 and on February 16, 1971 -
destroying 8,520 madri-cacao trees and 24 cylindrical cement posts boundaries
valued at P18,540.00. Bulldozed on November 24, 1970 - destroying 90 coconut
trees, 3 years old cornfield at 40 cavans per harvest and at 3 harvests a year
(120 cavans) valued at P31,800.00. Bulldozed on February 16, 1971 - destroying
25,727 trees and sugarcane field value P856,725.00 or a total value of
P1,123,825.00. (Exh. V, including submarkings)
t) SALVADOR DAYDAY - Tax Declaration No. (unnumbered) dated September
14, 1967; 4.000 has. Bulldozed on May 6, 1971 - destroying 576 trees, 9 cavans
yearly of corn, 30 kerosene cans of cassava yearly valued at
P4,795.00. Bulldozed from March 26, 1973 to the first week of April, 1973 -
 destroying 108 trees and cornland, 6 cavans harvest per year valued at
P53,900.00 or a total value of P58,695.00. (Exh. A, including submarkings)
u) VENANCIA REPASO - Tax Declaration No. 18867; 1.1667 has. Bulldozed on
April 15, 1971 - Improvements destroyed were 775 trees, 500 abaca, about to be
reaped, and being reaped 3 times a year 2 bamboo groves all valued at
P47,700.00. (Exh. O, including submarkings)
v) HERMOGENES TITO - Tax Declaration No. 38009; over one (1) ha. Bulldozed
in the latter part of September, 1970 - destroying 1 coconut tree, 18 sacks of
corn per year valued at P1,020.00. Bulldozed on March 15, 1973 - destroying 2
coconut trees, 5 buri trees, 1 bamboo grove valued at P1,400.00. Bulldozed on
March 26, 1974 - destroying 3 coconut trees valued at P1,500.00 with a total
value of P3,920.00. (Exh. P, including submarkings).[6]
On April 22, 1975, petitioners moved to dismiss their complaint with the
trial court. The trial court granted the motion to dismiss, without prejudice to
respondents right to proceed with their counterclaim.
Hence, the trial proceeded only on the counterclaim.
On September 23, 1980, this Court issued a resolution in Administrative Matter No.
6290 changing the venue of trial in Civil Case No. DC-56 to the Regional Trial Court of
Cebu City. The change was mainly in line with the transfer of Judge Bernardo Ll. Salas,
who presided over the case in Danao City, to Cebu City.
The parties agreed to dispense with pre-trial, and for the evidence-in-chief to be
submitted by way of affidavits together with a schedule of documentary exhibits, subject
to additional direct examination, cross examination and presentation of rebuttal evidence
by the parties.
The trial court and later, the Court of Appeals, took note of the following portions of
affidavits submitted by petitioners:

xxx City Fiscal Jesus Navarro said that in August, 1967, he issued subpoenas to several
tenants in Cahumayhumayan upon representation by Cepoc, the latter protesting failure
by the tenants to continue giving Cepoc its share of the corn produce. He learned from
the tenants that the reason why they were reluctant and as a matter of fact some
defaulted in giving Cepoc its share, was that Uy Bing Sepulveda made similar demands to
them for his share in the produce, and that they did not know to whom the shares should
be given.

xxx xxx xxx

Jesus Capitan said that he is familiar with the place Cahumayhumayan and that the
properties in said locality were acquired by Durano and Company and Ramon Durano III,
but formerly owned by Cepoc.
When the properties of Ramonito Durano were cultivated, the owners of the plants
requested him that they be given something for their effort even if the properties do not
belong to them but to Cepoc, and that he was directed by Ramonito Durano to do a
listing of the improvements as well as the owners. After he made a listing, this was given
to Ramonito who directed Benedicto Ramos to do payment.

When he was preparing the list, they did not object to the removal of the plants because
the counterclaimants understood that the lands did not belong to them, but later and
because of politics a complaint was filed, and finally that when he was doing the listing,
the improvements were even pointed to him by the counterclaimants themselves. (Exh.
48, Records, p. 385-386).

xxx xxx xxx

Ruperto Rom said that he had an occasion to work at Cepoc from 1947 to 1950 together
with Benedicto and Tomas Ramos, the latter a capataz of the Durano Sugar Mills. Owner
of the properties, subject of the complaint, was Cepoc.

The persons who eventually tilled the Cepoc properties were merely allowed to do
cultivation if planted to corn, and for Cepoc to be given a share, which condition was
complied with by all including the counterclaimants. He even possessed one parcel which
he planted to coconuts, jackfruit trees and other plants. (Exh. 51, Records, pp. 383-384)

xxx xxx xxx

Co-defendant Ramon Durano III said that he agreed with the dismissal of the complaint
because his fathers wish was reconciliation with the defendants following the death of
Pedro Sepulveda, father of Angeles Sepulveda Uy, but inspite of the dismissal of the
complaint, the defendants still prosecuted their counterclaim.

The disputed properties were owned formerly by Cepoc, and then of the latter selling the
properties to Durano and Company and then by the latter to him as of September 15,
1970. As a matter of fact, TCT T-103 and T-104 were issued to him and that from that time
on, he paid the taxes.

At the time he purchased the properties, they were not occupied by the defendants. The
first time he learned about the alleged bulldozing of the improvements was when the
defendants filed the complaint of land grabbing against their family with the Office of the
President and the attendant publicity. Precisely his family filed the complaint against
them. (Exh. 57, Records, pp. 723-730)

xxx xxx xxx

Congressman Ramon Durano said he is familiar with the properties, being owned
originally by Cepoc. Thereafter they were purchased by Durano and Company and then
sold to Ramon Durano III, the latter now the owner. He filed a motion to dismiss the case
against Angeles Sepulveda et al. as a gesture of respect to the deceased Pedro Sepulveda,
father of Angeles Sepulveda, and as a Christian, said Pedro Sepulveda being the former
Mayor of Danao, if only to stop all misunderstanding between their families.

xxx xxx xxx

He was the one who did the discovery of the properties that belonged to Cepoc, which
happened when he was doing mining work near Cahumayhumayan and without his
knowledge extended his operation within the area belonging to Cepoc. After Cepoc
learned of the substantial coal deposits, the property was claimed by Cepoc and then a
survey was made to relocate the muniments. Eventually he desisted doing mining work
and limited himself within the confines of his property that was adjacent to Cepocs
property. All the claimants except Sepulveda Uy were occupants of the Cepoc
properties. Durano and Company purchased the property adjacent to Cepoc, developed
the area, mined the coal and had the surveyed area planted with sugar cane, and finally
the notices to the occupants because of their intention to plant sugar cane and other
crops (T.S. N. December 4, 1985, pp. 31-32, 44-54, RTC Decision, pp. 16-19, Records, pp.
842-845).[7]

Petitioners also presented Court Commissioner, Engineer Leonidas Gicain, who was
directed by the trial court to conduct a field survey of the disputed property. Gicain
conducted surveys on the areas subjected to bulldozing, including those outside the
Cepoc properties. The survey --- which was based on TCT No. T-103 and TCT No. T-104,
titled in the name of Ramon Durano III, and TCT No. 35, in the name of respondent
Emigdio Bing Sing Uy --- was paid for by petitioners.[8]
Respondents, for their part, also presented their affidavits and supporting
documentary evidence, including tax declarations covering such portions of the property
as they formerly inhabited and cultivated.
On March 8, 1990, the RTC issued a decision upholding respondents
counterclaim. The dispositive portion of said decision reads:

THE FOREGOING CONSIDERED, judgment is hereby rendered in favor of the counter

claimants and against the plaintiffs directing the latter to pay the former:

a) With respect to Salvador Dayday P 14,400.00

b) With respect to Teofista Alcala 4,400.00

c) With respect to Faustino Alatan 118,400.00

 d) With respect to Andrea Mata de Batulan 115,050.00

e) With respect to Glicerio Barriga 35,500.00

f) With respect to Beatriz Galzada 70,300.00

g) With respect to Bienvenido Castro 5,000.00

h) With respect to Ismael Garro 66,060.00

i) With respect to Julian Garro 48,600.00

j) With respect to Primitiva Garro 13,000.00

k) With respect to Teotimo Gonzales 63,200.00

l) With respect to Leodegario Gonzales 85,300.00

m) With respect to Filemon Lavador 70,860.00

n) With respect to Venancia Repaso 101,700.00

o) With respect to Candelario Lumantao 192,550.00

p) With respect to Hermogenes Tito 1,200.00

q) With respect to Aurelia Mata 28,560.00

r) With respect to Gavino Quimbo 81,500.00

s) With respect to Silvestre Ramos 101,700.00

t) With respect to Justino Tito 27,800.00

u) With respect to Marcelino Gonzales 2,360.00

v) With respect to Angeles Supelveda 902,840.00

P120,000.00 should be the figure in terms of litigation expenses and a separate

amount of P100,000.00 as attorneys fees.

Return of the properties to Venancia Repaso, Hermogenes Tito and Marcelino Gonzales is
hereby directed.
With respect to counter claimant Angeles Sepulveda Uy, return of the property to her
should be with respect to the areas outside of the Cepoc property, as mentioned in the
sketch, Exhibit 56-A.

Finally with costs against the plaintiffs.

SO ORDERED. [9]

The RTC found that the case preponderated in favor of respondents, who all
possessed their respective portions of the property covered by TCT Nos. T-103 and T-104
thinking that they were the absolute owners thereof. A number of these respondents
alleged that they inherited these properties from their parents, who in turn inherited
them from their own parents. Some others came into the properties by purchase from the
former occupants thereof. They and their predecessors were responsible for the plantings
and improvements on the property. They were the ones who sought for the properties to
be tax-declared in their respective names, and they continually paid the taxes
thereto. Respondents maintained that they were unaware of anyone claiming adverse
possession or ownership of these lands until the bulldozing operations in 1970.
As for Venancia Repaso, Hermogenes Tito and Marcelino Gonzales, the Court found
that the properties they laid claim to were not part of the land that was purchased by
Durano & Co. from Cepoc. Thus, it found the bulldozing of these lands by petitioners
totally unjustified and ordered not only the total reimbursement of useful and necessary
expenses on the properties but also the return of these properties to Repaso, Tito and
Gonzales, respectively. As for all the other respondents, the RTC found their possession of
the properties to be in the concept of owner and adjudged them to be builders in good
faith. Considering that petitioners in the instant case appropriated the improvements on
the areas overran by the bulldozers, the RTC ruled that (t)he right of retention to the
improvements necessarily should be secured (in favor of respondents) until reimbursed
not only of the necessary but also useful expenses.[10]
On the matter of litigation expenses and attorneys fees, the RTC observed that the
trial period alone consisted of forty (40) trial dates spread over a period of sixteen (16)
years. At the time, respondents were represented by counsel based in Manila, and the
trial court took into consideration the travel, accommodation and miscellaneous
expenses of their lawyer that respondents must have shouldered during the trial of the
case.
Dissatisfied, petitioners appealed the RTC decision to the Court of Appeals, which, in
turn, affirmed the said decision and ordered the return of the property to all the
respondents-claimants, in effect modifying the RTC decision which allowed return only in
favor of respondents Repaso, Tito and Gonzales.
In its decision, the Court of Appeals upheld the factual findings and conclusions of
the RTC, including the awards for actual damages, attorneys fees and litigation expenses,
and found additionally that the issuance of TCT Nos. T-103 and T-104 in the name of
Ramon Durano III was attended by fraud. Evaluating the evidence before it, the Court of
Appeals observed that the alleged reconstituted titles of Cepoc over the property, namely,
TCT No. (RT-38) (T-14457) -4 and TCT No. (RT-39) (T-14456) -3 (Exhibits 19 and 20 of this
case), which were claimed to be the derivative titles of TCT Nos. T-103 and T-104, were
not submitted in evidence before the RTC. Thus, in an Order dated June 15, 1988, the RTC
ordered Exhibits 19 and 20 deleted from petitioners Offer of Exhibits. The Court of
Appeals further noted that even among the exhibits subsequently produced by petitioners
before the RTC, said Exhibits 19 and 20 were still not submitted.[11] Moreover, Cepoc had
no registered title over the disputed property as indicated in TCT Nos. T-103 and T-
104. Thus:

TRANSFER CERTIFICATE OF TITLE

NO. - 103 -

xxx xxx

IT IS FURTHER CERTIFIED that said land was originally registered on the N.A. day
of N.A., in the year nineteen hundred and N.A. in Registration Book No. N.A. page N.A. of
the Office of the Register of Deeds of N.A., as Original Certificate of Title No. N.A.,
pursuant to a N.A. patent granted by the President of the Philippines, on the N.A. day
of N.A., in the year nineteen hundred and N.A., under Act No. N.A.

This certificate is a transfer from Transfer Certificate of Title No. (RT-39) (T-14456) -3
which is cancelled by virtue hereof in so far as the above described land is concerned.

xxx xxx

TRANSFER CERTIFICATE OF TITLE

NO. T - 104 -

xxx xxx

IT IS FURTHER CERTIFIED that said land was originally registered on the N.A. day
of N.A., in the year nineteen hundred and N.A. in Registration Book No. N.A. page N.A. of
the Office of the Register of Deeds of N.A., as Original Certificate of Title No. N.A.,
pursuant to a N.A. patent granted by the President of the Philippines, on the N.A. day
of N.A., in the year nineteen hundred and N.A., under Act No. N.A.

This certificate is a transfer from Transfer Certificate of Title No. (RT-38) (T-14457) -
4 which is cancelled by virtue hereof in so far as the above described land is concerned.[12]
 From the foregoing, the Court of Appeals concluded that the issuance of the TCT
Nos. T-103 and T-104 in favor of petitioner Ramon Durano III was attended by fraud;
hence, petitioners could not invoke the principle of indefeasibility of title. Additionally,
the Court of Appeals found that the alleged Deed of Absolute Sale, undated, between
Cepoc Industries, Inc. and Durano & Co. was not notarized and thus, unregistrable.
The Court of Appeals went on to state that while, on the one hand, no valid issuance
of title may be imputed in favor of petitioners from the private Deed of Sale and the
alleged reconstituted titles of Cepoc that were not presented in evidence, respondents, in
contrast --- who although admittedly had no registered titles in their names --- were able
to demonstrate possession that was public, continuous and adverse --- or possession in
the concept of owner, and which was much prior (one or two generations back for many
of respondents) to the claim of ownership of petitioners.
Thus, the Court of Appeals ordered the return of the properties covered by TCT Nos.
T-103 and T-104 to all respondents who made respective claims thereto. Corollarily, it
declared that petitioners were possessors in bad faith, and were not entitled to
reimbursement for useful expenses incurred in the conversion of the property into
sugarcane lands. It also gave no merit to petitioners allegation that the actual damages
awarded by the trial court were excessive, or to petitioners argument that they should not
have been held personally liable for any damages imputable to Durano & Co.
Following is the dispositive portion of the decision of the Court of Appeals:

WHEREFORE, the appealed decision of the lower court in Civil Case No. DC-56 is hereby
AFFIRMED with MODIFICATION ordering the return of the respective subject properties
to all the defendants-appellees, without indemnity to the plaintiffs-appellants as regards
whatever improvements made therein by the latter. In all other respects, said decision in
affirmed.

Costs against plaintiffs-appellants.

SO ORDERED.[13]

On October 29, 1998, the Court of Appeals denied petitioners motion for
reconsideration for lack of merit. Hence, this petition.
Petitioners assign the following errors from the CA decision:
1. The Court of Appeals erred in granting relief to the respondents who did not
appeal the decision of the lower court.
2. The Court of Appeals erred in collaterally attacking the validity of the title of
petitioner Ramon Durano III.
3. The respondents should not have been adjudged builders in good faith.
 4. The petitioners should not be held personally liable for damages because of the
doctrine of separate corporate personality.
5. It was an error to hold that the respondents had proved the existence of
improvements on the land by preponderance of evidence, and in awarding
excessive damages therefor.
6. It was error to direct the return of the properties to respondents Venancia
Repaso, Hermogenes Tito and Marcelino Gonzales.
7. The award of litigation expenses and attorneys fees was erroneous.
8. The petitioners are not possessors in bad faith.
On their first assignment of error, petitioners contend that before the Court of
Appeals, they only questioned that portion of the RTC decision which directed the return
of the properties to respondents Repaso, Tito and Gonzales. They argued that the return
of the properties to all the other respondents by the Court of Appeals was erroneous
because it was not among the errors assigned or argued by petitioners on appeal. Besides,
since respondents themselves did not appeal from the RTC decision on the issue of return
of the physical possession of the property, it is understood that judgment as to them has
already become final by operation of law. To support its argument, petitioners cited the
cases of Madrideo vs. Court of Appeals[14] and Medida vs. Court of Appeals[15], which held
that whenever an appeal is taken in a civil case an appellee who has not himself appealed
cannot obtain from the appellate court any affirmative relief other than the ones granted
in the decision of the court below.
Rule 51 of the New Rules of Civil Procedure provides:

Sec. 8. Questions that may be decided. --- No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed from or
the proceedings therein will be considered unless stated in the assignment of errors,
or closely related to or dependent on an assigned error and properly argued in the
brief, save as the court may pass upon plain errors and clerical errors.

We find untenable petitioners argument that since no party (whether petitioners or

respondents) appealed for the return of the properties to respondents other than Repaso,
Tito and Gonzales, that portion of the RTC decision that awards damages to such other
respondents is final and may no longer be altered by the Court of Appeals. A reading of
the provisions of Section 8, Rule 51, aforecited, indicates that the Court of Appeals is not
limited to reviewing only those errors assigned by appellant, but also those that are
closely related to or dependent on an assigned error.[16] In other words, the Court of
Appeals is imbued with sufficient discretion to review matters, not otherwise assigned as
errors on appeal, if it finds that their consideration is necessary in arriving at a complete
and just resolution of the case. In this case, the Court of Appeals ordered the return of the
properties to respondents merely as a legal consequence of the finding that respondents
had a better right of possession than petitioners over the disputed properties, the former
being possessors in the concept of owner. Thus, it held ---

Plaintiffs-appellants have to return possession of the subject property, not only to

defendants-appellees Venancia Repaso, Hermogenes Tito and Marcelino Gonzales but to
all other defendants-appellees herein, by virtue of the latters priority in time of declaring
the corresponding portions of the subject properties in their name and/or their
predecessors-in-interest coupled with actual possession of the same property through
their predecessors-in-interest in the concept of an owner. Plaintiffs-appellants who had
never produced in court a valid basis by which they are claiming possession or ownership
over the said property cannot have a better right over the subject properties than
defendants-appellees.[17]

Moreover, petitioners reliance on the Madrideo and Medida cases is misplaced. In

the Madrideo case, the predecessors-in-interest of the Llorente Group sold the disputed
property to the Alcala Group, who in turn sold the same to the spouses Maturgo. The RTC
adjudged the spouses Maturgo purchasers in good faith, such that they could retain their
title to the property, but held that the Lllorente Group was unlawfully divested of its
ownership of the property by the Alcala Group. The Alcala Group appealed this decision
to the Court of Appeals, who denied the appeal and ordered the reinstatement in the
records of the Registry of Deeds of the Original Certificates of Title of the predecessors-
in-interest of the Llorente Group. In setting aside the decision of the Court of Appeals,
this Court held that no relief may be afforded in favor of the Llorente Group to the
prejudice of the spouses Maturgo, who --- the Court carefully emphasized --- were third
parties to the appeal, being neither appellants nor appellees before the Court of Appeals,
and whose title to the disputed property was confirmed by the RTC. The application of
the ruling in Madrideo to the instant case bears no justification because it is clear that
petitioners, in appealing the RTC decision, impleaded all the herein respondents.
Meanwhile, in the Medida case, petitioners (who were the appellees before the Court
of Appeals) sought the reversal of a finding of the RTC before the Supreme Court. The
Court explained that since petitioners failed to appeal from the RTC decision, they --- as
appellees before the Court of Appeals --- could only argue for the purpose of sustaining
the judgment in their favor, and could not ask for any affirmative relief other than that
granted by the court below. The factual milieu in Medida is different from that of the
instant case, where the return of the properties to respondents was not an affirmative
relief sought by respondents but an independent determination of the Court of Appeals
proceeding from its findings that respondents were long-standing possessors in the
concept of owner while petitioners were builders in bad faith. Certainly, under such
circumstances, the Court of Appeals is not precluded from modifying the decision of the
RTC in order to accord complete relief to respondents.
Moving now to the other errors assigned in the petition, the return of the properties
to respondents Repaso, Tito and Gonzales was premised upon the factual finding that
these lands were outside the properties claimed by petitioners under TCT Nos. T-103 and
T-104. Such factual finding of the RTC, sustained by the Court of Appeals, is now final and
binding upon this Court.
In respect of the properties supposedly covered by TCT Nos. T-103 and T-104, the
Court of Appeals basically affirmed the findings of the RTC that respondents have shown
prior and actual possession thereof in the concept of owner, whereas petitioners failed to
substantiate a valid and legitimate acquisition of the property --- considering that the
alleged titles of Cepoc from which TCT Nos. T-103 and T-104 were supposed to have
derived title were not produced, and the deed of sale between Cepoc and Durano & Co.
was unregistrable.
The records clearly bear out respondents prior and actual possession; more exactly,
the records indicate that respondents possession has ripened into ownership by
acquisitive prescription.
Ordinary acquisitive prescription, in the case of immovable property, requires
possession of the thing in good faith and with just title,[18] for a period of ten years.[19] A
possessor is deemed to be in good faith when he is not aware of any flaw in his title or
mode of acquisition of the property.[20] On the other hand, there is just title when the
adverse claimant came into possession of the property through one of the modes for
acquiring ownership recognized by law, but the grantor was not the owner or could not
transmit any right.[21] The claimant by prescription may compute the ten-year period by
tacking his possession to that of his grantor or predecessor-in-interest.[22]
The evidence shows that respondents successfully complied with all the requirements
for acquisitive prescription to set in. The properties were conveyed to respondents by
purchase or inheritance, and in each case the respondents were in actual, continuous,
open and adverse possession of the properties. They exercised rights of ownership over
the lands, including the regular payment of taxes and introduction of plantings and
improvements. They were unaware of anyone claiming to be the owner of these lands
other than themselves until the notices of demolition in 1970 --- and at the time each of
them had already completed the ten-year prescriptive period either by their own
possession or by obtaining from the possession of their predecessors-in-interest. Contrary
to the allegation of petitioners that the claims of all twenty-two (22) respondents were
lumped together and indiscriminately sustained, the lower courts (especially the RTC)
took careful consideration of the claims individually, taking note of the respective modes
and dates of acquisition. Whether respondents predecessors-in-interest in fact had title to
convey is irrelevant under the concept of just title and for purposes of prescription.
Thus, respondents counterclaim for reconveyance and damages before the RTC was
premised upon a claim of ownership as indicated by the following allegations:

(Y)our defendants are owners and occupants of different parcels of land located in
Barrio Cahumayhumayan, your defendants having occupied these parcels of land for
various periods by themselves or through their predecessors-in-interest, some for
over fifty years, and some with titles issued under the Land Registration Act; xxxxx [23]
 Respondents claim of ownership by acquisitive prescription (in respect of the
properties covered by TCT Nos. T-103 and T-104) having been duly alleged and proven,
the Court deems it only proper that such claim be categorically upheld. Thus, the
decision of the Court of Appeals insofar as it merely declares those respondents
possessors in the concept of owner is modified to reflect the evidence on record which
indicates that such possession had been converted to ownership by ordinary prescription.
Turning now to petitioners claim to ownership and title, it is uncontested that their
claim hinges largely on TCT Nos. T-103 and T-104, issued in the name of petitioner Ramon
Durano III. However, the validity of these certificates of title was put to serious doubt by
the following: (1) the certificates reveal the lack of registered title of Cepoc to the
properties;[24] (2) the alleged reconstituted titles of Cepoc were not produced in evidence;
and (3) the deed of sale between Cepoc and Durano & Co. was unnotarized and thus,
unregistrable.
It is true that fraud in the issuance of a certificate of title may be raised only in an
action expressly instituted for that purpose,[25] and not collaterally as in the instant case
which is an action for reconveyance and damages. While we cannot sustain the Court of
Appeals finding of fraud because of this jurisdictional impediment, we observe that the
above-enumerated circumstances indicate none too clearly the weakness of petitioners
evidence on their claim of ownership. For instance, the non-production of the alleged
reconstituted titles of Cepoc despite demand therefor gives rise to a presumption
(unrebutted by petitioners) that such evidence, if produced, would be adverse to
petitioners.[26] Also, the unregistrability of the deed of sale is a serious defect that should
affect the validity of the certificates of title. Notarization of the deed of sale is essential to
its registrability,[27] and the action of the Register of Deeds in allowing the registration of
the unacknowledged deed of sale was unauthorized and did not render validity to the
registration of the document.[28]
Furthermore, a purchaser of a parcel of land cannot close his eyes to facts which
should put a reasonable man upon his guard, such as when the property subject of the
purchase is in the possession of persons other than the seller.[29] A buyer who could not
have failed to know or discover that the land sold to him was in the adverse possession of
another is a buyer in bad faith.[30] In the herein case, respondents were in open possession
and occupancy of the properties when Durano & Co. supposedly purchased the same
from Cepoc. Petitioners made no attempt to investigate the nature of respondents
possession before they ordered demolition in August 1970.
In the same manner, the purchase of the property by petitioner Ramon Durano III
from Durano & Co. could not be said to have been in good faith. It is not disputed that
Durano III acquired the property with full knowledge of respondents occupancy
thereon. There even appears to be undue haste in the conveyance of the property to
Durano III, as the bulldozing operations by Durano & Co. were still underway when the
deed of sale to Durano III was executed on September 15, 1970. There is not even an
indication that Durano & Co. attempted to transfer registration of the property in its
name before it conveyed the same to Durano III.
 In the light of these circumstances, petitioners could not justifiably invoke the
defense of indefeasibility of title to defeat respondents claim of ownership by
prescription. The rule on indefeasibility of title, i.e., that Torrens titles can be attacked for
fraud only within one year from the date of issuance of the decree of registration, does
not altogether deprive an aggrieved party of a remedy at law.As clarified by the Court
in Javier vs. Court of Appeals[31] ---

The decree (of registration) becomes incontrovertible and can no longer be reviewed
after one (1) year from the date of the decree so that the only remedy of the
landowner whose property has been wrongfully or erroneously registered in anothers
name is to bring an ordinary action in court for reconveyance, which is an action in
personam and is always available as long as the property has not passed to an
innocent third party for value. If the property has passed into the hands of an
innocent purchaser for value, the remedy is an action for damages.

In the instant case, respondents action for reconveyance will prosper, it being clear
that the property, wrongfully registered in the name of petitioner Durano III, has not
passed to an innocent purchaser for value.
Since petitioners knew fully well the defect in their titles, they were correctly held by
the Court of Appeals to be builders in bad faith.
The Civil Code provides:

Art. 449. He who builds, plants or sows in bad faith on the land of another, loses what
is built, planted or sown without right of indemnity.

Art. 450. The owner of the land on which anything has been built, planted or sown in
bad faith may demand the demolition of the work, or that the planting or sowing be
removed, in order to replace things in their former condition at the expense of the
person who built, planted or sowed; or he may compel the builder or planter to pay
the price of the land, and the sower the proper rent.

Art. 451. In the cases of the two preceding articles, the landowner is entitled to
damages from the builder, planter or sower.

Based on these provisions, the owner of the land has three alternative rights: (1) to
appropriate what has been built without any obligation to pay indemnity therefor, or (2)
to demand that the builder remove what he had built, or (3) to compel the builder to pay
the value of the land.[32] In any case, the landowner is entitled to damages under Article
451, abovecited.
We sustain the return of the properties to respondents and the payment of indemnity
as being in accord with the reliefs under the Civil Code.
 On petitioners fifth assignment of error that respondents had not proved the
existence of improvements on the property by preponderance of evidence, and that the
damages awarded by the lower courts were excessive and not actually proved, the Court
notes that the issue is essentially factual. Petitioners, however, invoke Article 2199 of the
Civil Code which requires actual damages to be duly proved. Passing upon this matter,
the Court of Appeals cited with approval the decision of the RTC which stated:

The counter claimants made a detail of the improvements that were damaged. Then the
query, how accurate were the listings, supposedly representing damaged
improvements. The Court notes, some of the counter claimants improvements in the tax
declarations did not tally with the listings as mentioned in their individual
affidavits. Also, others did not submit tax declarations supporting identity of the
properties they possessed.The disparity with respect to the former and absence of tax
declarations with respect to the latter, should not be a justification for defeating right of
reimbursement. As a matter of fact, no controverting evidence was presented by the
plaintiffs that the improvements being mentioned individually in the affidavits did not
reflect the actual improvements that were overran by the bulldozing operation. Aside
from that, the City Assessor, or any member of his staff, were not presented as
witnesses. Had they been presented by the plaintiffs, the least that can be expected is that
they would have enlightened the Court the extent of their individual holdings being
developed in terms of existing improvements. This, the plaintiffs defaulted. It might be
true that there were tax declarations, then presented as supporting documents by the
counter claimants, but then mentioning improvements but in variance with the listings in
the individual affidavits. This disparity similarly cannot be accepted as a basis for the
setting aside of the listing of improvements being adverted to by the counter claimants in
their affidavits. This Court is not foreclosing the possibility that the tax declarations on
record were either table computations by the Assessor or his deputy, or tax declarations
whose entries were merely copied from the old tax declarations during the period of
revision. (RTC Decision, p. 36, Records, p. 862)[33]

The right of the owner of the land to recover damages from a builder in bad faith is
clearly provided for in Article 451 of the Civil Code. Although said Article 451 does not
elaborate on the basis for damages, the Court perceives that it should reasonably
correspond with the value of the properties lost or destroyed as a result of the occupation
in bad faith, as well as the fruits (natural, industrial or civil) from those properties that
the owner of the land reasonably expected to obtain. We sustain the view of the lower
courts that the disparity between respondents affidavits and their tax declarations on the
amount of damages claimed should not preclude or defeat respondents right to damages,
which is guaranteed by Article 451. Moreover, under Article 2224 of the Civil Code:
Temperate or moderate damages, which are more than nominal but less than
compensatory damages, may be recovered when the court finds that some pecuniary loss
has been suffered but its amount cannot, from the nature of the case, be proved with
certainty.
 We also uphold the award of litigation expenses and attorneys fees, it being clear that
petitioners acts compelled respondents to litigate and incur expenses to regain rightful
possession and ownership over the disputed property.[34]
The last issue presented for our resolution is whether petitioners could justifiably
invoke the doctrine of separate corporate personality to evade liability for damages. The
Court of Appeals applied the well-recognized principle of piercing the corporate veil, i.e.,
the law will regard the act of the corporation as the act of its individual stockholders
when it is shown that the corporation was used merely as an alter ego by those persons in
the commission of fraud or other illegal acts.
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 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.

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 defendants relationship to
that operation.[35]

The question of whether a corporation is a mere alter ego is purely one of fact.[36] The
Court sees no reason to reverse the finding of the Court of Appeals. The facts show that
shortly after the purported sale by Cepco to Durano & Co., the latter sold the property to
petitioner Ramon Durano III, who immediately procured the registration of the property
in his name. Obviously, Durano & Co. was used by petitioners merely as an
instrumentality to appropriate the disputed property for themselves.
WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals
is MODIFIED to declare respondents with claims to the properties covered by Transfer
Certificate of Title Nos. T-103 and T-104 owners by acquisitive prescription to the extent
of their respective claims. In all other respects, the decision of the Court of Appeals is
AFFIRMED. Costs against petitioners.
SO ORDERED.
GLORIA V. GOMEZ, G.R. No. 174044

Petitioner,
Present:
Carpio, J., Chairperson,
- versus - Leonardo-De Castro,

Brion,

Del Castillo, and

Abad, JJ.

PNOC DEVELOPMENT AND

MANAGEMENT CORPORATION

(PDMC) (formerly known as

FILOIL DEVELOPMENT AND

MANAGEMENT CORPORATION Promulgated:

[FDMC]),

Respondent. November 27, 2009

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

DECISION

ABAD, J.:

This case is about what distinguishes a regular company manager performing important
executive tasks from a corporate officer whose election and functions are governed by the
companys by-laws.
 The Facts and the Case

Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of Petron
Corporation, then a government-owned corporation. With Petrons privatization, she
availed of the companys early retirement program and left that organization on April 30,
1994. On the following day, May 1, 1994, however, Filoil Refinery Corporation (Filoil), also
a government-owned corporation, appointed her its corporate secretary and legal
counsel,[1] with the same managerial rank, compensation, and benefits that she used to
enjoy at Petron.

But Filoil was later on also identified for privatization. To facilitate its conversion,
the Filoil board of directors created a five-member task force headed by petitioner Gomez
who had been designated administrator.[2] While documenting Filoils assets, she found
several properties which were not in the books of the corporation. Consequently, she
advised the board to suspend the privatization until all assets have been accounted for.

With the privatization temporarily shelved, Filoil underwent reorganization and

was renamed Filoil Development Management Corporation (FDMC), which later became
the respondent PNOC Development Management Corporation (PDMC). When this
happened, Gomezs task force was abolished and its members, including Gomez, were
given termination notices on March 5, 1996.[3] The matter was then reported to the
Department of Labor and Employment on March 7, 1996.[4]

Meantime, petitioner Gomez continued to serve as corporate secretary of

respondent PDMC. On September 23, 1996 its president re-hired her as administrator and
legal counsel of the company.[5] In accordance with company guidelines, it credited her
the years she served with the Filoil task force. On May 24, 1998, the next president of
PDMC extended her term as administrator beyond her retirement age,[6] pursuant to his
authority under the PDMC Approvals Manual.[7] She was supposed to serve beyond
retirement from August 11, 1998 to August 11, 2004. Meantime, a new board of directors
for PDMC took over the company.

On March 29, 1999 the new board of directors of respondent PDMC removed
petitioner Gomez as corporate secretary. Further, at the boards meeting on October 21,
1999 the board questioned her continued employment as administrator. In answer, she
presented the former presidents May 24, 1998 letter that extended her term. Dissatisfied
with this, the board sought the advice of its legal department, which expressed the view
that Gomezs term extension was an ultra vires act of the former president. It reasoned
that, since her position was functionally that of a vice-president or general manager, her
term could be extended under the companys by-laws only with the approval of the
board. The legal department held that her de facto tenure could be legally put to an
end.[8]

Sought for comment, the Office of the Government Corporate Counsel (OGCC)
held the view that while respondent PDMCs board did not approve the creation of the
position of administrator that Gomez held, such action should be deemed ratified since
the board had been aware of it since 1994. But the OGCC ventured that the extension of
her term beyond retirement age should have been made with the boards approval.[9]

Petitioner Gomez for her part conceded that as corporate secretary, she served
only as a corporate officer. But, when they named her administrator, she became a regular
managerial employee. Consequently, the respondent PDMCs board did not have to
approve either her appointment as such or the extension of her term in 1998.

Pending resolution of the issue, the respondent PDMCs board withheld petitioner
Gomezs wages from November 16 to 30, 1999, prompting her to file a complaint for non-
payment of wages, damages, and attorneys fees with the Labor Arbiter on December 8,
1999.[10] She later amended her complaint to include other money claims.[11]
 In a special meeting held on December 29, 1999 the respondent PDMCs board
resolved to terminate petitioner Gomezs services retroactive on August 11, 1998, her
retirement date.[12] On January 5, 2000 the board informed petitioner of its
decision.[13] Thus, she further amended her complaint to include illegal dismissal.[14]

Respondent PDMC moved to have petitioner Gomezs complaint dismissed on

ground of lack of jurisdiction. The Labor Arbiter granted the motion[15] upon a finding
that Gomez was a corporate officer and that her case involved an intra-corporate dispute
that fell under the jurisdiction of the Securities and Exchange Commission (SEC)
pursuant to Presidential Decree (P.D.) 902-A.[16] On motion for reconsideration, the
National Labor Relations Commission (NLRC) Third Division set aside the Labor Arbiters
order and remanded the case to the arbitration branch for further proceedings.[17] The
Third Division held that Gomez was a regular employee, not a corporate officer; hence,
her complaint came under the jurisdiction of the Labor Arbiter.

Upon elevation of the matter to the Court of Appeals (CA) in CA-G.R. SP 88819,
however, the latter rendered a decision on May 19, 2006,[18] reversing the NLRC
decision. The CA held that since Gomezs appointment as administrator required the
approval of the board of directors, she was clearly a corporate officer. Thus, her complaint
is within the jurisdiction of the Regional Trial Court (RTC) under P.D. 902-A, as amended
by Republic Act (R.A.) 8799.[19] With the denial of her motion for
reconsideration,[20] Gomez filed this petition for review on certiorari under Rule 45.

The Issue Presented

The key issue in this case is whether or not petitioner Gomez was, in her capacity as
administrator of respondent PDMC, an ordinary employee whose complaint for illegal
dismissal and non-payment of wages and benefits is within the jurisdiction of the NLRC.

The Courts Ruling

Ordinary company employees are generally employed not by action of the directors and
stockholders but by that of the managing officer of the corporation who also determines
the compensation to be paid such employees.[21] Corporate officers, on the other hand, are
elected or appointed[22] by the directors or stockholders, and are those who are given that
character either by the Corporation Code or by the corporations by-laws.[23]

Here, it was the PDMC president who appointed petitioner Gomez administrator,
not its board of directors or the stockholders. The president alone also determined her
compensation package. Moreover, the administrator was not among the corporate
officers mentioned in the PDMC by-laws. The corporate officers proper were the
chairman, president, executive vice-president, vice-president, general manager, treasurer,
and secretary.[24]

Respondent PDMC claims, however, that since its board had under its by-laws the
power to create additional corporate offices, it may be deemed to have simply ratified its
presidents creation of the corporate position of administrator.[25] But creating an
additional corporate office was definitely not respondent PDMCs intent based on its
several actions concerning the position of administrator.

Respondent PDMC never told Gomez that she was a corporate officer until the
tail-end of her service after the board found legal justification for getting rid of her by
consulting its legal department and the OGCC which supplied an answer that the board
obviously wanted. Indeed, the PDMC president first hired her as administrator in May
1994 and then as administrator/legal counsel in September 1996 without a board
approval. The president even extended her term in May 1998 also without such
approval. The companys mindset from the beginning, therefore, was that she was not a
corporate officer.

Respondent PDMC of course claims that as administrator petitioner Gomez

performed functions that were similar to those of its vice-president or its general
manager, corporate positions that were mentioned in the companys by-laws. It points out
that Gomez was third in the line of command, next only to the
chairman and president,[26] and had been empowered to make major decisions and
manage the affairs of the company.

But the relationship of a person to a corporation, whether as officer or agent or

employee, is not determined by the nature of the services he performs but by the
incidents of his relationship with the corporation as they actually exist. [27] Here,
respondent PDMC hired petitioner Gomez as an ordinary employee without board
approval as was proper for a corporate officer. When the company got her the first time,
it agreed to have her retain the managerial rank that she held with
Petron. Her appointment paper said that she would be entitled to all the rights,
privileges, and benefits that regular PDMC employees enjoyed.[28] This is in sharp contrast
to what the former PDMC presidents appointment paper stated: he was elected to the
position and his compensation depended on the will of the board of directors.[29]

What is more, respondent PDMC enrolled petitioner Gomez with the Social
Security System, the Medicare, and the Pag-Ibig Fund. It even issued certifications dated
October 10, 2008,[30] stating that Gomez was a permanent employee and that the
company had remitted combined contributions during her tenure. The company also
made her a member of the PDMCs savings and provident plan[31] and its retirement
plan.[32] It grouped her with the managers covered by the companys group hospitalization
insurance.[33] Likewise, she underwent regular employee performance
appraisals,[34] purchased stocks through the employee stock option plan,[35] and was
entitled to vacation and emergency leaves.[36] PDMC even withheld taxes on her salary
and declared her as an employee in the official Bureau of Internal Revenue
forms.[37] These are all indicia of an employer-employee relationship which respondent
PDMC failed to refute.

Estoppel, an equitable principle rooted on natural justice, prevents a person from

rejecting his previous acts and representations to the prejudice of others who have relied
on them.[38] This principle of law applies to corporations as well. The PDMC in this case is
estopped from claiming that despite all the appearances of regular employment that it
weaved around petitioner Gomezs position it must have technically hired her only as a
corporate officer. The board and its officers made her stay on and work with the company
for years under the belief that she held a regular managerial position.

That petitioner Gomez served concurrently as corporate secretary for a time is

immaterial. A corporation is not prohibited from hiring a corporate officer to perform
services under circumstances which will make him an employee.[39] Indeed, it is possible
for one to have a dual role of officer and employee. In Elleccion Vda. De Lecciones v.
National Labor Relations Commission,[40] the Court upheld NLRC jurisdiction over a
complaint filed by one who served both as corporate secretary and administrator, finding
that the money claims were made as an employee and not as a corporate officer.

WHEREFORE, the Court GRANTS the petition, REVERSES and SETS ASIDE the
decision dated May 19, 2006 and the resolution dated August 15, 2006 of the Court of
Appeals in CA-G.R. SP 88819, and REINSTATES the resolution dated November 22, 2002
of the National Labor Relations Commissions Third Division in NLRC NCR 30-12-00856-
99. Let the records of this case be REMANDED to the arbitration branch of origin for the
conduct of further proceedings.

SO ORDERED.

G.R. No. L-23893 October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC
SERVICE COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-
appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.

Chuidian Law Office for plaintiff-appellant.

Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.

ANGELES, J.:

This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil
Case No. 41845, declaring null and void the sheriff's sale of two certificates of public
convenience in favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by
the latter to defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa
Rey Transit, Inc., to be the lawful owner of the said certificates of public convenience; and
ordering the private defendants, jointly and severally, to pay to the plaintiff, the sum of
P5,000.00 as and for attorney's fees. The case against the PSC was dismissed.

The rather ramified circumstances of the instant case can best be understood by a
chronological narration of the essential facts, to wit:

Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the
business name of Villa Rey Transit, pursuant to certificates of public convenience granted
him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651,
which authorized him to operate a total of thirty-two (32) units on various routes or lines
from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the
aforementioned two certificates of public convenience to the Pangasinan Transportation
Company, Inc. (otherwise known as Pantranco), for P350,000.00 with the condition,
among others, that the seller (Villarama) "shall not for a period of 10 years from the date
of this sale, apply for any TPU service identical or competing with the buyer."

Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey
Transit, Inc. (which shall be referred to hereafter as the Corporation) was organized with
a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each;
P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama)
was one of the incorporators, and she subscribed for P1,000.00; the balance of
P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the
subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, who
was Natividad R. Villarama.

In less than a month after its registration with the Securities and Exchange Commission
(March 10, 1959), the Corporation, on April 7, 1959, bought five certificates of public
convenience, forty-nine buses, tools and equipment from one Valentin Fernando, for the
sum of P249,000.00, of which P100,000.00 was paid upon the signing of the contract;
P50,000.00 was payable upon the final approval of the sale by the PSC; P49,500.00 one
year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by
the BUYER to the different suppliers of the SELLER."

The very same day that the aforementioned contract of sale was executed, the parties
thereto immediately applied with the PSC for its approval, with a prayer for the issuance
of a provisional authority in favor of the vendee Corporation to operate the service
therein involved.1 On May 19, 1959, the PSC granted the provisional permit prayed for,
upon the condition that "it may be modified or revoked by the Commission at any time,
shall be subject to whatever action that may be taken on the basic application and shall
be valid only during the pendency of said application." Before the PSC could take final
action on said application for approval of sale, however, the Sheriff of Manila, on July 7,
1959, levied on two of the five certificates of public convenience involved therein, namely,
those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of execution
issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of
Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant,
judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On
July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of
public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in
his name.

Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly
submitted for approval their corresponding contract of sale to the PSC.2 Pantranco
therein prayed that it be authorized provisionally to operate the service involved in the
said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the
Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were
scheduled for a joint hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an
order disposing that during the pendency of the cases and before a final resolution on the
aforesaid applications, the Pantranco shall be the one to operate provisionally the service
under the twocertificates embraced in the contract between Ferrer and Pantranco. The
Corporation took issue with this particular ruling of the PSC and elevated the matter to
the Supreme Court,3 which decreed, after deliberation, that until the issue on the
ownership of the disputed certificates shall have been finally settled by the proper court,
the Corporation should be the one to operate the lines provisionally.

On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a
complaint for the annulment of the sheriff's sale of the aforesaid two certificates of public
convenience (PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the
subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco and the PSC.
The plaintiff Corporation prayed therein that all the orders of the PSC relative to the
parties' dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff
Corporation had no valid title to the certificates in question because the contract
pursuant to which it acquired them from Fernando was subject to a suspensive condition
— the approval of the PSC — which has not yet been fulfilled, and, therefore, the Sheriff's
levy and the consequent sale at public auction of the certificates referred to, as well as the
sale of the same by Ferrer to Pantranco, were valid and regular, and vested unto
Pantranco, a superior right thereto.

Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging
that Villarama and the Corporation, are one and the same; that Villarama and/or the
Corporation was disqualified from operating the two certificates in question by virtue of
the aforementioned agreement between said Villarama and Pantranco, which stipulated
that Villarama "shall not for a period of 10 years from the date of this sale, apply for any
TPU service identical or competing with the buyer."

Upon the joinder of the issues in both the complaint and third-party complaint, the case
was tried, and thereafter decision was rendered in the terms, as above stated.

As stated at the beginning, all the parties involved have appealed from the decision. They
submitted a joint record on appeal.

Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey
Transit, Inc. (Corporation) is a distinct and separate entity from Jose M. Villarama; that
the restriction clause in the contract of January 8, 1959 between Pantranco and Villarama
is null and void; that the Sheriff's sale of July 16, 1959, is likewise null and void; and the
failure to award damages in its favor and against Villarama.

Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null
and void; and the sale of the two certificates in question by Valentin Fernando to the
Corporation, is valid. He also assails the award of P5,000.00 as attorney's fees in favor of
the Corporation, and the failure to award moral damages to him as prayed for in his
counterclaim.

The Corporation, on the other hand, prays for a review of that portion of the decision
awarding only P5,000.00 as attorney's fees, and insisting that it is entitled to an award of
P100,000.00 by way of exemplary damages.

After a careful study of the facts obtaining in the case, the vital issues to be resolved are:
(1) Does the stipulation between Villarama and Pantranco, as contained in the deed of
sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF
THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE
BUYER," apply to new lines only or does it include existing lines?; (2) Assuming that said
stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the
affirmative, that said stipulation is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with the last
proposition.

The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder
of the Corporation, alleging that he did not become such, because he did not have
sufficient funds to invest, his wife, however, was an incorporator with the least subscribed
number of shares, and was elected treasurer of the Corporation. The finances of the
Corporation which, under all concepts in the law, are supposed to be under the control
and administration of the treasurer keeping them as trust fund for the Corporation, were,
nonetheless, manipulated and disbursed as if they were the private funds of Villarama, in
such a way and extent that Villarama appeared to be the actual owner-treasurer of the
business without regard to the rights of the stockholders. The following testimony of
Villarama,4together with the other evidence on record, attests to that effect:

Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit,
Inc. You heard the testimony presented here by the bank regarding the initial
opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which amount
Eighty-Five Thousand Pesos was a check drawn by yourself personally. In the
direct examination you told the Court that the reason you drew a check for Eighty-
Five Thousand Pesos was because you and your wife, or your wife, had spent the
money of the stockholders given to her for incorporation. Will you please tell the
Honorable Court if you knew at the time your wife was spending the money to pay
debts, you personally knew she was spending the money of the incorporators?

A. You know my money and my wife's money are one. We never talk about
those things.

Q. Doctor, your answer then is that since your money and your wife's money
are one money and you did not know when your wife was paying debts with the
incorporator's money?

A. Because sometimes she uses my money, and sometimes the money given to
her she gives to me and I deposit the money.

Q. Actually, aside from your wife, you were also the custodian of some of the
incorporators here, in the beginning?

A. Not necessarily, they give to my wife and when my wife hands to me I did
not know it belonged to the incorporators.

Q. It supposes then your wife gives you some of the money received by her in
her capacity as treasurer of the corporation?

A. Maybe.
 Q. What did you do with the money, deposit in a regular account?

A. Deposit in my account.

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

A. I do not remember.

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

xxx xxx xxx

JUDGE: Reform the question.

Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand

Pesos, did your wife give you Fifty-two Thousand Pesos?

A. I have testified before that sometimes my wife gives me money and I do not
know exactly for what.

The evidence further shows that the initial cash capitalization of the corporation of
P105,000.00 was mostly financed by Villarama. Of the P105,000.00 deposited in the First
National City Bank of New York, representing the initial paid-up capital of the
Corporation, P85,000.00 was covered by Villarama's personal check. The deposit slip for
the said amount of P105,000.00 was admitted in evidence as Exh. 23, which shows on its
face that P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No.
F-50271 of the First National City Bank of New York. The testimonies of Alfonso
Sancho5 and Joaquin Amansec,6 both employees of said bank, have proved that the
drawer of the check was Jose Villarama himself.

Another witness, Celso Rivera, accountant of the Corporation, testified that while in the
books of the corporation there appears an entry that the treasurer received P95,000.00 as
second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as
the first installment of the offer for second subscriptions worth P200,000.00 from the
original subscribers, yet Villarama directed him (Rivera) to make vouchers liquidating the
sums.7 Thus, it was made to appear that the P95,000.00 was delivered to Villarama in
payment for equipment purchased from him, and the P100,000.00 was loaned as advances
to the stockholders. The said accountant, however, testified that he was not aware of any
amount of money that had actually passed hands among the parties involved,8 and
actually the only money of the corporation was the P105,000.00 covered by the deposit
slip Exh. 23, of which as mentioned above, P85,000.00 was paid by Villarama's personal
check.
Further, the evidence shows that when the Corporation was in its initial months of
operation, Villarama purchased and paid with his personal checks Ford trucks for the
Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by Philippine
Bank of Commerce Checks Nos. 992618-B and 993621-B, respectively. These checks have
been sufficiently established by Fausto Abad, Assistant Accountant of Manila Trading &
Supply Co., from which the trucks were purchased9 and Aristedes Solano, an employee of
the Philippine Bank of Commerce,10as having been drawn by Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers
showing that Villarama had co-mingled his personal funds and transactions with those
made in the name of the Corporation, are very illuminating evidence. Villarama has
assailed the admissibility of these exhibits, contending that no evidentiary value
whatsoever should be given to them since "they were merely photostatic copies of the
originals, the best evidence being the originals themselves." According to him, at the time
Pantranco offered the said exhibits, it was the most likely possessor of the originals
thereof because they were stolen from the files of the Corporation and only Pantranco
was able to produce the alleged photostat copies thereof.

Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility
of secondary evidence when the original is in the custody of the adverse party, thus: (1)
opponent's possession of the original; (2) reasonable notice to opponent to produce the
original; (3) satisfactory proof of its existence; and (4) failure or refusal of opponent to
produce the original in court.11 Villarama has practically admitted the second and fourth
requisites.12As to the third, he admitted their previous existence in the files of the
Corporation and also that he had seen some of them.13 Regarding the first element,
Villarama's theory is that since even at the time of the issuance of the subpoena duces
tecum, the originals were already missing, therefore, the Corporation was no longer in
possession of the same. However, it is not necessary for a party seeking to introduce
secondary evidence to show that the original is in the actual possession of his adversary.
It is enough that the circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party entitled to the
custody of the instrument should, on being notified to produce it, admit having it in his
possession.14 Hence, secondary evidence is admissible where he denies having it in his
possession. The party calling for such evidence may introduce a copy thereof as in the
case of loss. For, among the exceptions to the best evidence rule is "when the original has
been lost, destroyed, or cannot be produced in court."15 The originals of the vouchers in
question must be deemed to have been lost, as even the Corporation admits such loss.
Viewed upon this light, there can be no doubt as to the admissibility in evidence of
Exhibits 6 to 19 and 22.

Taking account of the foregoing evidence, together with Celso Rivera's testimony,16 it
would appear that: Villarama supplied the organization expenses and the assets of the
Corporation, such as trucks and equipment;17 there was no actual payment by the original
subscribers of the amounts of P95,000.00 and P100,000.00 as appearing in the
books;18 Villarama made use of the money of the Corporation and deposited them to his
private accounts;19 and the Corporation paid his personal accounts.20

Villarama himself admitted that he mingled the corporate funds with his own
money.21 He also admitted that gasoline purchases of the Corporation were made in his
name22 because "he had existing account with Stanvac which was properly secured and he
wanted the Corporation to benefit from the rebates that he received."23

The foregoing circumstances are strong persuasive evidence showing that Villarama has
been too much involved in the affairs of the Corporation to altogether negative the claim
that he was only a part-time general manager. They show beyond doubt that the
Corporation is his alter ego.

It is significant that not a single one of the acts enumerated above as proof of Villarama's
oneness with the Corporation has been denied by him. On the contrary, he has admitted
them with offered excuses.

Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the
Corporation with the lame excuse that "his wife had requested him to reimburse the
amount entrusted to her by the incorporators and which she had used to pay the
obligations of Dr. Villarama (her husband) incurred while he was still the owner of Villa
Rey Transit, a single proprietorship." But with his admission that he had received
P350,000.00 from Pantranco for the sale of the two certificates and one unit,24 it becomes
difficult to accept Villarama's explanation that he and his wife, after consultation,25 spent
the money of their relatives (the stockholders) when they were supposed to have their
own money. Even if Pantranco paid the P350,000.00 in check to him, as claimed, it could
have been easy for Villarama to have deposited said check in his account and issued his
own check to pay his obligations. And there is no evidence adduced that the said amount
of P350,000.00 was all spent or was insufficient to settle his prior obligations in his
business, and in the light of the stipulation in the deed of sale between Villarama and
Pantranco that P50,000.00 of the selling price was earmarked for the payments of
accounts due to his creditors, the excuse appears unbelievable.

On his having paid for purchases by the Corporation of trucks from the Manila Trading &
Supply Co. with his personal checks, his reason was that he was only sharing with the
Corporation his credit with some companies. And his main reason for mingling his funds
with that of the Corporation and for the latter's paying his private bills is that it would be
more convenient that he kept the money to be used in paying the registration fees on
time, and since he had loaned money to the Corporation, this would be set off by the
latter's paying his bills. Villarama admitted, however, that the corporate funds in his
possession were not only for registration fees but for other important obligations which
were not specified.26
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only
a part-time manager,27 he admitted not only having held the corporate money but that he
advanced and lent funds for the Corporation, and yet there was no Board Resolution
allowing it.28

Villarama's explanation on the matter of his involvement with the corporate affairs of the
Corporation only renders more credible Pantranco's claim that his control over the
corporation, especially in the management and disposition of its funds, was so extensive
and intimate that it is impossible to segregate and identify which money belonged to
whom. The interference of Villarama in the complex affairs of the corporation, and
particularly its finances, are much too inconsistent with the ends and purposes of the
Corporation law, which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that the acts and conduct
of the corporation be carried out in its own corporate name because it has its own
personality.

The doctrine that a corporation is a legal entity distinct and separate from the members
and stockholders who compose it is recognized and respected in all cases which are
within reason and the law.29 When the fiction is urged as a means of perpetrating a fraud
or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or generally the perpetration of
knavery or crime,30 the veil with which the law covers and isolates the corporation from
the members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.

Upon the foregoing considerations, We are of the opinion, and so hold, that the
preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of
Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter
and Pantranco is also enforceable and binding against the said Corporation. For the rule
is that a seller or promisor may not make use of a corporate entity as a means of evading
the obligation of his covenant.31 Where the Corporation is substantially the alter ego of
the covenantor to the restrictive agreement, it can be enjoined from competing with the
covenantee.32

The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and
Villarama are one and the same, the restrictive clause in the contract between Villarama
and Pantranco does not include the purchase of existing lines but it only applies to
application for the new lines. The clause in dispute reads thus:

(4) The SELLER shall not, for a period of ten (10) years from the date of this
sale apply for any TPU service identical or competing with the BUYER. (Emphasis
supplied)
As We read the disputed clause, it is evident from the context thereof that the intention
of the parties was to eliminate the seller as a competitor of the buyer for ten years along
the lines of operation covered by the certificates of public convenience subject of their
transaction. The word "apply" as broadly used has for frame of reference, a service by the
seller on lines or routes that would compete with the buyer along the routes acquired by
the latter. In this jurisdiction, prior authorization is needed before anyone can operate a
TPU service,33whether the service consists in a new line or an old one acquired from a
previous operator. The clear intention of the parties was to prevent the seller from
conducting any competitive line for 10 years since, anyway, he has bound himself not to
apply for authorization to operate along such lines for the duration of such period.34

If the prohibition is to be applied only to the acquisition of new certificates of public

convenience thru an application with the Public Service Commission, this would, in
effect, allow the seller just the same to compete with the buyer as long as his authority to
operate is only acquired thru transfer or sale from a previous operator, thus defeating the
intention of the parties. For what would prevent the seller, under the circumstances, from
having a representative or dummy apply in the latter's name and then later on
transferring the same by sale to the seller? Since stipulations in a contract is the law
between the contracting parties,

Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.
(Art. 19, New Civil Code.)

We are not impressed of Villarama's contention that the re-wording of the two previous
drafts of the contract of sale between Villarama and Pantranco is significant in that as it
now appears, the parties intended to effect the least restriction. We are persuaded, after
an examination of the supposed drafts, that the scope of the final stipulation, while not as
long and prolix as those in the drafts, is just as broad and comprehensive. At most, it can
be said that the re-wording was done merely for brevity and simplicity.

The evident intention behind the restriction was to eliminate the sellers as a competitor,
and this must be, considering such factors as the good will35 that the seller had already
gained from the riding public and his adeptness and proficiency in the trade. On this
matter, Corbin, an authority on Contracts has this to say.36

When one buys the business of another as a going concern, he usually wishes to
keep it going; he wishes to get the location, the building, the stock in trade, and
the customers. He wishes to step into the seller's shoes and to enjoy the same
business relations with other men. He is willing to pay much more if he can get the
"good will" of the business, meaning by this the good will of the customers, that
they may continue to tread the old footpath to his door and maintain with him the
business relations enjoyed by the seller.
 ... In order to be well assured of this, he obtains and pays for the seller's promise
not to reopen business in competition with the business sold.

As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on

the matter37says:

The law concerning contracts which tend to restrain business or trade has gone
through a long series of changes from time to time with the changing condition of
trade and commerce. With trifling exceptions, said changes have been a
continuous development of a general rule. The early cases show plainly a
disposition to avoid and annul all contract which prohibited or restrained any one
from using a lawful trade "at any time or at any place," as being against the benefit
of the state. Later, however, the rule became well established that if the restraint was
limited to "a certain time" and within "a certain place," such contracts were valid and
not "against the benefit of the state." Later cases, and we think the rule is now well
established, have held that a contract in restraint of trade is valid providing there is a
limitation upon either time or place. A contract, however, which restrains a man
from entering into business or trade without either a limitation as to time or place,
will be held invalid.

The public welfare of course must always be considered and if it be not involved
and the restraint upon one party is not greater than protection to the other
requires, contracts like the one we are discussing will be sustained. The general
tendency, we believe, of modern authority, is to make the test whether the
restraint is reasonably necessary for the protection of the contracting parties. If the
contract is reasonably necessary to protect the interest of the parties, it will be
upheld. (Emphasis supplied.)

Analyzing the characteristics of the questioned stipulation, We find that although it is in

the nature of an agreement suppressing competition, it is, however, merely ancillary or
incidental to the main agreement which is that of sale. The suppression or restraint is
only partial or limited: first, in scope, it refers only to application for TPU by the seller in
competition with the lines sold to the buyer; second, in duration, it is only for ten (10)
years; and third, with respect to situs or territory, the restraint is only along the lines
covered by the certificates sold. In view of these limitations, coupled with the
consideration of P350,000.00 for just two certificates of public convenience, and
considering, furthermore, that the disputed stipulation is only incidental to a main
agreement, the same is reasonable and it is not harmful nor obnoxious to public
service.38 It does not appear that the ultimate result of the clause or stipulation would be
to leave solely to Pantranco the right to operate along the lines in question, thereby
establishing monopoly or predominance approximating thereto. We believe the main
purpose of the restraint was to protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price
controls or deterioration of the service because of the close supervision of the Public
Service Commission.39 This Court had stated long ago,40that "when one devotes his
property to a use in which the public has an interest, he virtually grants to the public an
interest in that use and submits it to such public use under reasonable rules and
regulations to be fixed by the Public Utility Commission."

Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful
agreement, the underlying reason sustaining its validity is well explained in 36 Am. Jur.
537-539, to wit:

... Numerous authorities hold that a covenant which is incidental to the sale and
transfer of a trade or business, and which purports to bind the seller not to engage
in the same business in competition with the purchaser, is lawful and enforceable.
While such covenants are designed to prevent competition on the part of the
seller, it is ordinarily neither their purpose nor effect to stifle competition
generally in the locality, nor to prevent it at all in a way or to an extent injurious to
the public. The business in the hands of the purchaser is carried on just as it was in
the hands of the seller; the former merely takes the place of the latter; the
commodities of the trade are as open to the public as they were before; the same
competition exists as existed before; there is the same employment furnished to
others after as before; the profits of the business go as they did before to swell the
sum of public wealth; the public has the same opportunities of purchasing, if it is a
mercantile business; and production is not lessened if it is a manufacturing plant.

The reliance by the lower court on tile case of Red Line Transportation Co. v.
Bachrach41 and finding that the stipulation is illegal and void seems misplaced. In the
said Red Line case, the agreement therein sought to be enforced was virtually a division of
territory between two operators, each company imposing upon itself an obligation not to
operate in any territory covered by the routes of the other. Restraints of this type, among
common carriers have always been covered by the general rule invalidating agreements in
restraint of trade. 42

Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant
case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not
to apply for the lifting of restrictions imposed on his certificates of public convenience
was not an ancillary or incidental agreement. The restraint was the principal objective.
On the other hand, in Red Line Transportation Co., Inc. v. Gonzaga,44 the restraint there
in question not to ask for extension of the line, or trips, or increase of equipment — was
not an agreement between the parties but a condition imposed in the certificate of public
convenience itself.

Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting
Villarama for a period of 10 years to "apply" for TPU service along the lines covered by the
certificates of public convenience sold by him to Pantranco is valid and reasonable.
Having arrived at this conclusion, and considering that the preponderance of the
evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, We
hold, as prayed for in Pantranco's third party complaint, that the said Corporation should,
until the expiration of the 1-year period abovementioned, be enjoined from operating the
line subject of the prohibition.

To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition

upon Villarama is not against his application for, or purchase of, certificates of public
convenience, but merely the operation of TPU along the lines covered by the certificates
sold by him to Pantranco. Consequently, the sale between Fernando and the Corporation
is valid, such that the rightful ownership of the disputed certificates still belongs to the
plaintiff being the prior purchaser in good faith and for value thereof. In view of the
ancient rule of caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer
in the sheriff's sale was only the right which Fernando, judgment debtor, had in the
certificates of public convenience on the day of the sale.45

Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service
was notified that "by virtue of an Order of Execution issued by the Court of First Instance
of Pangasinan, the rights, interests, or participation which the defendant, VALENTIN A.
FERNANDO — in the above entitled case may have in the following realty/personalty is
attached or levied upon, to wit: The rights, interests and participation on the Certificates
of Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines
— Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that
Ferrer, the vendee at auction of said certificates, merely stepped into the shoes of the
judgment debtor. Of the same principle is the provision of Article 1544 of the Civil Code,
that "If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it
should be movable property."

There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of
public convenience in question, between the Corporation and Fernando, was not
consummated, it being only a conditional sale subject to the suspensive condition of its
approval by the Public Service Commission. While section 20(g) of the Public Service Act
provides that "subject to established limitation and exceptions and saving provisions to
the contrary, it shall be unlawful for any public service or for the owner, lessee or
operator thereof, without the approval and authorization of the Commission previously
had ... to sell, alienate, mortgage, encumber or lease its property, franchise, certificates,
privileges, or rights or any part thereof, ...," the same section also provides:

... Provided, however, That nothing herein contained shall be construed to prevent
the transaction from being negotiated or completed before its approval or to
prevent the sale, alienation, or lease by any public service of any of its property in
the ordinary course of its business.
It is clear, therefore, that the requisite approval of the PSC is not a condition precedent
for the validity and consummation of the sale.

Anent the question of damages allegedly suffered by the parties, each of the appellants
has its or his own version to allege.

Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco
and Ferrer) in acquiring the certificates of public convenience in question, despite
constructive and actual knowledge on their part of a prior sale executed by Fernando in
favor of the said corporation, which necessitated the latter to file the action to annul the
sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is entitled to collect
actual and compensatory damages, and attorney's fees in the amount of P25,000.00. The
evidence on record, however, does not clearly show that said defendants acted in bad
faith in their acquisition of the certificates in question. They believed that because the bill
of sale has yet to be approved by the Public Service Commission, the transaction was not
a consummated sale, and, therefore, the title to or ownership of the certificates was still
with the seller. The award by the lower court of attorney's fees of P5,000.00 in favor of
Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.

Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale,
he had suffered and should be awarded moral, exemplary damages and attorney's fees,
cannot be entertained, in view of the conclusion herein reached that the sale by Fernando
to the Corporation was valid.

Pantranco, on the other hand, justifies its claim for damages with the allegation that
when it purchased ViIlarama's business for P350,000.00, it intended to build up the traffic
along the lines covered by the certificates but it was rot afforded an opportunity to do so
since barely three months had elapsed when the contract was violated by Villarama
operating along the same lines in the name of Villa Rey Transit, Inc. It is further claimed
by Pantranco that the underhanded manner in which Villarama violated the contract is
pertinent in establishing punitive or moral damages. Its contention as to the proper
measure of damages is that it should be the purchase price of P350,000.00 that it paid to
Villarama. While We are fully in accord with Pantranco's claim of entitlement to damages
it suffered as a result of Villarama's breach of his contract with it, the record does not
sufficiently supply the necessary evidentiary materials upon which to base the award and
there is need for further proceedings in the lower court to ascertain the proper amount.

PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando
to Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at public
auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan
Transportation Co. against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an
entity distinct and separate from the personality of Jose M. Villarama, and insofar as it
awards the sum of P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;

3. The case is remanded to the trial court for the reception of evidence in consonance
with the above findings as regards the amount of damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered.

UNLAD RESOURCES DEVELOPMENT G.R. No. 149338

CORPORATION, UNLAD RURAL BANK OF
NOVELETA, INC., UNLAD COMMODITIES,
INC., HELENA Z. BENITEZ, and CONRADO L.
BENITEZ II,

Petitioners,

Present:
- versus -

YNARES-SANTIAGO, J.,
RENATO P. DRAGON, TARCISIUS R. Chairperson,
RODRIGUEZ, VICENTE D. CASAS, ROMULO
M. VIRATA, FLAVIANO PERDITO, TEOTIMO AUSTRIA-MARTINEZ,
BENITEZ, ELENA BENITEZ, and ROLANDO
CHICO-NAZARIO,
SUAREZ,
NACHURA, and
Respondents.
REYES, JJ.

Promulgated:

July 28, 2008

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

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Civil Procedure seeking the reversal of the November 29, 2000 Decision[1] and August 2,
2001 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 54226.

The facts, as found by the CA, are as follows:

On December 29, 1981, the Plaintiffs (herein respondents) and

defendant (herein petitioner) Unlad Resources, through its Chairman[,]
Helena Z. Benitez[,] entered into a Memorandum of Agreement wherein it
is provided that [respondents], as controlling stockholders of the Rural
Bank [of Noveleta] shall allow Unlad Resources to invest four million eight
hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of
additional equity. On the other hand, [petitioner] Unlad Resources bound
itself to invest the said amount of 4.8 million pesos in the Rural Bank; upon
signing, it was, likewise, agreed that [petitioner] Unlad Resources shall
subscribe to a minimum of four hundred eighty thousand pesos
(P480,000.00) (sic) common or preferred non-voting shares of stock with a
total par value of four million eight hundred thousand pesos
(P4,800,000.00) and pay up immediately one million two hundred
thousand pesos (P1,200,000.00) for said subscription; that the
[respondents], upon the signing of the said agreement shall transfer control
and management over the Rural Bank to Unlad Resources. According to the
[respondents], immediately after the signing of the agreement, they
complied with their obligation and transferred control of the Rural Bank to
Unlad Resources and its nominees and the Bank was renamed the Unlad
Rural Bank of Noveleta, Inc. However, [respondents] claim that despite
repeated demands, Unlad Resources has failed and refused to comply with
their obligation under the said Memorandum of Agreement when it did not
invest four million eight hundred thousand pesos (P4,800,000.00) in the
Rural Bank in the form of additional equity and, likewise, it failed to
immediately infuse one million two hundred thousand pesos
(P1,200,000.00) as paid in capital upon signing of the Memorandum of
Agreement.

On August 10, 1984, the Board of Directors of [petitioner] Unlad

Resources passed Resolution No. 84-041 authorizing the President and the
General Manager to lease a mango plantation situated in
Naic, Cavite. Pursuant to this Resolution, the Bank as [lessee] entered into a
Contract of Lease with the [petitioner] Helena Z. Benitez as [lessor]. The
management of the mango plantation was undertaken by Unlad
Commodities, Inc., a subsidiary of Unlad Resources[,] under a Management
Contract Agreement. The Management Contract provides that Unlad
Commodities, Inc. would receive eighty percent (80%) of the net profits
generated by the operation of the mango plantation while the Banks share
is twenty percent (20%). It was further agreed that at the end of the lease
period, the Rural Bank shall turn over to the lessor all permanent
improvements introduced by it on the plantation.

xxxx

On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents]

regarding [the] Central Banks approval to retire its [Development Bank of
 the Philippines] preferred shares in the amount of P219,000.00 and giving
notice for subscription to proportionate shares. The [respondents] objected
on the grounds that there is already a sinking fund for the retirement of the
said DBP-held preferred shares provided for annually and that it could
deprive the Rural Bank of a cheap source of fund. (sic)

[Respondents] alleged compliance with all of their obligations under

the Memorandum of Agreement in that they have transferred control and
management over the Rural bank to the [petitioners] and are ready, willing
and able to allow [petitioners] to subscribe to a minimum of four hundred
eighty thousand (P480,000.00) (sic) common or preferred non-voting
shares of stocks with a total par value of four million eight hundred
thousand pesos (P4,800,000.00) in the Rural Bank. However, [petitioners]
have failed and refused to subscribe to the said shares of stock and to pay
the initial amount of one million two hundred thousand pesos
(P1,200,000.00) for said subscription.[3]

On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC)
of Makati City, Branch 61 a Complaint[4] for rescission of the agreement and the return of
control and management of the Rural Bank from petitioners to respondents, plus
damages. After trial, the RTC rendered a Decision,[5] the dispositive portion of which
provides:

WHEREFORE, Premises Considered, judgment is hereby rendered,

as follows:

1. The Memorandum of Agreement dated 29 December

1991 (sic) is hereby declared rescinded and:
 (a) Defendant Unlad Resources Development
Corporation is hereby ordered to immediately return control
and management over the Rural Bank of Noveleta, Inc. to
Plaintiffs; and

(b) Unlad Rural Bank of Noveleta, Inc. is hereby

ordered to return to Defendants the sum of One Million
Three Thousand Seventy Pesos (P1,003,070.00)

2. The Director for Rural Banks of the Bangko Sentral ng

Pilipinas is hereby appointed as Receiver of the Rural Bank;

3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined

from placing the retired DBP-held preferred shares available for
subscription and the same is hereby ordered to be placed under a sinking
fund;

4. Defendant Unlad Resources Development Corporation is

hereby ordered to pay plaintiffs the following:

(a) actual compensatory damages amounting to Four

Million Six Hundred One Thousand Seven Hundred Sixty-
Five and 38/100 Pesos (P4,601,765.38);

(b) moral damages in the amount of Five Hundred

Thousand Pesos (P500,000.00);

(c) exemplary and corrective damages in the

amount of One Hundred Thousand Pesos (P100,000.00);
and
 (d) attorneys fees in the sum of (P100,000.00), plus
cost of suit.

SO ORDERED.[6]

Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to
Dismiss and, subsequently, a Supplemental Motion to Dismiss, which were both denied.
Later, however, the CA, in a Decision dated November 29, 2000, dismissed the appeal for
lack of merit and affirmed the RTC Decision in all respects. Petitioners motion for
reconsideration was denied in CA Resolution dated August 2, 2001.

Petitioners are now before this Court alleging that the CA committed a grave and
serious reversible error in issuing the assailed Decision. Petitioners question the
jurisdiction of the trial court, something they have done from the beginning of the
controversy, contending that the issues that respondents raised before the trial court are
intra-corporate in nature and are, therefore, beyond the jurisdiction of the trial
court. They point out that respondents complaint charged them with mismanagement
and alleged dissipation of the assets of the Rural Bank. Since the complaint challenges
corporate actions and decisions of the Board of Directors and prays for the recovery of the
control and management of the Rural Bank, these matters fall outside the jurisdiction of
the trial court. Thus, they posit that the judgment of the trial court, as affirmed by the
CA, is null and void and may be impugned at any time.

Petitioners further argue that the action instituted by respondents had already
prescribed, because Article 1389 of the Civil Code provides that an action for rescission
must be commenced within four years. They claim that the trial court and the CA
mistakenly applied Article 1144 of the Civil Code which treats of prescription of actions in
general. They submit that Article 1389, which deals specifically with actions for rescission,
is the applicable law.

Moreover, petitioners assert that they have fully complied with their undertaking
under the subject Memorandum of Agreement, but that the undertaking has become a
legal and factual impossibility because the authorized capital stock of the Rural Bank was
increased from P1.7 million to only P5 million, and could not accommodate the
subscription by petitioners of P4.8 million worth of shares. Such deficiency, petitioners
contend, is with the knowledge and approval of respondent Renato P. Dragon and his
nominees to the Board of Directors.

Petitioners, without conceding the propriety of the judgment of rescission, also

argue that the subject Memorandum of Agreement could not just be ordered rescinded
without the corresponding order for the restitution of the parties total contributions
and/or investments in the Rural Bank. Finally, they assail the award for moral and
exemplary damages, as well as the award for attorneys fees, as bereft of factual and legal
bases given that, in the body of the Decision, it was merely stated that respondents
suffered moral damages without any discussion or explanation of, nor any justification for
such award. Likewise, the matter of attorneys fees was not at all discussed in the body of
the Decision. Petitioners claim that pursuant to the prevailing rule, attorneys fees cannot
be recovered in the absence of stipulation.

On the other hand, respondents declare that immediately after the signing of the
Memorandum of Agreement, they complied with their obligation and transferred control
of the Rural Bank to petitioner Unlad Resources and its nominees, but that, despite
repeated demands, petitioners have failed and refused to comply with their concomitant
obligations under the Agreement.

Respondents narrate that shortly after taking over the Rural Bank, petitioners
Conrado L. Benitez II and Jorge C. Cerbo, as President and General Manager, respectively,
entered into a Contract of Lease over the Naic, Cavite mango plantation, and that, as a
consequence of this venture, the bank incurred expenses amounting to P475,371.57,
equivalent to 25.76% of its capital and surplus. The respondents further assert that the
Central Bank found this undertaking not inherently connected with bona fide rural
banking operations, nor does it fall within the allied undertakings permitted under
Section 26 of Central Bank Circular No. 741 and Section 3379 of the Manual of Regulations
of the Central Bank. Thus, respondents contend that this circumstance, coupled with the
fact that petitioners Helena Z. Benitez and Conrado L. Benitez II were also stockholders
and members of the Board of Directors of Unlad Resources, Unlad Rural Bank, and Unlad
Commodities at that time, is adequate proof that the Rural Banks management had every
intention of diverting, dissipating, and/or wasting the banks assets for petitioners own
gain.

They likewise allege that because of the failure of petitioners to comply with their
obligations under the Memorandum of Agreement, respondents, with the exception of
Tarcisius Rodriguez, lodged a complaint with the Securities and Exchange Commission
(SEC), seeking rescission of the Agreement, damages, and the appointment of a
management committee, but the SEC dismissed the complaint for lack of jurisdiction.

Furthermore, when the Rural Bank informed respondents of the Central Banks
approval of its plan to retire its DBP-held preferred shares, giving notices for subscription
to proportionate shares, respondents objected on the ground that there was already a
sinking fund for the retirement of said shares provided for annually, and that the
retirement would deprive the petitioner Rural Bank of a cheap source of fund. It was at
that point, respondents claim, that they instituted the aforementioned Complaint against
petitioners before the RTC of Makati.

The respondents also seek the outright dismissal of this Petition for lack of
verification as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of proper
verification as to petitioners Unlad Resources Development Corporation, Unlad Rural
Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper verified statement of
material dates; and lack of proper sworn certification of non-forum shopping.
 They support the proposition that Tijam v. Sibonghanoy[7] applies, and that
petitioners are indeed estopped from questioning the jurisdiction of the trial court. They
also share the lower courts view that it is Article 1144 of the Civil Code, and not Article
1389, that is applicable to this case. Finally, respondents allege that the failure of
petitioner Unlad Resources to comply with its undertaking under the Agreement, as
uniformly found by the trial court and the CA, may no longer be assailed in the instant
Petition, and that the award of moral and exemplary damages and attorneys fees is
justified.

The Petition is bereft of merit. We uphold the Decision of the CA affirming that of
the RTC.

First, the subject of jurisdiction. The main issue in this case is the rescission of the
Memorandum of Agreement. This is to be distinguished from respondents allegation of
the alleged mismanagement and dissipation of corporate assets by the petitioners which
is based on the prayer for receivership over the bank. The two issues, albeit related, are
obviously separate, as they pertain to different acts of the parties involved. The issue of
receivership does not arise from the parties obligations under the Memorandum of
Agreement, but rather from specific acts attributed to petitioners as members of the
Board of Directors of the Bank. Clearly, the rescission of the Memorandum of Agreement
is a cause of action within the jurisdiction of the trial courts, notwithstanding the fact
that the parties involved are all directors of the same corporation.

Still, the petitioners insist that the trial court had no jurisdiction over the
complaint because the issues involved are intra-corporate in nature.

This argument miserably fails to persuade. The law in force at the time of the filing
of the case was Presidential Decree (P.D.) 902-A, Section 5(b) of which vested the
Securities and Exchange Commission with original and exclusive jurisdiction to hear and
decide cases involving controversies arising out of intra-corporate
relations.[8] Interpreting this statutorily conferred jurisdiction on the SEC, this Court had
occasion to state:

Nowhere in said decree do we find even so much as an [intimation] that

absolute jurisdiction and control is vested in the Securities and Exchange
Commission in all matters affecting corporations. To uphold the
respondents arguments would remove without legal imprimatur from the
regular courts all conflicts over matters involving or affecting corporations,
regardless of the nature of the transactions which give rise to such disputes.
The courts would then be divested of jurisdiction not by reason of the
nature of the dispute submitted to them for adjudication, but solely for the
reason that the dispute involves a corporation. This cannot be done.[9]

It is well to remember that the respondents had actually filed with the SEC a case
against the petitioners which, however, was dismissed for lack of jurisdiction due to the
pendency of the case before the RTC.[10] The SECs Order dismissing the respondents
complaint is instructive:

From the foregoing allegations, it is apparent that the present action

involves two separate causes of action which are interrelated, and the
resolution of which hinges on the very document sought to be rescinded.
The assertion that the defendants failed to comply with their contractual
undertaking and the claim for rescission of the contract by the plaintiffs
has, in effect, put in issue the very status of the herein defendants as
stockholders of the Rural Bank. The issue as to whether or not the
defendants are stockholders of the Rural Bank is a pivotal issue to be
determined on the basis of the Memorandum of Agreement. It is a
prejudicial question and a logical antecedent to confer jurisdiction to this
Commission.
 It is to be noted, however, that determination of the contractual
undertaking of the parties under a contract lies with the Regional Trial
Courts and not with this Commission. x x x[11]

Be that as it may, this point has been rendered moot by Republic Act (R.A.) No.
8799, also known as the Securities Regulation Code. This law, which took effect in 2000,
has transferred jurisdiction over such disputes to the RTC. Specifically, R.A. 8799
provides:

Sec. 5. Powers and Functions of the Commission

xxxx

5.2. The Commissions jurisdiction over all cases enumerated under Section
5 of Presidential Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided, That
the Supreme Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over these
cases. The Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

Section 5 of P.D. No. 902-A reads, thus:

 Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:

a) Devices and schemes employed by or any acts of the

board of directors, business associates, its officers or partnership,
amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission;

b) Controversies arising out of intra-corporate or

partnership relations, between and among stockholders, members, or
associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as
such entity;

c) Controversies in the election or appointment of

directors, trustees, officers or managers of such corporations, partnerships
or associations.

Consequently, whether the cause of action stems from a contractual dispute or one
that involves intra-corporate matters, the RTC already has jurisdiction over this case. In
this light, the question of whether the doctrine of estoppel by laches applies, as
enunciated by this Court in Tijam v. Sibonghanoy, no longer finds relevance.
 Second, the issue of prescription. Petitioners further contend that the action for
rescission has prescribed under Article 1398 of the Civil Code, which provides:

Article 1389. The action to claim rescission must be commenced

within four years x x x.

This is an erroneous proposition. Article 1389 specifically refers to rescissible

contracts as, clearly, this provision is under the chapter entitled Rescissible Contracts.

In a previous case,[12] this Court has held that Article 1389:

applies to rescissible contracts, as enumerated and defined in Articles 1380

and 1381. We must stress however, that the rescission in Article 1381 is not
akin to the term rescission in Article 1191 and Article 1592. In Articles 1191
and 1592, the rescission is a principal action which seeks the resolution or
cancellation of the contract while in Article 1381, the action is a subsidiary
one limited to cases of rescission for lesion as enumerated in said article.

The prescriptive period applicable to rescission under Articles 1191

and 1592, is found in Article 1144, which provides that the action upon a
written contract should be brought within ten years from the time the right
of action accrues.

Article 1381 sets out what are rescissible contracts, to wit:

 Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval
of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject
to rescission.

The Memorandum of Agreement subject of this controversy does not fall under
the above enumeration. Accordingly, the prescriptive period that should apply to this
case is that provided for in Article 1144, to wit:

Article 1144. The following actions must be brought within ten years from
the time the right of action accrues:

(1) Upon a written contract;

xxxx

Based on the records of this case, the action was commenced on July 3, 1987, while
the Memorandum of Agreement was entered into on December 29, 1981. Article 1144
specifically provides that the 10-year period is counted from the time the right of action
accrues. The right of action accrues from the moment the breach of right or duty
occurs.[13] Thus, the original Complaint was filed well within the prescriptive period.

We now proceed to determine if the trial court, as affirmed by the CA, correctly
ruled for the rescission of the subject Agreement.

Petitioners contend that they have fully complied with their obligation under the
Memorandum of Agreement. They allege that due to respondents failure to increase the
capital stock of the corporation to an amount that will accommodate their undertaking, it
had become impossible for them to perform their end of the Agreement.

Again, petitioners contention is untenable. There is no question that petitioners

herein failed to fulfill their obligation under the Memorandum of Agreement. Even they
admit the same, albeit laying the blame on respondents.

It is true that respondents increased the Rural Banks authorized capital stock to
only P5 million, which was not enough to accommodate the P4.8 million worth of stocks
that petitioners were to subscribe to and pay for. However, respondents failure to fulfill
their undertaking in the agreement would have given rise to the scenario contemplated
by Article 1191 of the Civil Code, which reads:

Article 1191. The power to rescind reciprocal obligations is implied in

reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
 The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons

who have acquired the thing, in accordance with Articles 1385 and 1388 and
the Mortgage Law.

Thus, petitioners should have exacted fulfillment from the respondents or asked
for the rescission of the contract instead of simply not performing their part of the
Agreement. But in the course of things, it was the respondents who availed of the remedy
under Article 1191, opting for the rescission of the Agreement in order to regain control of
the Rural Bank.

Having determined that the rescission of the subject Memorandum of Agreement

was in order, the trial court ordered petitioner Unlad Resources to return to respondents
the management and control of the Rural Bank and for the latter to return the sum
of P1,003,070.00 to petitioners.

Mutual restitution is required in cases involving rescission under Article 1191. This
means bringing the parties back to their original status prior to the inception of the
contract.[14]Article 1385 of the Civil Code provides, thus:

ART. 1385. Rescission creates the obligation to return the things

which were the object of the contract, together with their fruits, and the
price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obligated to restore.
 Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons who did
not act in bad faith.

In this case, indemnity for damages may be demanded from the

person causing the loss.

This Court has consistently ruled that this provision applies to rescission under
Article 1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states
that rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest, the Court finds no justification to sustain petitioners position that
said Article 1385 does not apply to rescission under Article 1191.[15]

Rescission has the effect of unmaking a contract, or its undoing from the beginning,
and not merely its termination.[16] Hence, rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore. To rescind is to declare a contract void
at its inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to abrogate
it from the beginning and restore the parties to their relative positions as if no contract
has been made.[17]

Accordingly, when a decree for rescission is handed down, it is the duty of the
court to require both parties to surrender that which they have respectively received and
to place each other as far as practicable in his original situation. The rescission has the
effect of abrogating the contract in all parts.[18]

Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there
was just cause for rescission. With the contract thus rescinded, the parties must be
restored to the status quo ante, that is, before they entered into the Memorandum of
Agreement.

Finally, we must resolve the question of the propriety of the award for damages
and attorneys fees.

The trial courts Decision mentioned that the evidence is clear and convincing that
Plaintiffs (herein respondents) suffered actual compensatory damages amounting to Four
Million Six Hundred One Thousand Seven Hundred Sixty-Five and 38/100 Pesos
(P4,601,765.38) moral damages and attorneys fees.

Though not discussed in the body of the Decision, the records show that the amount
of P4,601,765.38 pertains to actual losses incurred by respondents as a result of petitioners
non-compliance with their undertaking under the Memorandum of Agreement. On this
point, respondent Dragon presented testimonial and documentary evidence to prove the
actual amount of damages, thus:

Atty. Cruz

Q: Was there any consequence to you Mr. Dragon due to any breach of the
agreement marked as Exhibit A?
A: Yes sir I could have earned thru the shares of stock that I have, or we
have or we had by this time amounting to several millions pesos
(sic). They have only put in the whole amount that we have agreed
upon (sic).

Q: In this connection did you cause computation of these losses that you
incured (sic)?

A: Yes sir.

xxxx

Q: Will you please kindly go through this computation and explain the
same to the Honorable Court?

A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only
Three Hundred Ninety Nine Thousand Two hundred for Nineteen
Thousand Nine Hundred Sixty shares which should have been sold if
it were sold to others for P50.00 each for a total of Nine Hundred
Ninety Eight Thousand but sold to them for Three Hundred Ninety
nine (sic) Thousand two (sic) Hundred only and of which only Three
Hundred Twenty Four Thousand Six Hundred was paid to me.
Therefore, there was a difference of Six Hundred Seven Three (sic)
Thousand Four Hundred (P673,400.00). On the basis of the
commulative (sic) lost income every year from March 1982 from the
amount of Seven Six Hundred (sic) Seventy Three Thousand four
(sic) Hundred (P673,400.) (sic) there would be a discommulative
(sic) lost (sic) of One Million Ninety Three Thousand Nine Hundred
Fifty Two Pesos and forty two (sic) centavos (P1,093,952.42). Please
note that the interest imputed is only at 12% per annum but it should
had (sic) been much higher. In 1984 to 1986 (sic) alone rates went as
higher (sic) as 40% per annum from the so called (sic) Jobo Bills and
 yet we only computed the imputed income or lost income at 12% per
annum and then there is a 40% participation on the unrealized
earnings due to their failure to put in an stabilized (sic) earnings.
You will note that if they put in 4.8 million Pesos and it would be
earning money, 40% of that will go to us because 40% of the bank
would be ours and 60% would be there (sic). But because they did
put in the 4.8 million our 40% did not earn up to that extent and
computed again on the basis of 12% the amount (sic) on the
commulative (sic) basis up to September 1990 is 2 million three
hundred fifty two thousand sixty five pesos and four centavos (sic).
(P2,352,065.04). You will note again that the average return of
investment of any Cavite based (sic) Rural Bank has been no less
than 20% or about 30% per annum. And we computed only the
earnings at 12%.

xxxx

There were loans granted fraudulently to members of the board and

some borrowers which were not all charged interest for several years
and on this basis we computed a 40% shares (sic) on the foregone
income interest income (sic) on all these fraudulently granted loans,
without interest being collected and none a project (sic) among a
plantation project (sic), which was funded by the bank but nothing
was given back to the bank for several hundred thousand of pesos
(sic). And we arrived an (sic) estimate of the foregone interest
income a total of One Million Two Hundred Five Thousand Eight
Hundred Sixty None Pesos and eighty one (sic) centavos and 40
percent share of this (sic) would be Four Hundred Eighty Two
Thousand Three Hundred Forty Seven Pesos and Ninety Two
Centavos. All in all our estimate of the damages we have suffered is
Four Million Six Hundred one (sic) Thousand Seven Hundred Sixty
Five Pesos and thirty eight (sic) centavos (P4,601,765.38).[19]
More importantly, petitioners never raised in issue before the CA this award of actual
compensatory damages. They did not raise the matter of damages in their Appellants
Brief, while in their Motion for Reconsideration, they questioned only the award of moral
and exemplary damages, not the award of actual damages. Even in the present Petition
for Review, what petitioners raised was the propriety of the award of moral and
exemplary damages and attorneys fees.

On the grant of moral and exemplary damages and attorneys fees, we note that the
trial courts Decision did not discuss the basis for the award. No mention of these
damages awarded or their factual basis is made in the body of the Decision, only in the
dispositive portion. Be that as it may, we have examined the records of the case and found
that the award must be sustained.

It should be remembered that there are two separate causes of action in this case:
one for rescission of the Memorandum of Agreement and the other for receivership based
on alleged mismanagement of the company by the plaintiffs. While the award of actual
compensatory damages was based on the breach of duty under the Memorandum of
Agreement, the award of moral damages appears to be based on petitioners
mismanagement of the company when they became members of the Board of Directors of
the Rural Bank.

Thus, the trial court said:

Under the Rural Banks management, a systematic diversion of the

banks assets was conceived whereby: (a) The Rural Banks funds would be
funneled in the development and improvements of the Benitez Mango
Plantation in the guise of an investment in said plantation; (b) Of the net
profits earned from the plantations operations, the Rural Banks share
therein, although it shoulders all of the financial risks, would be a measly
twenty percent (20%) thereof while UCI, without investing a single centavo,
would earn eighty percent (80%) of the said profits. Thus, the bulk of the
profits of the mango plantation was also sought to be diverted to an entity
wherein Helena Z. Benitez and Conrado L. Benitez II are not only principal
stockholders but also the Chairman of the Board of Directors and President,
respectively. Moreover, Defendant Helena Z. Benitez would be entitled to
receive, under the lease contract, rentals in the total amount of Three
Hundred Thousand Pesos (P300,000.00) or ten percent (10%) of gross
profits, whichever is higher. (c) Finally, at the end of the lease period, the
Rural Bank was obliged to turn over to the lessor (Helena Z. Benitez) all
permanent improvements introduced by it on the plantation at no cost to
Ms. Benitez.

Further, in its report dated March 13, 1985, the [Central Bank] after
conducting its general examination upon the Rural Bank ordered the latter
to explain satisfactorily why the bank engage (sic) in an undertaking not
inherently connected with [bona fide] rural banking operations nor within
the allowed allied undertakings, contrary to the provisions of Section 3379
of the CB Manual of Regulations and Section 26 of CB Circular No. 741,
otherwise known as the Circular on Rural Banks[.]

The aforestated CB report states that total exposure to this project

now amounts to P475,371.57 or 25.76% of its capital and surplus[.]
Notwithstanding a finding by the CB of the undertakings illegality, the
defendants nevertheless persisted in pursuing the Mango Plantation Project
and never acceded to the call of [the] CB for it to desist from further
implementing the said project. It was only after another letter from the CB
was received when defendant finally shelved the mango plantation project.

The result of the aforestated report, as well as the actuations of the

Defendants in not yielding to the order of the CB, adequately establishes
not only a violation of CB Rules (specifically Section 26, Circular 741 and
Section 3379 of the CB Manual of Regulations, but also, that it has caused
undue damage both to the Rural bank as well as its stockholders.
 The initial CB report should have sufficiently apprised Defendants of
the illegality of the undertaking. Defendants, therefore have the duty to
terminate the Mango Plantation Project. They, however, [chose] to
continue it, apparently to further their [own] interest in the scheme for
their own personal benefit and gain, an act which is clearly contrary to the
fiduciary nature of their relationship with the corporation in which they are
officers. Such persistence proves evident bad faith, or a breach of a known
duty through some motive or ill-will, which resulted in the further
dissipation and wastage of the Rural Banks assets, unjustly depriving
Plaintiffs of their fair share in the assets of the bank.

All the foregoing satisfactorily affirms the allegations of Plaintiffs to

the effect that these contracts were but part of a device employed by
Defendants to siphon [off] the Rural bank for their personal gain.[20]

Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Though incapable of precise pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants wrongful act or
omission.[21] Article 2220 of the Civil Code further provides that moral damages may be
recovered in case of a breach of contract where the defendant acted in bad faith.[22]

To award moral damages, a court must be satisfied with proof of the following
requisites: (1) an injury whether physical, mental, or psychological clearly sustained by
the claimant; (2) a culpable act or omission factually established; (3) a wrongful act or
omission of the defendant as the proximate cause of the injury sustained by the claimant;
and (4) the award of damages predicated on any of the cases stated in Article 2219.[23]
 Accordingly, based upon the findings of the trial court, it is clear that respondents
are entitled to moral damages. The acts attributed to the petitioners as directors of the
Rural Bank manifestly prejudiced the respondents causing detriment to their standing as
directors and stockholders of the Rural Bank.

Exemplary damages cannot be recovered as a matter of right.[24] While these need

not be proved, respondents must show that they are entitled to moral, temperate or
compensatory damages before the court may consider the question of awarding
exemplary damages.[25] We find that respondents are indeed entitled to moral damages;
thus, the award for exemplary damages is in order.

Anent the award for attorneys fees, Article 2208 of the Civil Code states:

In the absence of stipulation, attorneys fees and expenses of

litigation, other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded.

Hence, the award of exemplary damages is in itself sufficient justification for the
award of attorneys fees.[26]

WHEREFORE, the foregoing premises considered, the petition is

hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 54226 are AFFIRMED.
 SO ORDERED.

PHILIPPINE FISHERIES G.R. No. 169836

DEVELOPMENT AUTHORITY,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,

Chico-Nazario, and

Nachura, JJ.

COURT OF APPEALS, OFFICE OF

THE PRESIDENT, DEPARTMENT

OF FINANCE and the CITY OF Promulgated:

ILOILO,

Respondents. July 31, 2007

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

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the June 21, 2005 Decision[1] of the Court of Appeals
in CA-G.R. SP No. 81228, which held that petitioner Philippine Fisheries Development
Authority (hereafter referred to as Authority) is liable to pay real property taxes on the
land and buildings of the Iloilo Fishing Port Complex (IFPC) which are owned by the
Republic of the Philippines but operated and governed by the Authority.
The facts are not disputed.

On August 11, 1976, then President Ferdinand E. Marcos issued Presidential Decree No.
977 (PD 977) creating the Authority and placing it under the direct control and
supervision of the Secretary of Natural Resources. On February 8, 1982, Executive Order
No. 772 (EO 772) was issued amending PD 977, and renaming the Authority as the now
Philippine Fisheries Development Authority, and attaching said agency to the Ministry of
Natural Resources. Upon the effectivity of the Administrative Code (EO 292), the
Authority became an attached agency of the Department of Agriculture.[2]

Meanwhile, beginning October 31, 1981, the then Ministry of Public Works and Highways
reclaimed from the sea a 21-hectare parcel of land in Barangay Tanza, Iloilo City, and
constructed thereon the IFPC, consisting of breakwater, a landing quay, a refrigeration
building, a market hall, a municipal shed, an administration building, a water and fuel oil
supply system and other port related facilities and machineries. Upon its completion, the
Ministry of Public Works and Highways turned over IFPC to the Authority, pursuant to
Section 11 of PD 977, which places fishing port complexes and related facilities under the
governance and operation of the Authority. Notwithstanding said turn over, title to the
land and buildings of the IFPC remained with the Republic.

The Authority thereafter leased portions of IFPC to private firms and individuals engaged
in fishing related businesses.

Sometime in May 1988, the City of Iloilo assessed the entire IFPC for real property
taxes. The assessment remained unpaid until the alleged total tax delinquency of the
Authority for the fiscal years 1988 and 1989 amounted to P5,057,349.67, inclusive of
penalties and interests. To satisfy the tax delinquency, the City of Iloilo scheduled
on August 30, 1990, the sale at public auction of the IFPC.

The Authority filed an injunction case with the Regional Trial Court. At the pre-trial, the
parties agreed to avail of administrative proceedings, i.e., for the Authority to file a claim
for tax exemption with the Iloilo City Assessors Office. The latter, however, denied the
claim for exemption, hence, the Authority elevated the case to the Department of Finance
(DOF).

In its letter-decision[3] dated March 6, 1992, the DOF ruled that the Authority is liable to
pay real property taxes to the City of Iloilo because it enjoys the beneficial use of the
IFPC. The DOF added, however, that in satisfying the amount of the unpaid real property
taxes, the property that is owned by the Authority shall be auctioned, and not the IFPC,
which is a property of the Republic.[4]

The Authority filed a petition before the Office of the President but it was dismissed. [5] It
also denied the motion for reconsideration filed by the Authority.[6]

On petition with the Court of Appeals, the latter affirmed the decision of the Office of the
President. It opined, however, that the IFPC may be sold at public auction to satisfy the
tax delinquency of the Authority.[7] The dispositive portion thereof, reads:

WHEREFORE, premises considered, the instant Petition for Review is

DENIED, and accordingly the June 30, 2003 Decision and December 3,
2003 Order of the Office of the President are hereby AFFIRMED.

SO ORDERED.[8]
Hence, this petition.

The issues are as follows: Is the Authority liable to pay real property tax to the City
of Iloilo? If the answer is in the affirmative, may the IFPC be sold at public auction to
satisfy the tax delinquency?

To resolve said issues, the Court has to determine (1) whether the Authority is a
government owned or controlled corporation (GOCC) or an instrumentality of the
national government; and (2) whether the IFPC is a property of public dominion.

The Court rules that the Authority is not a GOCC but an instrumentality of the
national government which is generally exempt from payment of real property
tax. However, said exemption does not apply to the portions of the IFPC which the
Authority leased to private entities. With respect to these properties, the Authority is
liable to pay real property tax. Nonetheless, the IFPC, being a property of public
dominion cannot be sold at public auction to satisfy the tax delinquency.

In Manila International Airport Authority (MIAA) v. Court of Appeals,[9] the Court

made a distinction between a GOCC and an instrumentality. Thus:

Section 2(13) of the Introductory Provisions of the Administrative Code of

1987 defines a government-owned or controlled corporation as follows:

SEC. 2. General Terms Defined. x x x

 (13) Government-owned or controlled corporation refers
to any agency organized as a stock or non-stock
corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by
the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of
its capital stock: x x x (Emphasis supplied)

A government-owned or controlled corporation must be organized

as a stock or non-stock corporation. MIAA is not organized as a stock or
non-stock corporation. MIAA is not a stock corporation because it has no
capital stock divided into shares. MIAA has no stockholders or voting
shares.

xxxx

Section 3 of the Corporation Code defines a stock corporation as one

whose capital stock is divided into shares and x x x authorized to distribute
to the holders of such shares dividends x x x. MIAA has capital but it is
not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no

members. Section 87 of the Corporation Code defines a non-stock
corporation as one where no part of its income is distributable as
dividends to its members, trustees or officers. A non-stock corporation
must have members. Even if we assume that the Government is considered
as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their
income to their members. Section 11 of the MIAA Charter mandates MIAA
 to remit 20% of its annual gross operating income to the National
Treasury. This prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock

corporations are organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, scientific, social, civil
service, or similar purposes, like trade, industry, agriculture and like
chambers. MIAA is not organized for any of these purposes. MIAA, a public
utility, is organized to operate an international and domestic airport for
public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does

not qualify as a government-owned or controlled corporation.[10] (Emphasis
supplied)

Thus, for an entity to be considered as a GOCC, it must either be organized as a

stock or non-stock corporation. Two requisites must concur before one may be classified
as a stock corporation, namely: (1) that it has capital stock divided into shares, and (2)
that it is authorized to distribute dividends and allotments of surplus and profits to its
stockholders. If only one requisite is present, it cannot be properly classified as a stock
corporation. As for non-stock corporations, they must have members and must not
distribute any part of their income to said members.[11]

On the basis of the parameters set in the MIAA case, the Authority should be
classified as an instrumentality of the national government. As such, it is generally
exempt from payment of real property tax, except those portions which have been leased
to private entities.

In the MIAA case, petitioner Philippine Fisheries Development Authority was cited
as among the instrumentalities of the national government. Thus

Some of the national government instrumentalities vested by

law with juridical personalities are: Bangko Sentral ng
Pilipinas, Philippine Rice Research Institute, Laguna Lake Development
Authority, Fisheries Development Authority, Bases Conversion
Development Authority, Philippine Ports Authority, Cagayan de Oro Port
 Authority, San Fernando Port Authority, Cebu Port Authority, and
Philippine National Railways.

Indeed, the Authority is not a GOCC but an instrumentality of the

government. The Authority has a capital stock but it is not divided into shares of
stocks.[12] Also, it has no stockholders or voting shares. Hence, it is not a stock
corporation. Neither it is a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined

as an agency of the national government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter.[13]When the law vests in a government instrumentality
corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers.

Thus, the Authority which is tasked with the special public function to carry out
the governments policy to promote the development of the countrys fishing industry and
improve the efficiency in handling, preserving, marketing, and distribution of fish and
other aquatic products, exercises the governmental powers of eminent domain,[14] and the
power to levy fees and charges.[15] At the same time, the Authority exercises the general
corporate powers conferred by laws upon private and government-owned or controlled
corporations.[16]

The MIAA case held[17] that unlike GOCCs, instrumentalities of the national
government, like MIAA, are exempt from local taxes pursuant to Section 133(o) of the
Local Government Code. This exemption, however, admits of an exception with respect to
real property taxes. Applying Section 234(a) of the Local Government Code, the Court
ruled that when an instrumentality of the national government grants to a taxable person
the beneficial use of a real property owned by the Republic, said instrumentality becomes
liable to pay real property tax. Thus, while MIAA was held to be an instrumentality of the
national government which is generally exempt from local taxes, it was at the same time
declared liable to pay real property taxes on the airport lands and buildings which it
leased to private persons. It was held that the real property tax assessments and notices of
delinquencies issued by the City of Pasay to MIAA are void except those pertaining to
portions of the airport which are leased to private parties. Pertinent portions of the
decision, reads:

Section 193 of the Local Government Code expressly withdrew the tax
exemption of all juridical persons [u]nless otherwise provided in this
Code. Now, Section 133(o) of the Local Government Code expressly
provides otherwise, specifically prohibiting local governments from
imposing any kind of tax on national government instrumentalities. Section
133(o) states:

SEC. 133. Common Limitations on the Taxing

Powers of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the

National Government, its agencies
and instrumentalities, and local government units.

By express mandate of the Local Government Code, local

governments cannot impose any kind of tax on national government
instrumentalities like the MIAA. Local governments are devoid of power
to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not extend
to the national government, its agencies and instrumentalities, [u]nless
otherwise provided in this Code as stated in the saving clause of Section 133.
xxx

xxxx

The saving clause in Section 133 refers to the exception to the

exemption in Section 234(a) of the Code, which makes the national
government subject to real estate tax when it gives the beneficial use
of its real properties to a taxable entity. Section 234(a) of the Local
Government Code provides:

SEC. 234. Exemptions from Real Property Tax The

following are exempted from payment of the real
property tax:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions except when
the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

x x x[18] (Emphasis supplied)

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed

Resolutions of the Court of Appeals of 5 October 2001 and 27 September
2002 in CA-G.R. SP No. 66878. We DECLAREthe Airport Lands and
Buildings of the Manila International Airport Authority EXEMPT from the
real estate tax imposed by the City of Paraaque. We declare VOID all the
real estate tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Paraaque on the Airport Lands and
Buildings of the Manila International Airport Authority, except for the
 portions that the Manila International Airport Authority has leased to
private parties. We also declare VOID the assailed auction sale, and all its
effects, of the Airport Lands and Buildings of the Manila International
Airport Authority.

x x x x.[19] (Emphasis added)

In light of the foregoing, the Authority should be classified as an instrumentality of

the national government which is liable to pay taxes only with respect to the portions of
the property, the beneficial use of which were vested in private entities. When local
governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt
whether a person, article or activity is taxable is resolved against taxation. This rule
applies with greater force when local governments seek to tax national government
instrumentalities.[20]

Thus, the real property tax assessments issued by the City of Iloilo should be
upheld only with respect to the portions leased to private persons. In case the Authority
fails to pay the real property taxes due thereon, said portions cannot be sold at public
auction to satisfy the tax delinquency. In Chavez v. Public Estates Authority it was held
that reclaimed lands are lands of the public domain and cannot, without
Congressional fiat, be subject of a sale, public or private, thus:[21]

The salient provisions of CA No. 141, on government reclaimed,

foreshore and marshy lands of the public domain, are as follows:

Sec. 59. The lands disposable under this title shall be classified
as follows:
 (a) Lands reclaimed by the Government by dredging,
filling, or other means;

(b) Foreshore;

(c) Marshy lands or lands covered with water bordering upon

the shores or banks of navigable lakes or rivers;

(d) Lands not included in any of the foregoing classes.

xxxx

Sec. 61. The lands comprised in classes (a), (b), and (c) of section
fifty-nine shall be disposed of to private parties by lease only and not
otherwise, as soon as the President, upon recommendation by the
Secretary of Agriculture, shall declare that the same are not necessary
for the public service and are open to disposition under this chapter. The
lands included in class (d) may be disposed of by sale or lease under
the provisions of this Act. (Emphasis supplied)

xxxx

Since then and until now, the only way the government can sell to
private parties government reclaimed and marshy disposable lands of the
public domain is for the legislature to pass a law authorizing such sale. CA
No. 141 does not authorize the President to reclassify government reclaimed
and marshy lands into other non-agricultural lands under Section 59 (d).
Lands classified under Section 59 (d) are the only alienable or disposable
lands for non-agricultural purposes that the government could sell to
private parties. (Emphasis supplied)

In the same vein, the port built by the State in the Iloilo fishing complex is a
property of the public dominion and cannot therefore be sold at public auction. Article
420 of the Civil Code, provides:
 ARTICLE 420. The following things are property of public
dominion:

(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use,
and are intended for some public service or for the development of the
national wealth.

The Iloilo fishing port which was constructed by the State for public use and/or
public service falls within the term port in the aforecited provision. Being a property of
public dominion the same cannot be subject to execution or foreclosure sale.[22] In like
manner, the reclaimed land on which the IFPC is built cannot be the object of a private or
public sale without Congressional authorization. Whether there are improvements in the
fishing port complex that should not be construed to be embraced within the term port,
involves evidentiary matters that cannot be addressed in the present case. As for now,
considering that the Authority is a national government instrumentality, any doubt on
whether the entire IFPC may be levied upon to satisfy the tax delinquency should be
resolved against the City of Iloilo.

In sum, the Court finds that the Authority is an instrumentality of the national
government, hence, it is liable to pay real property taxes assessed by the City of Iloilo on
the IFPC only with respect to those portions which are leased to private
entities. Notwithstanding said tax delinquency on the leased portions of the IFPC, the
latter or any part thereof, being a property of public domain, cannot be sold at public
auction. This means that the City of Iloilo has to satisfy the tax delinquency through
means other than the sale at public auction of the IFPC.

WHEREFORE, the petition is GRANTED and the June 21, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 81228 is SET ASIDE. The real property tax
assessments issued by the City Iloilo on the land and buildings of the Iloilo Fishing Port
Complex, is declared VOID EXCEPT those pertaining to the portions leased to private
parties. The City of Iloilo is DIRECTED to refrain from levying on the Iloilo Fishing Port
Complex to satisfy the payment of the real property tax delinquency.

No costs.

SO ORDERED.

[G.R. No. 132684. September 11, 2002]

HERNANI N. FABIA, petitioner, vs. COURT OF APPEALS, DEPARTMENT OF

JUSTICE, OFFICE OF THE CITY PROSECUTOR OF MANILA, RTC-Br. 22,
MANILA and THE MARITIME TRAINING CENTER OF THE PHILIPPINES
(MTCP), respondents.

RESOLUTION
BELLOSILLO, J.:

This resolves the 9 October 2001 Motion for Clarification of Judgment filed by private
respondent which seeks the elucidation of the 20 August 2001 Decision of this Court by
praying that the Regional Trial Court of Manila that will hear Crim. Case No. 98-162570 be
directed to arraign petitioner, try the case and render judgment thereon as the facts may
warrant.
It will be recalled that in the subject Decision of 20 August 2001 this Court reversed
and set aside the Decision of the Court of Appeals of 12 November 1997 as well as its
Resolution of 9 February 1998, this Court holding that Crim. Case No. 98-162570 involves
an intra-corporate dispute over which the Securities and Exchange Commission (SEC) has
jurisdiction and not the regular courts. Cognizant however that The Securities Regulation
Code (RA 8799) amending PD 902-A has effectively vested upon the Regional Trial Courts
jurisdiction over all cases formerly cognizable by the SEC, this Court ordered that Crim.
Case No. 98-162570 be transferred to the appropriate branch of the Regional Trial Court
of Manila tasked to handle intra-corporate matters pursuant to A.M. No. 00-11-3-SC.
As the motion for clarification in effect urges the reversal of the questioned Decision
of the Court of Appeals, this Court in its Resolution of 12 November 2001 resolved to treat
the motion of private respondent MTCP as a motion for reconsideration and required
petitioner to file his comment thereon.
In his Comment petitioner Fabia prays for the denial of MTCPs motion, arguing that
it does not assign any error on the findings and conclusions of law made by this Court as
it in fact even accepted the ratio decidendi behind the resolution of the case. Petitioner
likewise insists that there is no ambiguity in the Decision as it clearly mandates the
dismissal of the criminal case for estafa filed against him after a finding that the matter
involved an intra-corporate dispute within the jurisdiction of the SEC.
In its Reply private respondent MTCP stresses that Crim. Case No. 98-162570 remains
to be a criminal proceeding and may not be converted into an administrative action. It
reasons that the substance of the assailed Decision of the Court of Appeals that there is
probable cause to indict petitioner for the crime of estafa was after all not reversed by the
Decision of this Court of 20 August 2001 as only the procedural aspect was modified.
In its Resolution of 17 April 2002 this Court set the case for oral argument on 16 June
2002 during which the principal issue was defined and discussed: Whether the
prosecution for violation of PD 902-A as amended by RA 8799 is without prejudice to any
liability for violation of The Revised Penal Code.
Petitioner Fabia argues that there is no ambiguity in the Decision as it clearly
mandates the dismissal of the criminal case filed before the RTC of Manila upon the
Court's finding that the matter involves an intra-corporate dispute within the jurisdiction
of the SEC, and not of the regular courts. Petitioner concedes that the dismissal of the
criminal action is without prejudice to the filing of an intra-corporate/civil case for
violation of PD 902-A as amended by RA 8799 before the RTC which currently exercises
jurisdiction over corporate matters. However, invoking the doctrine of primary
jurisdiction, petitioner reasons that his corporate/civil prosecution must first be resolved
before the criminal action could be filed. Citing Saavedra v. Securities and Exchange
Commission,[1] petitioner argues that under the doctrine of primary jurisdiction the
public prosecutor in the instant case has no authority to rule in a preliminary
investigation on a criminal charge arising from an intra-corporate dispute absent prior
resolution of the SEC on the matter. Petitioner notes that Saavedra does not deprive the
public prosecutors of their jurisdiction to determine the propriety of filing criminal cases,
but merely calls for a deferment of the exercise of such criminal jurisdiction pending prior
determination by the pertinent administrative agency of the issues involved in the
case. Petitioner contends that a violation of the doctrine of primary jurisdiction is
jurisdictional in nature and is not rendered moot by RA 8799.
Petitioner also avers that RA 8799 is not a curative statute and hence cannot apply
retroactively. He explains that curative statutes are intended to retroactively apply to
cases pending before their enactment to supply defects, abridge superfluities in the
existing law and curb certain evils, or to correct a situation involving conflicting
jurisdictions - curative effects which are not evident under RA 8799 as the legislative
intent on the transfer of jurisdiction over SEC cases to the regular courts is merely to
enable the SEC to concentrate more on its regulatory functions.
Petitioner stresses that prior to RA 8799 it was the SEC which had primary
jurisdiction over the instant controversy as the governing law then was PD 902-A. He
argues that a subsequent law cannot apply retroactively so as to confer jurisdiction upon
the city prosecutor and/or regular courts to render a decision which under the law
applicable at the time of the rendition of the decision was clearly outside the competence
of the prosecutor or the courts. He clarifies that RA 8799 has retroactive application only
insofar as it applies to cases pending before the SEC and have not yet been submitted for
resolution upon its effectivity.
Respondent MTCP does not agree. It maintains that Crim. Case No. 98-162570
subsists, and simultaneously with it, a civil case may be filed for violation of RA 8799. It
argues that petitioner is being prosecuted for fraud defined and penalized under The
Revised Penal Code which is not a law administered by the SEC; hence, the SEC has no
jurisdiction over the criminal case as it lies with the regular courts. It contends however
that a civil/intra-corporate case may be filed and prosecuted simultaneously with the
criminal case. It argues that the doctrine of primary jurisdiction does not apply as there is
no controversy between petitioner and private respondent pending before the SEC or any
administrative agency since it filed a criminal complaint.
Respondent further claims that RA 8799 rendered the doctrine of primary
jurisdiction moot and academic since the rationale behind the prior referral of intra-
corporate controversies to the then SEC before the public prosecutor could act on them
for purposes of criminal prosecution, i.e., to implore the special knowledge, experience
and services of the administrative agency to ascertaintechnical and intricate matters, no
longer stands since the newly enacted law recognizes that the regular courts now have
the legal competence to decide intra-corporate disputes. Respondent also argues that
Saavedra is not applicable since it involved a pure and simple intra-corporate controversy,
i.e., the ownership of stocks in a corporation, which is far different from the criminal
nature of the instant case.
MTCP likewise claims that RA 8799 has rendered moot and academic the issue of
jurisdiction. It argues that when a case is filed with the court which originally has no
jurisdiction over the case but in the meantime a law is passed vesting that court with
jurisdiction to try the case, the jurisdiction of that court will be sustained on the theory
that the enabling law is curative in nature and therefore has retroactive effect. It notes
that before the jurisdictional issue on the authority of the Office of the Public Prosecutor
of Manila to conduct a preliminary investigation of what was claimed to be an intra-
corporate controversy was resolved with finality, the criminal case had already been filed
with the RTC and, in the meantime, RA 8799 was enacted transferring the intra-corporate
jurisdiction of the SEC to the RTC. There is thus no cogent reason to divest the RTC of
jurisdiction that it has already acquired over the case.
 Section 5 of PD 902-A pertinently provides that the SEC shall have jurisdiction to
hear and decide cases involving (a) devices or schemes employed by, or any acts of, the
board of directors, business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or organizations registered with the
Commission, and (b) controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders, members or
associates, respectively.
In synthesis, Sec. 5 of PD 902-A mandates that cases involving fraudulent actions and
devices which are detrimental to the interest of stockholders, members or associates and
directors of the corporation are within the original and exclusive jurisdiction of the
SEC. Taken in conjunction with Sec. 6 of the same law, it will be gathered that the
fraudulent acts/schemes which the SEC shall exclusively investigate and prosecute are
those "in violation of any law or rules and regulations administered and enforced by the
Commission" alone. This investigative and prosecutorial powers of the SEC are
further "without prejudice to any liability for violation of any provision of The Revised
Penal Code."
From the foregoing, it can thus be concluded that the filing of the civil/intra-
corporate case before the SEC does not preclude the simultaneous and concomitant filing
of a criminal action before the regular courts; such that, a fraudulent act may give rise to
liability for violation of the rules and regulations of the SEC cognizable by the SEC itself,
as well as criminal liability for violation of the Revised Penal Code cognizable by the
regular courts, both charges to be filed and proceeded independently, and may be
simultaneously, with the other.
It can be discerned from the affidavit-complaint of MTCP President Exequiel B.
Tamayo that he sufficiently alleged acts sufficient to constitute the crime of estafa as well
as to give rise to a prosecution for violation of PD 902-A. The affidavit-complaint alleged
that petitioner Fabia failed to liquidate his cash advances amounting
to P1,291,376.61. These cash advances were drawn by petitioner in his capacity as then
president of the corporation and include those which were taken purportedly for the
purpose of buying office equipment and appliances which petitioner however failed to
deliver despite demands as he apparently had converted or misappropriated it to his own
use and benefit to the prejudice and damage of respondent MTCP.
These incidents are cognizable not only by the then intra-corporate jurisdiction of
the SEC but could also very well fall within the criminal jurisdiction of the regular
courts. The acts charged may be in the nature of an intra-corporate dispute as they
involve fraud committed by virtue of the office assumed by petitioner as President,
Director and stockholder in MTCP, and committed against the MTCP corporation, and
therefore violative of SEC rules and regulations. An intra-corporate controversy involves
fraudulent actions and devices which are detrimental to the interest of stockholders,
directors and the corporation. It is one which arises between stockholders and the
corporation. In Abejo v. de la Cruz,[2] the Court held that there is no distinction,
qualification nor any exemption whatsoever, as the provision is broad and covers all
kinds of controversies between stockholders and corporations. The alleged failure of
petitioner to liquidate and settle his cash advances with respondent MTCP despite
demand qualifies as one such controversy.
In the same vein, the alleged fraudulent acts constitute the elements of abuse of
confidence, deceit or fraudulent means, and damage under Art. 315 of The Revised Penal
Code on estafa. In this case, the relationship of the party-litigants with each other or the
position held by petitioner as a corporate officer in respondent MTCP during the time he
committed the crime becomes merely incidental and holds no bearing on
jurisdiction. What is essential is that the fraudulent acts are likewise of a criminal nature
and hence cognizable by the regular courts.
Be that as it may, petitioner argues that a charge of estafa against him cannot
prosper. He insists that no finding of probable cause may be made against him during a
preliminary investigation as a question of accounting still exists between him and private
respondent. Respondent MTCP believes otherwise.
We hold for respondent. Probable cause has been defined as the existence of such
facts and circumstances as would excite the belief, in a reasonable mind, acting on the
facts within the knowledge of the prosecutor, that the person charged was guilty of the
crime for which he was prosecuted.[3] It has been explained as a reasonable presumption
that a matter is, or may be, well founded, such a state of facts in the mind of the
prosecutor as would lead a person of ordinary caution and prudence to believe, or
entertain an honest or strong suspicion, that a thing is so. The term does not
mean "actual and positive cause" nor does it import absolute certainty. It is merely based
on opinion and reasonable belief. Thus a finding of probable cause does not require an
inquiry into whether there is sufficient evidence to procure a conviction. It is enough that
it is believed that the act or omission complained of constitutes the offense charged, as
there is a trial for the reception of evidence of the prosecution in support of the charge.[4]
Respondent MTCP through its President Exequiel B. Tamayo alleges that petitioner
Fabia, as then president of the corporation, drew cash advances from the corporation in
huge amounts which he failed to liquidate despite demand. Respondent also claims that
certain cash vouchers show that cash was received by petitioner for the purpose of
procuring office equipment and materials which upon inventory however failed to
materialize. These accusations infer that the acquisitions were facilitated through the
office or position occupied by petitioner and as a consequence of which respondent was
in dire straits to pay its loan of P850,000.00 owing to the Bank of the Philippine Islands
(BPI) - circumstances which make up the elements of abuse of confidence and damages
and give rise to the presumption or reasonable belief that the offense of estafa has been
committed and thus the filing of an Information against petitioner is warranted.
Petitioner disagrees and contends that a proper accounting of the amount owing
from him should first be conducted before probable cause for estafa can be established
since a discrepancy of the amounts allegedly owed by him exists, i.e., the Information
for estafa declares a balance of P1,291,376.61 while the audit report of MTCP's external
auditor and its Treasurer's report declare the amounts of P1,333,699.89 and P766,135.05
respectively.
Prior accounting is not an element of the offense and hence its absence would not
preclude the finding of probable cause for estafa against petitioner. In fact, accounting
does not seem to be inexistent in this case, as the records show that it has been
conducted on two (2) occasions by two (2) separate entities - the auditing firm of
Mendoza Ignacio Corvera and Company, and MTCP's own Treasurer, only that petitioner
deems it defective due to the divergent amounts computed by the two (2) entities as
allegedly owed by him.
In his Reply-Affidavit petitioner admits that the auditing firm of Mendoza Ignacio
Corvera and Company determined his accountability to MTCP to be P1,291,376.61 but
alleges that he was not furnished copy of the audit report thus he doubts that it was ever
conducted. MTCP on the other hand claims that petitioner was notified thereof through
an audit report, a copy of which petitioner himself had attached in his Comment dated 15
May 1998 and his Petition before the Court of Appeals dated 2 May 1997. Given that the
defense mounted by the petitioner calls for an inquiry into the authenticity of the
documents he relies upon, a judicial determination, not a preliminary investigation,
would be the proper occasion to ferret out the truth.
Petitioner's reliance on Perez v. People,[5] U.S. v. Camara,[6] and U.S. v.
Berbari[7] which held that there can be no estafa where a previous settlement of an
account is necessary to determine the balance owing the offended party is misplaced. As
correctly discerned by the Department of Justice, the present case involves a
determination of probable cause, while the Perez, Camara and Berbari cases delved into
an inquiry on guilt beyond reasonable doubt. Therein, the accused had all undergone trial
and were found guilty of the offense charged but were acquitted on appeal for lack of
proof beyond reasonable doubt. In the present case, the only issue is whether or not there
is probable cause to warrant the filing of the Information for estafa, which issue is
resolved in the affirmative.
Concededly, the proper case in point is Cruz v. People[8] where the president of the
corporation was likewise charged with estafa through falsification of public documents
for fraud he committed against the corporation. During preliminary investigation, the
president invoked the defense that the cash advances were loans to him that he had
already paid - the same line of defense herein petitioner Fabia is pursuing. In that case,
the Court ruled that such a defense does not defeat probable cause and such is best
ventilated in the trial court. Thus, petitioner's defense of accounting does not ipso facto
clear him of prima facie guilt. Being a matter of defense, its validity needs to be tested in
the crucible of a full-blown trial.
In that connection, petitioner in his Reply-Affidavit vehemently disclaimed any
liability for the amount demanded from him as he had already fully liquidated his cash
advances and averred that the complaint was instigated by those who would like to
discredit him and tarnish his name, and had attached copies of vouchers and checks to
prove his innocence. The presence or absence of the elements of the crime are evidentiary
in nature and are matters of defense, the truth of which can best be passed upon after a
full-blown trial on the merits. Litigation will prove petitioner's innocence if his defense be
true.
The criminal case for estafa currently pending before the RTC can then
independently and simultaneously proceed with a civil/intra-corporate case to be filed
with the Regional Trial Court vested with special jurisdiction pursuant to The Securities
Regulation Code (RA 8799). With RA 8799 signed into law on 19 July 2000, which
effectively amended Sec. 5 of PD 902-A, jurisdiction over intra-corporate disputes is now
vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-
03-SC promulgated on 21 November 2000. However, while Sec. 5 of PD No. 902-A was
amended by Sec. 5.2 of RA 8799, there is no repeal of Sec. 6 thereof declaring that
prosecution under the Decree, or any Act, law, rules and regulations enforced and
administered by the SEC shall be without prejudice to any liability for violation of any
provision of The Revised Penal Code.
Moreover, as pointed out by the Department of Justice, Sec. 54 on Administrative
Sanctions found in RA 8799 itself provides that the imposition of the sanctions shall be
without prejudice to the filing of criminal charges against the individuals responsible for
the violation.
From the foregoing, it could be concluded that the fraudulent devices, schemes or
representations which, originally, the Prosecution and Enforcement Department of the
SEC would exclusively investigate and prosecute, are those in violation of any law or rules
and regulations administered and enforced by the SEC and shall be without prejudice to
any liability for violation of any provision of The Revised Penal Code. Hence, if the
fraudulent act is punished under The Revised Penal Code, like estafa under Art. 315, the
responsible person may be criminally prosecuted before the regular courts in addition to
proceedings before the branches of the RTC designated by this Court to try and decide
intra-corporate controversies.
Therefore, since the alleged fraudulent acts committed by petitioner pertaining to the
non-liquidation of his cash advances amounting to P1,291,376.61 constitute the offense of
estafa under Art. 315 of The Revised Penal Code, the criminal case may be prosecuted
independently and simultaneously with the corporate/civil case that may be filed for
violation of Sec. 5 of PD 902-A, as amended by RA 8799.
In light of the amendment brought about by RA 8799, the doctrine of primary
jurisdiction no longer precludes the simultaneous filing of the criminal case with the
corporate/civil case.
In cases involving specialized disputes, the practice has been to refer the same to an
administrative agency of special competence in observance of the doctrine of primary
jurisdiction. The Court has ratiocinated that it cannot or will not determine a controversy
involving a question which is within the jurisdiction of the administrative tribunal prior
to the resolution of that question by the administrative tribunal, where the question
demands the exercise of sound administrative discretion requiring the special knowledge,
experience and services of the administrative tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply with the
premises of the regulatory statute administered.[9] The objective of the doctrine of
primary jurisdiction is to guide a court in determining whether it should refrain from
exercising its jurisdiction until after an administrative agency has determined some
question or some aspect of some question arising in the proceeding before the court.[10] It
applies where claim is originally cognizable in the courts and comes into play whenever
enforcement of the claim requires the resolution of issues which, under a regulatory
scheme, has been placed within the special competence of an administrative body; in
such case, the judicial process is suspended pending referral of such issues to the
administrative body for its view.[11]
However, as correctly observed by respondent MTCP, the rationale behind the prior
referral of intra-corporate controversies to the SEC before the public prosecutor could act
on them for purposes of criminal prosecution loses significance since the newly enacted
law recognizes that the specially designated RTC branches now have the legal
competence to decide intra-corporate disputes.
To support its contention, petitioner cites the landmark case of Saavedra. However,
the doctrine of primary jurisdiction prevailed therein because the dispute comprehends a
pure and simple intra-corporate controversy involving the ownership of stocks of the
corporation arising between and among the principal stockholders, while the instant case
involves non-liquidation of corporate funds by a corporate officer as he had allegedly
misappropriated the same for his own use and benefit. It was the SEC's authority to issue
a temporary restraining order enjoining the petitioners therein from disposing of the
company assets that was being challenged, not that of the regular courts, and it was
upheld as it was clear that the SEC had properly acquired jurisdiction over the subject
matter.Resort to the doctrine of primary jurisdiction was essential as the matter of sales
of stocks of the corporation, and thus its ownership, necessitates the expertise and
competence of the SEC. It is not so in the instant case, as the liability of petitioner for the
alleged fraudulent acts is the issue under contention.
WHEREFORE, the Decision of this Court of 20 August 2001 is modified as
follows: The Decision of the Court of Appeals of 12 November 1997 annulling and setting
aside the Resolution of the Department of Justice of 2 December 1996 and accordingly
directing the filing of an Information for estafa against petitioner Hernani N. Fabia in
Crim. Case No. 98-162570, "People of the Philippines v. Hernani N.
Fabia," is AFFIRMED. The Regional Trial Court, Branch 22, Manila, to which this criminal
case was previously raffled and assigned, or any branch of the court to which the case may
properly be assigned, is directed to immediately arraign petitioner Hernani N. Fabia and
try his case until decided and terminated. No costs.
SO ORDERED.
THIRD DIVISION

PACIFIC WIDE REALTY AND G.R. No. 178768

DEVELOPMENT CORPORATION,

Petitioner,

- versus -

PUERTO AZUL LAND, INC.,

Respondent.

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

PACIFIC WIDE REALTY AND G.R. No. 180893

DEVELOPMENT CORPORATION,

Petitioner,
Present:

CORONA, J.,

Chairperson,

CHICO-NAZARIO,
- versus -
NACHURA,

LEONARDO-DE

CASTRO,* and
 PERALTA, JJ.

PUERTO AZUL LAND, INC., Promulgated:

Respondent.

November 25, 2009

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

DECISION

NACHURA, J.:
Before the Court are the consolidated petitions for review on certiorari under Rule 45 of
the Rules of Court: (1) G.R. No. 180893, assailing the Decision[1] dated May 17, 2007 and
the Resolution[2] dated October 30, 2007 of the Court of Appeals (CA) in CA-G.R. SP No.
92695, entitled Export and Industry Bank v. Puerto Azul Land, Inc.; and (2) G.R. No.
178768, assailing the Decision[3] dated March 16, 2007 and the Resolution[4] dated June 29,
2007 of the CA in CA-G.R. SP No. 91996, entitled Puerto Azul Land, Inc. v. The Regional
Trial Court of Manila, Br. 24; Sheriff IV of Pasay City Virgilio F. Villar; and Pacific Wide
Realty & Development Corporation (as substitute for Export and Industry Bank, Inc.).

The Facts

In G.R. No. 180893

Puerto Azul Land, Inc. (PALI) is the owner and developer of the Puerto Azul Complex
situated in Ternate, Cavite. Its business involves the development of Puerto Azul into a
satellite city with residential areas, resort, tourism and retail commercial centers with
recreational areas.[5] In order to finance its operations, it obtained loans from various
banks, the principal amount of which amounted to Six Hundred Forty Million Two
Hundred Twenty-Five Thousand Three Hundred Twenty-Four Pesos (P640,225,324.00).
PALI and its accommodation mortgagors, i.e., Ternate Development Corporation (TDC),
Ternate Utilities, Inc. (TUI), and Mrs. Trinidad Diaz-Enriquez, secured the loans.[6]

In the beginning, PALIs business did very well. However, it started encountering
problems when the Philippine Stock Exchange rejected the listing of its shares in its
initial public offering which sent a bad signal to the real estate market. This resulted in
potential investors and real estate buyers shying away from the business venture. The
situation was aggravated by the 1997 Asian financial crisis and the decline of the real
estate market. Consequently, PALI was unable to keep up with the payment of its
obligations, both current and those that were about to fall due. One of its creditors, the
Export and Industry Bank[7] (EIB), later substituted by Pacific Wide Realty and
Development Corporation (PWRDC), filed foreclosure proceedings on PALIs mortgaged
properties. Thrust to a corner, PALI filed a petition for suspension of payments and
rehabilitation,[8] accompanied by a proposed rehabilitation plan and three (3) nominees
for the appointment of a rehabilitation receiver.[9]

On September 17, 2004, after finding that the petition was sufficient in form and
substance, the Regional Trial Court (RTC) issued a Stay Order[10] and appointed Patrick V.
Caoile as rehabilitation receiver.[11] Dissatisfied, EIB filed a motion to replace the
appointed rehabilitation receiver. On January 25, 2005, the RTC denied the motion.[12]

On April, 20, 2005, the rehabilitation receiver filed his rehabilitation report and
recommendation, wherein he proposed that PALI should be rehabilitated rather than be
dissolved and liquidated. On June 9, 2005, PALI filed a revised rehabilitation plan.[13]

EIB and the other creditors of PALI filed their respective comments/opposition to the
report/recommendations of the rehabilitation receiver. On November 2, 2005, EIB,
together with another creditor of PALI, Tranche I (SPV-MC), Inc., filed an urgent motion
to disqualify the appointed rehabilitation receiver. The RTC denied the motion in an
Order[14] dated December 9, 2005.[15]

On December 13, 2005, the RTC rendered a Decision[16] approving PALIs petition for
suspension of payments and rehabilitation. The pertinent portions of the decision read:

The rehabilitation of the petitioner, therefore, shall proceed as follows:

1. The creditors shall have, as first option, the right to be paid with real
estate properties being offered by the petitioner in dacion en pago, which
shall be implemented under the following terms and conditions:
a. The properties offered by the petitioner shall be appraised by three
appraisers, one to be chosen by the petitioner, a second to be chosen by the
bank creditors and the third to be chosen by the Receiver.The average of
the appraisals of the three (3) chosen appraisers shall be the value to be
applied in arriving at the dacion value of the properties. In case the dacion
amount is less than the total of the secured creditors principal obligation,
the balance shall be restructured in accordance with the schedule of
payments under option 2, paragraph (a). In case of excess, the same shall
[be] applied in full or partial payment of the accrued interest on the
obligations. The balance of the accrued interest, if any, together with the
penalties shall [be] condoned.

2. Creditors who will not opt for dacion shall be paid in accordance with the
restructuring of the obligations as recommended by the Receiver as follows:

a) The obligations to secured creditors will be subject to a 50% haircut of

the principal, and repayment shall be semi-annually over a period of 10
years, with 3-year grace period. Accrued interests and penalties shall be
condoned. Interest shall be paid at the rate of 2% p.a. for the first 5 years
and 5% p.a. thereafter until the obligations are fully paid. The petitioner
shall allot 50% of its cash flow available for debt service for secured
creditors. Upon completion of payments to government and employee
accounts, the petitioners cash flow available for debt service shall be used
until the obligations are fully paid.

b) One half (1/2) of the principal of the petitioners unsecured loan

obligations to other creditors shall be settled through non-cash offsetting
arrangements, with the balance payable semi-annually over a period of 10
years, with 3-year grace period, with interest at the rate of 2% p.a. for the
first 5 years and 5% p.a. from the 6th year onwards until the obligations are
settled in full. Accrued interest and penalties shall be condoned.
c) Similarly, one half (1/2) of the petitioners obligations to trade creditors
shall be settled through non-cash offsetting arrangements. The cash
payments shall be made semi-annually over a period of 10 years on a pari
passu basis with the bank creditors, without interest, penalties and other
charges of similar kind.

WHEREFORE, the rehabilitation of petitioner Puerto Azul Land, Inc. is

hereby approved in accordance with the foregoing pronouncements by the
Court. Subject to the following terms and conditions:

1. Immediately upon the implementation of the rehabilitation of the

petitioner, the Rehabilitation Receiver shall inform the Court thereof;

2. The Rehabilitation Receiver, creditors, and the petitioner shall submit to

the Court at the end of the first year of the petitioners rehabilitation, and
annually thereafter until the termination of the rehabilitation, their
respective reports on the progress of the petitioners rehabilitation, specially
the petitioners compliance with the provisions of the plan as modified by
the Rehabilitation Receiver;

3. The Rehabilitation Receiver shall report to the Court any change in the
assumptions used in the Rehabilitation Plan, its projections, and forecasts,
that may be brought about by the settlement through dacion en pago of any
of the obligations and to recommend corresponding changes, if any, in such
assumptions, projections, and forecasts;

4. The rehabilitation of the petitioner is binding upon the creditors and all
persons who may be affected by it, including the creditors, whether or not
they have participated in the proceedings or opposed the plan or whether
or not their claims have been scheduled.
The petitioner is hereby strictly enjoined to abide by the terms and
conditions set forth in this Order and the provisions of the Interim Rules on
Corporate Rehabilitation.

The Rehabilitation Receiver is hereby directed to perform his functions and

responsibilities pursuant to Section 14 of the Interim Rules, with particular
emphasis on the following:

u) To be notified of, and to attend all meetings of the board of directors and
stockholders of the debtors;

v) To recommend any modification of an approved rehabilitation plan as he

may deem appropriate;

w) To bring to the attention of the court any material change affecting the
debtors ability to meet the obligations under the rehabilitation plan;

[x x x x]

y) To recommend the termination of the proceedings and the dissolution of

the debtor if he determines that the continuance in business of such entity
is no longer feasible or profitable or no longer works to the best interest of
the stockholders, parties- litigants, creditors, or the general public.

SO ORDERED.[17]
Finding the terms of the rehabilitation plan and the qualifications of the appointed
rehabilitation receiver unacceptable, EIB filed with the CA a petition for review under
Rule 42 of the Rules of Court. The case was entitled, Export and Industry Bank v. Puerto
Azul Land, Inc.

On May 17, 2007, the CA rendered a Decision,[18] the fallo of which reads:

WHEREFORE, in view of the forgoing, the petition for review is

hereby DISMISSED. The assailed December 13, 2005 decision of the court a
quo is hereby AFFIRMED in toto.[19]

EIB filed a motion for reconsideration. However, the same was denied in a
Resolution[20] dated October 30, 2007.

In G.R. No. 178768

On September 21, 2004, EIB entered its appearance before the rehabilitation court and
moved for the clarification of the stay order dated September 17, 2004 and/or leave to
continue the extrajudicial foreclosure of the real estates owned by PALIs accommodation
mortgagors. In opposition, PALI argued that the foreclosure sought would preempt the
rehabilitation proceedings and would give EIB undue preference over PALIs other
creditors. On November 10, 2004, the RTC issued an Order,[21] denying EIBs motion.[22]

On March 3, 2005, EIB filed an urgent motion to order PALI and/or the mortgagor
TUI/rehabilitation receiver to pay all the taxes due on Transfer Certificate of Title (TCT)
No. 133164. EIB claimed that the property covered by TCT No. 133164, registered in the
name of TUI, was one of the properties used to secure PALIs loan from EIB. The said
property was subject to a public auction by the Treasurers Office of Pasay City for non-
payment of realty taxes. Hence, EIB prayed that PALI or TUI be ordered to pay the realty
taxes due on TCT No. 133164.[23]

PALI opposed the motion, arguing that the rehabilitation courts stay order stopped the
enforcement of all claims, whether for money or otherwise, against a debtor, its
guarantors, and its sureties not solidarily liable to the debtor; thus, TCT No. 133164 was
covered by the stay order.[24]

On March 31, 2005, the RTC issued an Order,[25] the dispositive portion of which reads:

Accordingly, and as being invoked by the creditor movant, this Court

hereby modifies the Stay Order of September 17, 2004, in such a manner
that TCT No. 133614 which is mortgaged with creditor movant Export and
Industry Bank, Inc. is now excluded from the Stay Order. As such, Export
and Industry Bank, Inc. may settle the above-stated realty taxes of third
party mortgagor with the local government of Pasay City. In return, and to
adequately protect the creditor movant Export and Industry Bank, Inc., the
latter may foreclose on TCT No. 133614.

SO ORDERED.[26]

On April 12, 2005, PALI filed an urgent motion for a status quo order, praying that the
stay order be maintained and that the enforcement of the claim of Pasay City be held in
abeyance pending the hearing of its motion.[27] On April 13, 2005, the RTC, so as not to
render moot PALIs motion, issued an Order,[28] directing EIB to refrain from taking any
steps to implement the March 31, 2005 Order. The City Treasurer of Pasay City was,
likewise, directed to respect the stay order dated September 17, 2004 insofar as TCT No.
133164 was concerned, until further orders from the court.[29]
On August 16, 2005, the RTC issued an Order[30] addressing the April 12, 2005 urgent
motion of PALI. In the said order, the rehabilitation court maintained its March 31, 2005
Order. The court reiterated that TCT No. 133164, under the name of TUI, was excluded
from the stay order. In order to protect the interest of EIB as creditor of PALI, it may
foreclose TCT No. 133164 and settle the delinquency taxes of third-party mortgagor TUI
with the local government of Pasay City.

PALI filed an urgent motion to modify the Order dated August 16, 2005. The same was
denied by the RTC in an Order[31] dated October 19, 2005. Aggrieved, PALI filed with the
CA a petition for certiorari under Rule 65 of the Rules of Court, ascribing grave abuse of
discretion on the part of the rehabilitation court in allowing the foreclosure of a mortgage
constituted over the property of an accommodation mortgagor, to secure the loan
obligations of a corporation seeking relief in a rehabilitation proceeding. The case was
entitled, Puerto Azul Land, Inc. v. The Regional Trial Court of Manila, Br. 24; Sheriff IV
of Pasay City Virgilio F. Villar; and Export and Industry Bank, Inc.

On March 16, 2007, the CA rendered a Decision,[32] the fallo of which reads:

WHEREFORE, above premises considered, the instant Petition

is GRANTED. The October 19, 2005 Order of the Regional Trial Court of
Manila, Br. 24, in Civil Case No. 04-110914 is hereby
declared NULL and VOID and the properties covered by TCT No. 133164 are
hereby DECLARED subject to and covered by the September 17, 2004 stay
order. Accordingly, Public Respondent Sheriff Virgilio F. Villar, or his
substitute or equivalent, is ORDERED to immediately cease and desist
from enforcing the Amended Notice of Sheriffs Sale, dated February 8,
2007, and from conducting the sale at public auction of the parcels of land
covered by TCT No. 133164 on March 20, 2007 or at anytime thereafter. No
costs.

SO ORDERED.[33]
EIB filed a motion for reconsideration. The CA denied the same in a Resolution[34] dated
June 29, 2007.

Hence, this petition for review on certiorari under Rule 45 of the Rules of Court.

On July 27, 2009, the Court ordered the consolidation of the two petitions.

The Issues

The issues for resolution are the following: (1) whether the terms of the rehabilitation
plan are unreasonable and in violation of the non-impairment clause; and (2) whether the
rehabilitation court erred when it allowed the foreclosure of the accommodation
mortgagees property and excluded the same from the coverage of the stay order.

The Ruling of the Court

Rehabilitation[35] contemplates a continuance of corporate life and activities in an effort

to restore and reinstate the corporation to its former position of successful operation and
solvency. The purpose of rehabilitation proceedings is to enable the company to gain a
new lease on life and thereby allow creditors to be paid their claims from its earnings. The
rehabilitation of a financially distressed corporation benefits its employees, creditors,
stockholders and, in a larger sense, the general public.[36]
Under the Rules of Procedure on Corporate Rehabilitation,[37] rehabilitation is defined as
the restoration of the debtor to a position of successful operation and solvency, if it is
shown that its continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan, more if the
corporation continues as a going concern than if it is immediately liquidated.

An indispensable requirement in the rehabilitation of a distressed corporation is the

rehabilitation plan, and Section 5 of the Interim Rules of Procedure on Corporate
Rehabilitation provides the requisites thereof:

SEC. 5. Rehabilitation Plan. The rehabilitation plan shall include (a) the
desired business targets or goals and the duration and coverage of the
rehabilitation; (b) the terms and conditions of such rehabilitation which
shall include the manner of its implementation, giving due regard to the
interests of secured creditors; (c) the material financial commitments to
support the rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include conversion of the debts or any
portion thereof to equity, restructuring of the debts, dacion en pago, or sale
of assets or of the controlling interest; (e) a liquidation analysis that
estimates the proportion of the claims that the creditors and shareholders
would receive if the debtors properties were liquidated; and (f) such other
relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.

In G.R. No. 180893, the rehabilitation plan is contested on the ground that the same is
unreasonable and results in the impairment of the obligations of contract. PWRDC
contests the following stipulations in PALIs rehabilitation plan: fifty percent (50%)
reduction of the principal obligation; condonation of the accrued and substantial
interests and penalty charges; repayment over a period of ten years, with minimal interest
of two percent (2%) for the first five years and five percent (5%) for the next five years
until fully paid, and only upon availability of cash flow for debt service.
We find nothing onerous in the terms of PALIs rehabilitation plan. The Interim Rules on
Corporate Rehabilitation provides for means of execution of the rehabilitation plan,
which may include, among others, the conversion of the debts or any portion thereof to
equity, restructuring of the debts, dacion en pago, or sale of assets or of the controlling
interest.

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover,
per findings of fact of the RTC and as affirmed by the CA, the restructuring of the debts of
PALI would not be prejudicial to the interest of PWRDC as a secured creditor.
Enlightening is the observation of the CA in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the

principal amount when, as found by the court a quo, a Special Purpose
Vehicle (SPV) acquired the credits of PALI from its creditors at deep
discounts of as much as 85%. Meaning, PALIs creditors accepted only 15%
of their credits value. Stated otherwise, if PALIs creditors are in a position
to accept 15% of their credits value, with more reason that they should be
able to accept 50% thereof as full settlement by their debtor. x x x. [38]

We also find no merit in PWRDCs contention that there is a violation of the impairment
clause. Section 10, Article III of the Constitution mandates that no law impairing the
obligations of contract shall be passed. This case does not involve a law or an executive
issuance declaring the modification of the contract among debtor PALI, its creditors and
its accommodation mortgagors. Thus, the non-impairment clause may not be invoked.
Furthermore, as held in Oposa v. Factoran, Jr.[39] even assuming that the same may be
invoked, the non-impairment clause must yield to the police power of the State. Property
rights and contractual rights are not absolute. The constitutional guaranty of non-
impairment of obligations is limited by the exercise of the police power of the State for
the common good of the general public.
Successful rehabilitation of a distressed corporation will benefit its debtors, creditors,
employees, and the economy in general. The court may approve a rehabilitation plan
even over the opposition of creditors holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable.[40] The rehabilitation plan, once approved, is
binding upon the debtor and all persons who may be affected by it, including the
creditors, whether or not such persons have participated in the proceedings or have
opposed the plan or whether or not their claims have been scheduled.[41]

II

On the issue of whether the rehabilitation court erred when it allowed the foreclosure by
PWRDC of the property of the accommodation mortgagor and excluded the same from
the coverage of the stay order, we rule in the negative.

The governing law concerning rehabilitation and suspension of actions for claims against
corporations is Presidential Decree (P.D.) No. 902-A, as amended (P.D. No. 902-A).
Section 6(c) of P.D. No. 902-A mandates that, upon appointment of a management
committee, rehabilitation receiver, board, or body, all actions for claims against
corporations, partnerships or associations under management or receivership pending
before any court, tribunal, board, or body shall be suspended. Stated differently, all
actions for claims against a corporation pending before any court, tribunal or board
shall ipso jure be suspended in whatever stage such actions may be found.[42]

The justification for the suspension of actions or claims pending rehabilitation

proceedings is to enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extrajudicial interference that
might unduly hinder or prevent the "rescue" of the debtor company. To allow such other
action to continue would only add to the burden of the management committee or
rehabilitation receiver, whose time, effort and resources would be wasted in defending
claims against the corporation instead of being directed toward its restructuring and
rehabilitation.[43]

In G.R. No. 178768, the rehabilitation court, in its Orders dated March 31, 2005 and
August 16, 2005, removed TCT No. 133164 from the coverage of the stay order. The
property covered by TCT No. 133164 is owned by TUI. TCT No. 133164 was mortgaged to
PWRDC by TUI as an accommodation mortgagor of PALI by virtue of the Mortgage Trust
Indenture (MTI) dated February 1995.

The MTI was executed among TDC, TUI and Mrs. Trinidad Diaz- Enriquez, as
mortgagors; PALI, as borrower; and Urban Bank, as trustee. Under Section 4.04 thereof,
the mortgagors and the borrower guaranteed to pay and discharge on time all taxes,
assessments and governmental charges levied or assessed on the collateral and
immediately surrender to the trustee copies of the official receipts for such payments. It
was also agreed therein that should the borrower fail to pay such uncontested taxes,
assessments and charges within sixty (60) calendar days from due date thereof, the
trustee, at its option, shall declare the mortgagors and the borrower in default under
Section 6.01(d) of the MTI, or notify all the lenders of such failure.[44]

In excluding the property from the coverage of the stay order and allow PWRDC to
foreclose on the mortgage and settle the realty tax delinquency of the property with Pasay
City, the rehabilitation court used as justification Section 12, Rule 4 of the Interim Rules
on Corporate Rehabilitation. The said section provides:

SEC. 12. Relief from, Modification, or Termination of Stay Order. The court
may, on motion or motu proprio, terminate, modify, or set conditions for
the continuance of the stay order, or relieve a claim from the coverage
thereof upon showing that (a) any of the allegations in the petition, or any
of the contents of any attachment, or the verification thereof has ceased to
be true; (b) a creditor does not have adequate protection over property
securing its claim; or (c) the debtors secured obligation is more than the fair
market value of the property subject of the stay and such property is not
necessary for the rehabilitation of the debtor.

For purposes of this section, the creditor shall lack adequate protection if it
can be shown that:

a. the debtor fails or refuses to honor a pre-existing agreement with the

creditor to keep the property insured;

b. the debtor fails or refuses to take commercially reasonable steps to

maintain the property; or

c. the property has depreciated to an extent that the creditor is

undersecured.

Upon showing of a lack of adequate protection, the court shall order the
rehabilitation receiver to (a) make arrangements to provide for the
insurance or maintenance of the property, or (b) to make payments or
otherwise provide additional or replacement security such that the
obligation is fully secured. If such arrangements are not feasible, the court
shall modify the stay order to allow the secured creditor lacking adequate
protection to enforce its claim against the debtor; Provided, however, that
the court may deny the creditor the remedies in this paragraph if such
remedies would prevent the continuation of the debtor as a going concern
or otherwise prevent the approval and implementation of a rehabilitation
plan.
In its March 31, 2005 Order, the rehabilitation court ratiocinated that PALI violated the
terms of the MTI by failing to take reasonable steps to protect the security given to
PWRDC, viz.:

It is crystal clear that Ternate Utilities, Inc. being the owner of TCT No.
133614 is the one liable to pay the realty taxes to the local government
of Pasay City. The petitioner [PALI], not being the owner of the subject land
does not owe the local government of Pasay City in the same way [as] the
local government of Pasay City is not a creditor of petitioner [PALI]. The
local government of Pasay City is pursuing directly the tax obligation of
Ternate Utilities, Inc. which company is not the petitioner [PALI] in this
case. Hence, for all intents and purposes, the Stay Order does not cover the
tax obligations of Ternate Utilities, Inc. to the local government
of Pasay City.

In [petitioner PALIs] Comment, it can be gleaned that neither Ternate

Utilities, Inc. nor the petitioner [PALI] has the intention of paying the real
property taxes on TCT No. 133614, which inaction will naturally result in the
auctioning of [the] subject land to the prejudice and damage of creditor
movant being the mortgagee thereof. Likewise, it is uncontested that the
failure of the petitioner or Ternate Utilities, Inc. to pay the realty property
taxes violate[d] the pre-existing agreement of the petitioner [PALI] and
Ternate Utilities, Inc. to the creditor movant.[45]

In the August 16, 2005 Order, the rehabilitation court reaffirmed its decision to remove
TCT No. 133164 from the coverage of the stay order in order to protect the secured claim
of PWRDC, viz.:

Considering that the auction sale of TCT No. 133614 by the local
government of Pasay City without the Ternate Utilities, Inc., or the
petitioner [PALI] redeeming or paying the corresponding due taxes and
penalties totaling to P7,523,257.50 as indicated in the aforesaid Certificate of
 Sale of Delinquent Real Property, the interest of creditor EIB is greatly
prejudiced.

Lastly, even assuming that the value of the PALI property covered by the
MTI [Mortgage Trust Indenture] is indeed P1.877 Billion, however, the total
claim of EIB against the petitioner [PALI] is more than P1.4 Billion Pesos (By
statement of Asset attached by EIB in its Comment/Opposition to the
petition for rehabilitation dated November 10, 2004) as of October 31, 2004
which total obligation is still counting as to date. Hence, not redeeming the
auctioned TCT No. 133614 from the Pasay City Government definitely
renders creditor EIB not possessing adequate protection over [the] property
securing its claim against petitioner [PALI].[46]

Accordingly, the rehabilitation court committed no reversible error when it removed TCT
No. 133164 from the coverage of the stay order. The Interim Rules of Procedure on
Corporate Rehabilitation is silent on the enforcement of claims specifically against the
properties of accommodation mortgagors. It only covers the suspension, during the
pendency of the rehabilitation, of the enforcement of all claims against the debtor, its
guarantors and sureties not solidarily liable with the mortgagor.

Furthermore, the newly adopted Rules of Procedure on Corporate Rehabilitation has a

specific provision for this special arrangement among a debtor, its creditor and its
accommodation mortgagor. Section 7(b), Rule 3 of the said Rules explicitly allows the
foreclosure by a creditor of a property not belonging to a debtor under corporate
rehabilitation, as it provides:

SEC. 7. Stay Order. x x x (b) staying enforcement of all claims, whether for
money or otherwise and whether such enforcement is by court action or
otherwise, against the debtor, its guarantors and persons not solidarily
liable with the debtor; provided, that the stay order shall not cover claims
against letters of credit and similar security arrangements issued by a third
 party to secure the payment of the debtors obligations; provided, further,
that the stay order shall not cover foreclosure by a creditor of property not
belonging to a debtor under corporate rehabilitation; provided, however, that
where the owner of such property sought to be foreclosed is also a
guarantor or one who is not solidarily liable, said owner shall be entitled to
the benefit of excussion as such guarantor[.][47]

Thus, there is no question that the action of the rehabilitation court in G.R. No. 178768
was justified.

WHEREFORE, in view of the foregoing, (1) the Decision dated May 17, 2007 and the
Resolution dated October 30, 2007 of the Court of Appeals in CA-G.R. SP No. 92695 are
hereby AFFIRMED; and (2) the Decision dated March 16, 2007 and the Resolution dated
June 29, 2007 of the Court of Appeals in CA-G.R. SP No. 91996 are hereby SET ASIDE.
The October 19, 2005 Order of the Regional Trial Court of Manila in Civil Case No. 04-
110914 is hereby AFFIRMED. The property covered by TCT No. 133164 is hereby declared
excluded from the coverage of the September 17, 2004 Stay Order.

No costs.

SO ORDERED.

SECOND DIVISION

VALLE VERDE COUNTRY CLUB, INC., G.R. No. 151969

ERNESTO VILLALUNA, RAY GAMBOA,
AMADO M. SANTIAGO, JR., Present:
FORTUNATO DEE, AUGUSTO SUNICO,
VICTOR SALTA, FRANCISCO ORTIGAS QUISUMBING, J., Chairperson,
III, ERIC ROXAS, in their capacities as
members of the Board of Directors of CARPIO-MORALES,
Valle Verde Country Club, Inc., and
JOSE RAMIREZ, BRION,
Petitioners,
DEL CASTILLO, and

ABAD, JJ.
- versus -

VICTOR AFRICA,
Respondent.

Promulgated:

September 4, 2009
x ---------------------------------------------------------------------------------------------- x

DECISION

BRION, J.:

In this petition for review on certiorari,[1] the parties raise a legal question on
corporate governance: Can the members of a corporations board of directors elect
another director to fill in a vacancy caused by the resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

 On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle
Verde Country Club, Inc. (VVCC), the following were elected as members of the VVCC
Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo
Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr.,
Fortunato Dee, Augusto Sunico, and Ray Gamboa.[2] In the years 1997, 1998, 1999, 2000,
and 2001, however, the requisite quorum for the holding of the stockholders meeting
could not be obtained.Consequently, the above-named directors continued to serve in the
VVCC Board in a hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of the

VVCC Board. In a meeting held on October 6, 1998, the remaining directors, still
constituting a quorum of VVCCs nine-member board, elected Eric Roxas (Roxas) to fill in
the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the
VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the
remaining members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas

and Ramirez as members of the VVCC Board with the Securities and Exchange
Commission (SEC) and the Regional Trial Court (RTC), respectively. The SEC case
questioning the validity of Roxas appointment was docketed as SEC Case No. 01-99-
6177. The RTC case questioning the validity of Ramirez appointment was docketed as
Civil Case No. 68726.

In his nullification complaint[3] before the RTC, Africa alleged that the election of
Roxas was contrary to Section 29, in relation to Section 23, of the Corporation Code of
the Philippines (Corporation Code). These provisions read:

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 until their successors are elected and qualified.

xxxx

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy

occurring in the board of directors or trustees other than by removal
by the stockholders or members or by expiration of term, may be filled
by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies
must be filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill a vacancy
shall be elected only for the unexpired term of his predecessor in office. xxx.
[Emphasis supplied.]

Africa claimed that a year after Makalintals election as member of the VVCC Board in
1996, his [Makalintals] term as well as those of the other members of the VVCC Board
should be considered to have already expired. Thus, according to Africa, the resulting
vacancy should have been filled by the stockholders in a regular or special meeting called
for that purpose, and not by the remaining members of the VVCC Board, as was done in
this case.

Africa additionally contends that for the members to exercise the authority to fill
in vacancies in the board of directors, Section 29 requires, among others, that there
should be an unexpired term during which the successor-member shall serve. Since
Makalintals term had already expired with the lapse of the one-year term provided in
Section 23, there is no more unexpired term during which Ramirez could serve.
Through a partial decision[4] promulgated on January 23, 2002, the RTC ruled in favor
of Africa and declared the election of Ramirez, as Makalintals replacement, to the VVCC
Board as null and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of
Roxas as member of the VVCC Board, vice hold-over director Dinglasan. While VVCC
manifested its intent to appeal from the SECs ruling, no petition was actually filed with
the Court of Appeals; thus, the appellate court considered the case closed and terminated
and the SECs ruling final and executory.[5]

THE PETITION

VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision for
being contrary to law and jurisprudence. VVCC made a direct resort to the Court via a
petition for review on certiorari, claiming that the sole issue in the present case involves a
purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining directors
of the corporations Board, still constituting a quorum, can elect another director
to fill in a vacancy caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy
created by the resignation of a hold-over director is expressly granted to the remaining
members of the corporations board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring

in the board of directors caused by the expiration of a members term shall be filled by the
corporations stockholders. Correlating Section 29 with Section 23 of the same law, VVCC
alleges that a members term shall be for one year and until his successor is elected
and qualified; otherwise stated, a members term expires only when his successor to the
Board is elected and qualified. Thus, until such time as [a successor is] elected or qualified
in an annual election where a quorum is present, VVCC contends that the term of [a
member] of the board of directors has yet not expired.

As the vacancy in this case was caused by Makalintals resignation, not by the
expiration of his term, VVCC insists that the board rightfully appointed Ramirez to fill in
the vacancy.

In support of its arguments, VVCC cites the Courts ruling in the 1927 El
Hogar[6] case which states:

Owing to the failure of a quorum at most of the general meetings

since the respondent has been in existence, it has been the practice
of the directors to fill in vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its
sanction in Article 71 of the By-Laws, which reads as follows:

Art. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally

holds over and continues to function until another directorate is chosen
and qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of the term of
office for which the officer was elected, the general rule is to allow the
officer to hold over until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of existing
officers nor dissolve the corporation. The doctrine above stated finds
expression in article 66 of the by-laws of the respondent which declares in
so many words that directors shall hold office "for the term of one year or
until their successors shall have been elected and taken possession of their
offices." xxx.

It results that the practice of the directorate of filling vacancies by the

action of the directors themselves is valid. Nor can any exception be
taken to the personality of the individuals chosen by the directors to fill
vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same arguments that he did before the
trial court.

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition
unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining directors
of a corporations Board, still constituting a quorum, can elect another director to
fill in a vacancy caused by the resignation of a hold-over director. The resolution of
this legal issue is significantly hinged on the determination of what constitutes a directors
term of office.

The holdover period is not part of the term

of office of a member of the board of
directors

The word term has acquired a definite meaning in jurisprudence. In several cases,
we have defined term as the time during which the officer may claim to hold the
office as of right, and fixes the interval after which the several incumbents shall succeed
one another.[7] The term of office is not affected by the holdover.[8] The term is fixed
by statute and it does not change simply because the office may have become vacant, nor
because the incumbent holds over in office beyond the end of the term due to the fact
that a successor has not been elected and has failed to qualify.
 Term is distinguished from tenure in that an officers tenure represents the term
during which the incumbent actually holds office. The tenure may be shorter (or, in
case of holdover, longer) than the term for reasons within or beyond the power of the
incumbent.

Based on the above discussion, when Section 23[9] of the Corporation Code
declares that the board of directorsshall hold office for one (1) year until their successors
are elected and qualified, we construe the provision to mean that the term of the
members of the board of directors shall be only for one year; their term expires one
year after election to the office. The holdover period that time from the lapse of one year
from a members election to the Board and until his successors election and qualification
is not part of the directors original term of office, nor is it a new term; the holdover
period, however, constitutes part of his tenure. Corollary, when an incumbent member of
the board of directors continues to serve in a holdover capacity, it implies that the office
has a fixed term, which has expired, and the incumbent is holding the succeeding
term.[10]

After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintals term of office is deemed to have already expired. That he continued to serve
in the VVCC Board in a holdover capacity cannot be considered as extending his term. To
be precise, Makalintals term of office began in 1996 and expired in 1997, but, by virtue of
the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office
until his resignation on November 10, 1998. This holdover period, however, is not to be
considered as part of his term, which, as declared, had already expired.

With the expiration of Makalintals term of office, a vacancy resulted which, by the
terms of Section 29[11] of the Corporation Code, must be filled by the stockholders of
VVCC in a regular or special meeting called for the purpose. To assume as VVCC does
that the vacancy is caused by Makalintals resignation in 1998, not by the expiration of his
term in 1997, is both illogical and unreasonable. His resignation as a holdover director did
not change the nature of the vacancy; the vacancy due to the expiration of Makalintals
term had been created long before his resignation.

The powers of the corporations board of

directors emanate from its stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to fill up
vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens
the stockholders power to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the directing and
controlling body of the corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board should exercise not
only care and diligence, but utmost good faith in the management of corporate affairs.[12]

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.[13]

This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations board
of directors is caused not by the expiration of a members term, the successor so elected to
fill in a vacancy shall be elected only for the unexpired term of the his predecessor in
office. The law has authorized the remaining members of the board to fill in a vacancy
only in specified instances, so as not to retard or impair the corporations operations; yet,
in recognition of the stockholders right to elect the members of the board, it limited the
period during which the successor shall serve only to the unexpired term of his
predecessor in office.
While the Court in El Hogar approved of the practice of the directors to fill
vacancies in the directorate, we point out that this ruling was made before the present
Corporation Code was enacted[14] and before its Section 29 limited the instances when the
remaining directors can fill in vacancies in the board, i.e., when the remaining directors
still constitute a quorum and when the vacancy is caused for reasons other than by
removal by the stockholders or by expiration of the term.

It also bears noting that the vacancy referred to in Section 29 contemplates

a vacancy occurring within the directors term of office. When a vacancy is created by
the expiration of a term, logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a members term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board
elected Ramirez to replace Makalintal, there was no more unexpired term to speak of, as
Makalintals one-year term had already expired. Pursuant to law, the authority to fill in
the vacancy caused by Makalintals leaving lies with the VVCCs stockholders, not the
remaining members of its board of directors.

WHEREFORE, we DENY the petitioners petition for review on certiorari,

and AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila,
promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the petitioners.

SO ORDERED.

HI-YIELD REALTY, G.R. No. 168863

INCORPORATED,

Petitioner, Present:

QUISUMBING, J., Chairperson,

- versus -
YNARES-SANTIAGO,*

CHICO-NAZARIO,**

LEONARDO-DE CASTRO,*** and

HON. COURT OF APPEALS, HON.
BRION, JJ.
CESAR O. UNTALAN, in his capacity as
PRESIDING JUDGE OF RTC-MAKATI,
BRANCH 142, HONORIO TORRES &
SONS, INC., and ROBERTO H. TORRES,

Respondents. Promulgated:
 June 23, 2009

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

DECISION

QUISUMBING, J.:

This is a special civil action for certiorari seeking to nullify and set aside the
Decision[1] dated March 10, 2005 and Resolution[2] dated May 26, 2005 of the Court of
Appeals in CA-G.R. SP. No. 83919. The appellate court had dismissed the petition for
certiorari and prohibition filed by petitioner and denied its reconsideration.

The antecedent facts of the case are undisputed.

On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres &
Sons, Inc. (HTSI), filed a Petition for Annulment of Real Estate Mortgage and Foreclosure
Sale[3]over two parcels of land located in Marikina and Quezon City. The suit was filed
against Leonora, Ma. Theresa, Glenn and Stephanie, all surnamed Torres, the Register of
Deeds of Marikina and Quezon City, and petitioner Hi-Yield Realty, Inc. (Hi-Yield). It was
docketed as Civil Case No. 03-892 with Branch 148 of the Regional Trial Court (RTC)
of Makati City.

On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper
venue and payment of insufficient docket fees. The RTC denied said motion in an
Order[4] dated January 22, 2004. The trial court held that the case was, in nature, a real
action in the form of a derivative suit cognizable by a special commercial court pursuant
to Administrative Matter No. 00-11-03-SC.[5] Petitioner sought reconsideration, but its
motion was denied in an Order[6] dated April 27, 2004.

Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of
Appeals. In a Decision dated March 10, 2005, the appellate court agreed with the RTC that
the case was a derivative suit. It further ruled that the prayer for annulment of mortgage
and foreclosure proceedings was merely incidental to the main action. The dispositive
portion of said decision reads:

WHEREFORE, premises considered, this Petition is

hereby DISMISSED. However, public respondent is hereby DIRECTED to
instruct his Clerk of Court to compute the proper docket fees and
thereafter, to order the private respondent to pay the
same IMMEDIATELY.
 SO ORDERED.[7]

Petitioners motion for reconsideration[8] was denied in a Resolution dated May 26, 2005.

Hence, this petition which raises the following issues:

I.

WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED

ITS DISCRETION IN NOT DISMISSING THE CASE AGAINST HI-YIELD
FOR IMPROPER VENUE DESPITE FINDINGS BY THE TRIAL COURT
THAT THE ACTION IS A REAL ACTION.

II.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT

DISMISSING THE COMPLAINT AS AGAINST HI-YIELD EVEN IF THE
JOINDER OF PARTIES IN THE COMPLAINT VIOLATED THE RULES ON
VENUE.

III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN

HOLDING THAT THE ANNULMENT OF REAL ESTATE MORTGAGE AND
FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL
[TO] THE DERIVATIVE SUIT.[9]

The pivotal issues for resolution are as follows: (1) whether venue was properly laid; (2)
whether there was proper joinder of parties; and (3) whether the action to annul the real
estate mortgage and foreclosure sale is a mere incident of the derivative suit.

Petitioner imputes grave abuse of discretion on the Court of Appeals for not dismissing
the case against it even as the trial court found the same to be a real action. It explains
that the rule on venue under the Rules of Court prevails over the rule prescribing the
venue for intra-corporate controversies; hence, HTSI erred when it filed its suit only
in Makati when the lands subjects of the case are in Marikina and Quezon City. Further,
petitioner argues that the appellate court erred in ruling that the action is mainly a
derivative suit and the annulment of real estate mortgage and foreclosure sale is merely
incidental thereto. It points out that the caption of the case, substance of the allegations,
and relief prayed for revealed that the main thrust of the action is to recover the
lands. Lastly, petitioner asserts that it should be dropped as a party to the case for it has
been wrongly impleaded as a non-stockholder defendant in the intra-corporate dispute.

On the other hand, respondents maintain that the action is primarily a derivative suit to
redress the alleged unauthorized acts of its corporate officers and major stockholders in
connection with the lands. They postulate that the nullification of the mortgage and
foreclosure sale would just be a logical consequence of a decision adverse to said officers
and stockholders.

After careful consideration, we are in agreement that the petition must be dismissed.

A petition for certiorari is proper if a tribunal, board or officer exercising judicial or quasi-
judicial functions acted without or in excess of jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction and there is no appeal, or any plain,
speedy and adequate remedy in the ordinary course of law.[10]

Petitioner sought a review of the trial courts Orders dated January 22,
2004 and April 27, 2004 via a petition for certiorari before the Court of Appeals. In
rendering the assailed decision and resolution, the Court of Appeals was acting under its
concurrent jurisdiction to entertain petitions for certiorari under paragraph 2,[11] Section 4
of Rule 65 of the Rules of Court. Thus, if erroneous, the decision and resolution of the
appellate court should properly be assailed by means of a petition for review on certiorari
under Rule 45 of the Rules of Court. The distinction is clear: a petition for certiorari seeks
to correct errors of jurisdiction while a petition for review on certiorari seeks to correct
errors of judgment committed by the court a quo.[12] Indeed, this Court has often reminded
members of the bench and bar that a special civil action for certiorari under Rule 65 lies
only when there is no appeal nor plain, speedy and adequate remedy in the ordinary course
of law.[13] In the case at hand, petitioner impetuously filed a petition for certiorari before us
when a petition for review was available as a speedy and adequate remedy. Notably,
petitioner filed the present petition 58[14] days after it received a copy of the assailed
resolution dated May 26, 2005. To our mind, this belated action evidences petitioners effort
to substitute for a lost appeal this petition for certiorari.

For the extraordinary remedy of certiorari to lie by reason of grave abuse of

discretion, the abuse of discretion must be so patent and gross as to amount to an evasion
of positive duty, or a virtual refusal to perform the duty enjoined or to act in
contemplation of law, or where the power is exercised in an arbitrary and despotic
manner by reason of passion and personal hostility.[15] We find no grave abuse of
discretion on the part of the appellate court in this case.

Simply, the resolution of the issues posed by petitioner rests on a determination of the
nature of the petition filed by respondents in the RTC. Both the RTC and Court of
Appeals ruled that the action is in the form of a derivative suit although captioned as a
petition for annulment of real estate mortgage and foreclosure sale.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.[16] Under

the Corporation Code, where a corporation is an injured party, its power to sue is lodged with
its board of directors or trustees. But an individual stockholder may be permitted to institute a
derivative suit on behalf of the corporation in order to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold
control of the corporation. In such actions, the corporation is the real party-in-interest while
the suing stockholder, on behalf of the corporation, is only a nominal party.[17]

In the case of Filipinas Port Services, Inc. v. Go,[18] we enumerated the foregoing requisites
before a stockholder can file a derivative suit:

a) the party bringing suit should be a shareholder as of the time of

the act or transaction complained of, the number of his shares not being
material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a

demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the

wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit.[19]

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a
derivative suit to prosper, the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit.[20]The Court finds that Roberto had satisfied this requirement in
paragraph five (5) of his petition which reads:

5. Individual petitioner, being a minority stockholder, is instituting

the instant proceeding by way of a derivative suit to redress wrongs done to
petitioner corporation and vindicate corporate rights due to the
mismanagement and abuses committed against it by its officers and
controlling stockholders, especially by respondent Leonora H. Torres
(Leonora, for brevity) who, without authority from the Board of Directors,
arrogated upon herself the power to bind petitioner corporation from
 incurring loan obligations and later allow company properties to be
foreclosed as hereinafter set forth;[21]

Further, while it is true that the complaining stockholder must satisfactorily show that he
has exhausted all means to redress his grievances within the corporation; such remedy is
no longer necessary where the corporation itself is under the complete control of the
person against whom the suit is being filed. The reason is obvious: a demand upon the
board to institute an action and prosecute the same effectively would have been useless
and an exercise in futility.[22]

Here, Roberto alleged in his petition that earnest efforts were made to reach a
compromise among family members/stockholders before he filed the case. He also
maintained that Leonora Torres held 55% of the outstanding shares while Ma. Theresa,
Glenn and Stephanie excluded him from the affairs of the corporation. Even more glaring
was the fact that from June 10, 1992, when the first mortgage deed was executed until July
23, 2002, when the properties mortgaged were foreclosed, the Board of Directors of HTSI
did nothing to rectify the alleged unauthorized transactions of Leonora. Clearly, Roberto
could not expect relief from the board.

Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-
SC[23] otherwise known as the Interim Rules of Procedure Governing Intra-Corporate
Controversies under Republic Act No. 8799.[24] Section 1,[25] Rule 1 thereof expressly lists
derivative suits among the cases covered by it.

As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:

SEC. 5. Venue. - All actions covered by these Rules shall be

commenced and tried in the Regional Trial Court which has jurisdiction
over the principal office of the corporation, partnership, or association
concerned. Where the principal office of the corporation, partnership or
association is registered in the Securities and Exchange Commission as
Metro Manila, the action must be filed in the city or municipality where the
head office is located.

Thus, the Court of Appeals did not commit grave abuse of discretion when it found that
respondents correctly filed the derivative suit before the Makati RTC where HTSI had its
principal office.
There being no showing of any grave abuse of discretion on the part of the Court of
Appeals the other alleged errors will no longer be passed upon as mere errors of judgment
are not proper subjects of a petition for certiorari.

WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March 10,
2005 and the Resolution dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No.
83919 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

JOSELITO MUSNI PUNO G.R. No. 177066

(as heir of the late Carlos Puno),

Present:
Petitioner,

YNARES-SANTIAGO, J.,

Chairperson,

CHICO-NAZARIO,

VELASCO, JR.,
- versus -
NACHURA, and

PERALTA, JJ.

Promulgated:
PUNO ENTERPRISES, INC., represented by
JESUSA PUNO,

Respondent. September 11, 2009

x------------------------------------------------------------------------------------x
 DECISION

NACHURA, J.:

Upon the death of a stockholder, the heirs do not automatically become

stockholders of the corporation; neither are they mandatorily entitled to the rights and
privileges of a stockholder. This, we declare in this petition for review on certiorari of the
Court of Appeals (CA) Decision[1] dated October 11, 2006 and Resolution dated March 6,
2007 in CA-G.R. CV No. 86137.

The facts of the case follow:

Carlos L. Puno, who died on June 25, 1963, was an incorporator of respondent Puno
Enterprises, Inc. On March 14, 2003, petitioner Joselito Musni Puno, claiming to be an
heir of Carlos L. Puno, initiated a complaint for specific performance against
respondent. Petitioner averred that he is the son of the deceased with the latters
common-law wife, Amelia Puno. As surviving heir, he claimed entitlement to the rights
and privileges of his late father as stockholder of respondent. The complaint thus prayed
that respondent allow petitioner to inspect its corporate book, render an accounting of all
the transactions it entered into from 1962, and give petitioner all the profits, earnings,
dividends, or income pertaining to the shares of Carlos L. Puno.[2]

Respondent filed a motion to dismiss on the ground that petitioner did not have
the legal personality to sue because his birth certificate names him as Joselito Musni
Muno. Apropos, there was yet a need for a judicial declaration that Joselito Musni Puno
and Joselito Musni Muno were one and the same.
 The court ordered that the proceedings be held in abeyance, ratiocinating that
petitioners certificate of live birth was no proof of his paternity and relation to Carlos L.
Puno.

Petitioner submitted the corrected birth certificate with the name Joselito M.
Puno, certified by the Civil Registrar of the City of Manila, and the Certificate of Finality
thereof. To hasten the disposition of the case, the court conditionally admitted the
corrected birth certificate as genuine and authentic and ordered respondent to file its
answer within fifteen days from the order and set the case for pretrial.[3]

On October 11, 2005, the court rendered a Decision, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered ordering Jesusa Puno

and/or Felicidad Fermin to allow the plaintiff to inspect the corporate
books and records of the company from 1962 up to the present including
the financial statements of the corporation.

The costs of copying shall be shouldered by the plaintiff. Any

expenses to be incurred by the defendant to be able to comply with this
order shall be the subject of a bill of costs.

SO ORDERED.[4]

On appeal, the CA ordered the dismissal of the complaint in its Decision dated October
11, 2006. According to the CA, petitioner was not able to establish the paternity of and his
filiation to Carlos L. Puno since his birth certificate was prepared without the
intervention of and the participatory acknowledgment of paternity by Carlos L.
Puno. Accordingly, the CA said that petitioner had no right to demand that he be allowed
to examine respondents books. Moreover, petitioner was not a stockholder of the
corporation but was merely claiming rights as an heir of Carlos L. Puno, an incorporator
of the corporation. His action for specific performance therefore appeared to be
premature; the proper action to be taken was to prove the paternity of and his filiation to
Carlos L. Puno in a petition for the settlement of the estate of the latter.[5]

Petitioners motion for reconsideration was denied by the CA in its Resolution[6] dated
March 6, 2007.

In this petition, petitioner raises the following issues:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT

RULING THAT THE JOSELITO PUNO IS ENTITLED TO THE
RELIEFS DEMANDED HE BEING THE HEIR OF THE LATE CARLOS
PUNO, ONE OF THE INCORPORATORS [OF] RESPONDENT
CORPORATION.

II. HONORABLE COURT OF APPEALS ERRED IN RULING THAT

FILIATION OF JOSELITO PUNO, THE PETITIONER[,] IS NOT
DULY PROVEN OR ESTABLISHED.

III. THE HONORABLE COURT ERRED IN NOT RULING THAT

JOSELITO MUNO AND JOSELITO PUNO REFERS TO THE ONE
AND THE SAME PERSON.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT

RULING THAT WHAT RESPONDENT MERELY DISPUTES IS THE
SURNAME OF THE PETITIONER WHICH WAS MISSPELLED AND
THE FACTUAL ALLEGATION E.G. RIGHTS OF PETITIONER AS
HEIR OF CARLOS PUNO ARE DEEMED ADMITTED
 HYPOTHETICALLY IN THE RESPONDENT[S] MOTION TO
DISMISS.

V. THE HONORABLE COURT OF APPEALS THEREFORE ERRED

I[N] DECREEING THAT PETITIONER IS NOT ENTITLED TO
INSPECT THE CORPORATE BOOKS OF DEFENDANT
CORPORATION.[7]

The petition is without merit. Petitioner failed to establish the right to inspect
respondent corporations books and receive dividends on the stocks owned by Carlos L.
Puno.

Petitioner anchors his claim on his being an heir of the deceased

stockholder. However, we agree with the appellate court that petitioner was not able to
prove satisfactorily his filiation to the deceased stockholder; thus, the former cannot
claim to be an heir of the latter.

Incessantly, we have declared that factual findings of the CA supported by

substantial evidence, are conclusive and binding.[8] In an appeal via certiorari, the Court
may not review the factual findings of the CA. It is not the Courts function under Rule 45
of the Rules of Court to review, examine, and evaluate or weigh the probative value of the
evidence presented.[9]

A certificate of live birth purportedly identifying the putative father is not

competent evidence of paternity when there is no showing that the putative father had a
hand in the preparation of the certificate. The local civil registrar has no authority to
record the paternity of an illegitimate child on the information of a third person. [10] As
correctly observed by the CA, only petitioners mother supplied the data in the birth
certificate and signed the same. There was no evidence that Carlos L. Puno acknowledged
petitioner as his son.

As for the baptismal certificate, we have already decreed that it can only serve as
evidence of the administration of the sacrament on the date specified but not of the
veracity of the entries with respect to the childs paternity.[11]

In any case, Sections 74 and 75 of the Corporation Code enumerate the persons
who are entitled to the inspection of corporate books, thus

Sec. 74. Books to be kept; stock transfer agent. x x x.

The records of all business transactions of the corporation and the

minutes of any meeting shall be open to the inspection of any director,
trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.

xxxx

Sec. 75. Right to financial statements. Within ten (10) days from
receipt of a written request of any stockholder or member, the corporation
shall furnish to him its most recent financial statement, which shall include
a balance sheet as of the end of the last taxable year and a profit or loss of
statement for said taxable year, showing in reasonable detail its assets and
liabilities and the result of its operations.[12]
 The stockholders right of inspection of the corporations books and records is
based upon his ownership of shares in the corporation and the necessity for self-
protection. After all, a shareholder has the right to be intelligently informed about
corporate affairs.[13] Such right rests upon the stockholders underlying ownership of the
corporations assets and property.[14]

Similarly, only stockholders of record are entitled to receive dividends declared by

the corporation, a right inherent in the ownership of the shares.[15]

Upon the death of a shareholder, the heirs do not automatically become

stockholders of the corporation and acquire the rights and privileges of the deceased as
shareholder of the corporation. The stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be recorded in the books of the
corporation. Section 63 of the Corporation Code provides that no transfer shall be valid,
except as between the parties, until the transfer is recorded in the books of the
corporation.[16] During such interim period, the heirs stand as the equitable owners of the
stocks, the executor or administrator duly appointed by the court being vested with the
legal title to the stock.[17] Until a settlement and division of the estate is effected, the
stocks of the decedent are held by the administrator or executor.[18] Consequently, during
such time, it is the administrator or executor who is entitled to exercise the rights of the
deceased as stockholder.

Thus, even if petitioner presents sufficient evidence in this case to establish that he
is the son of Carlos L. Puno, he would still not be allowed to inspect respondents books
and be entitled to receive dividends from respondent, absent any showing in its transfer
book that some of the shares owned by Carlos L. Puno were transferred to him. This
would only be possible if petitioner has been recognized as an heir and has participated in
the settlement of the estate of the deceased.

Corollary to this is the doctrine that a determination of whether a person, claiming

proprietary rights over the estate of a deceased person, is an heir of the deceased must be
ventilated in a special proceeding instituted precisely for the purpose of settling the estate
of the latter. The status of an illegitimate child who claims to be an heir to a decedents
estate cannot be adjudicated in an ordinary civil action, as in a case for the recovery of
property.[19] The doctrine applies to the instant case, which is one for specific
performance to direct respondent corporation to allow petitioner to exercise rights that
pertain only to the deceased and his representatives.

WHEREFORE, premises considered, the petition is DENIED. The Court of

Appeals Decision dated October 11, 2006 and Resolution dated March 6, 2007
are AFFIRMED.

SO ORDERED.

IMELDA O. COJUANGCO, PRIME G.R. No. 183278

HOLDINGS, INC., AND THE ESTATE
OF RAMON U. COJUANGCO Present:
Petitioners,
PUNO, C.J.,
QUISUMBING,*
YNARES-SANTIAGO,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
TINGA,
CHICO-NAZARIO,
SANDIGANBAYAN, REPUBLIC OF VELASCO, JR.,
THE PHILIPPINES, AND THE NACHURA,
SHERIFF OF SANDIGANBAYAN, LEONARDO-DE CASTRO,
Respondents. BRION,
PERALTA, and
BERSAMIN, JJ.

Promulgated:

April 24, 2009

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

DECISION

CARPIO MORALES, J.:

The present petition is one for Certiorari.

Petitioners Imelda O. Cojuangco, Prime Holdings, Inc., and the Estate of Ramon
Cojuangco assail via certiorari the Resolutions dated November 7, 2007[1] and June 13,
2008[2] of the Sandiganbayan in Civil Case No. 0002, Republic of the Philippines v.
Ferdinand Marcos, et. al.

A brief recital of the antecedent facts is in order.

On July 16, 1987, respondent Republic of the Philippines (Republic) filed before the
Sandiganbayan a Complaint for Reconveyance, Reversion, Accounting, Restitution and
Damages, docketed as Civil Case 0002, praying for the recovery of alleged ill-gotten
wealth from the late President Marcos and former First Lady Imelda Marcos and their
cronies, including some 2.4 million shares of stock in the Philippine Long Distance
Telephone Company (PLDT).

The complaint, which was later amended to implead herein petitioners Ramon and
Imelda Cojuangco (the Cojuangcos), alleged that the Marcoses ill-gotten wealth included
shares in the PLDT covered by shares of stock in the Philippine Telecommunications
Investment Corporation (PTIC), registered in the name of Prime Holdings, Inc. (Prime
Holdings).

The Sandiganbayan dismissed the complaint with respect to the recovery of the PLDT
shares, hence, the Republic appealed to this Court, docketed as G.R. No. 153459, which
appeal was later consolidated with pending cases of similar import G.R. Nos. 149802,
150320, and 150367.
By Decision[3] dated January 20, 2006, this Court, in G.R. No. 153459, ruled in favor of the
Republic, declaring it to be the owner of 111,415 PTIC shares registered in the name of
Prime Holdings. The dispositive portion of the Decision reads:
WHEREFORE, the petition of the Republic of the Philippines in
G.R. No. 153459 is GRANTED to the extent that it prays for the
reconveyance to the Republic of 111,415 PTIC shares registered in the name
of PHI. The petitions in G.R. Nos. 149802, 150320, 150367, and 153207
are DENIED for lack of merit.

SO ORDERED.

The Decision became final and executory on October 26, 2006, hence, the Republic
filed on November 20, 2006 with the Sandiganbayan a Motion for the Issuance of a Writ
of Execution, praying for the cancellation of the 111,415 shares/certificates of stock
registered in the name of Prime Holdings and the annotation of the change of ownership
on PTICs Stock and Transfer Book. The Republic further prayed for the issuance of an
order for PTIC to account for all cash and stock dividends declared and/or issued by
PLDT in favor of PTIC from 1986 up to the present including compounded interests
appurtenant thereto.

By Resolution dated December 14, 2006, the Sandiganbayan granted the Motion for the
Issuance of a Writ of Execution with respect to the reconveyance of the shares, but denied
the prayer for accounting of dividends.

On Motion for Reconsideration of the Republic, the Sandiganbayan, by the first

assailed Resolution dated November 7, 2007, directed PTIC to deliver the cash and
stock dividends pertaining to the 111,415 shares, including compounded interests,
ratiocinating that the same were covered by this Courts Decision in G.R. No. 153459,
since the Republic was therein adjudged the owner of the shares and, therefore, entitled
to the fruits thereof.
The Cojuangcos (hereafter petitioners) moved to reconsider the November 7, 2007
Sandiganbayan Resolution, alleging that this Courts Decision in G.R. No. 153459 did not
include a disposition of the dividends and interests accruing to the shares adjudicated in
favor of the Republic.
By the other challenged Resolution dated June 13, 2008, the Sandiganbayan partly
granted petitioners Motion for Reconsideration by including legal interests, but not
compounding the same, from the accounting and remittance to the Republic. The
Sandiganbayan thereupon issued a Writ of Execution,[4] hence, spawned the present
petition for certiorari.

From the myriad assignments of error proffered by petitioners, the pivotal issues for the
Courts resolution are: (1) whether the Sandiganbayan gravely abused its discretion in
ordering the accounting, delivery, and remittance to the Republic of the stock, cash, and
property dividends pertaining to the 111,415 PTIC shares of Prime Holdings, this Courts
Decision in G.R. No. 153459 not having even discussed the same; and (2) whether the
Republic, having transferred the shares to a third party, is entitled to the dividends,
interests, and earnings thereof.

Petitioners insist on a literal reading of the dispositive portion of this Courts

Decision in G.R. No. 153459 as excluding the dividends, interests, and earnings accruing
to the shares of stock from being accounted for and remitted.

The term dividend in its technical sense and ordinary acceptation is that part or portion
of the profits of the enterprise which the corporation, by its governing agents, sets apart
for ratable division among the holders of the capital stock.[5] It is a payment to the
stockholders of a corporation as a return upon their investment,[6] and the right thereto is
an incident of ownership of stock.[7]
 This Court, in directing the reconveyance to the Republic of the 111,415 shares of
PLDT stock owned by PTIC in the name of Prime Holdings, declared the Republic
as the owner of said shares and, necessarily, the dividends and interests accruing thereto.

Ownership is a relation in law by virtue of which a thing pertaining to one person

is completely subjected to his will in everything not prohibited by law or the concurrence
with the rights of another. Its traditional elements or attributes include jus utendi or the
right to receive from the thing what it produces.[8]

Contrary to petitioners contention, while the general rule is that the portion of a
decision that becomes the subject of execution is that ordained or decreed in
the dispositive part thereof, there are recognized exceptions to this rule, viz: (a).where
there is ambiguity or uncertainty, the body of the opinion may be referred to for purposes
of construing the judgment, because the dispositive part of a decision must find support
from the decisions ratio decidendi; and (b).where extensive and explicit discussion and
settlement of the issue is found in the body of the decision.[9]

In G.R. No. 153459, although the inclusion of the dividends, interests, and earnings
of the 111,415 PTIC shares as belonging to the Republic was not mentioned in the
dispositive portion of the Courts Decision, it is clear from its body that what was being
adjudicated in favor of the Republic was the whole block of shares and the fruits thereof,
said shares having been found to be part of the Marcoses ill-gotten wealth, and therefore,
public money.

It would be absurd to award the shares to the Republic as their owner and not
include the dividends and interests accruing thereto. An owner who cannot exercise
the juses or attributes of ownership -- the right to possess, to use and enjoy, to abuse or
consume, to accessories, to dispose or alienate, to recover or vindicate, and to the fruits -
is a crippled owner.[10]
 Respecting petitioners argument that the Republic has yielded its right to the
fruits of the shares when it sold them to Metro Pacific Assets Holdings, Inc., (Metro
Pacific), the same does not lie.

Dividends are payable to the stockholders of record as of the date of the

declaration of dividends or holders of record on a certain future date, as the case may be,
unless the parties have agreed otherwise.[11] And a transfer of shares which is not recorded
in the books of the corporation is valid only as between the parties, hence, the transferor
has the right to dividends as against the corporation without notice of transfer but
it serves as trustee of the real owner of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to receive the dividends.[12]

It is thus clear that the Republic is entitled to the dividends accruing from the
subject 111,415 shares since 1986 when they were sequestered up to the time they were
transferred to Metro Pacific via the Sale and Purchase Agreement of February 28,
2007;[13] and that the Republic has since the latter date been serving as trustee of those
dividends for the Metro Pacific up to the present, subject to the terms and conditions of
the said agreement they entered into.

WHEREFORE, the petition is DENIED. The challenged Resolutions dated November 7,

2007 and June 13, 2008 of the Sandiganbayan in Civil Case No. 0002 are, in light of the
foregoing, AFFIRMED.

SO ORDERED.

PHILIP TURNER and ELNORA G.R. No. 157479

TURNER,
Petitioners, Present:

CARPIO MORALES, Chairperson,

BRION,
-versus - BERSAMIN,
 VILLARAMA, JR., and
ARANAL-SERENO, JJ.
Promulgated:
LORENZO SHIPPING
CORPORATION, November 24, 2010
Respondent.
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J.:

This case concerns the right of dissenting stockholders to demand payment of the value
of their shareholdings.

In the stockholders suit to recover the value of their shareholdings from the
corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders, herein
petitioners, and ordered the corporation, herein respondent, to pay. Execution was
partially carried out against the respondent. On the respondents petition for certiorari,
however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners suit
on the ground that their cause of action for collection had not yet accrued due to the lack
of unrestricted retained earnings in the books of the respondent.

Thus, the petitioners are now before the Court to challenge the CAs decision
promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping
Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.[1]

Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic

corporation engaged primarily in cargo shipping activities. In June 1999, the respondent
decided to amend its articles of incorporation to remove the stockholders pre-emptive
rights to newly issued shares of stock. Feeling that the corporate move would be
prejudicial to their interest as stockholders, the petitioners voted against the amendment
and demanded payment of their shares at the rate of P2.276/share based on the book
value of the shares, or a total of P2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners
unacceptable. It insisted that the market value on the date before the action to remove
the pre-emptive right was taken should be the value, or P0.41/share (or a total
of P414,100.00), considering that its shares were listed in the Philippine Stock Exchange,
and that the payment could be made only if the respondent had unrestricted retained
earnings in its books to cover the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee pursuant to Section 82 of the Corporation Code, each of them nominating a
representative, who together then nominated the third member who would be chairman
of the appraisal committee. Thus, the appraisal committee came to be made up of
Reynaldo Yatco, the petitioners nominee; Atty. Antonio Acyatan, the respondents
nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third
member/chairman.
On October 27, 2000, the appraisal committee reported its valuation
of P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners.[2]

Subsequently, the petitioners demanded payment based on the valuation of the

appraisal committee, plus 2%/month penalty from the date of their original demand for
payment, as well as the reimbursement of the amounts advanced as professional fees to
the appraisers.[3]

In its letter to the petitioners dated January 2, 2001,[4] the respondent refused the
petitioners demand, explaining that pursuant to the Corporation Code, the dissenting
stockholders exercising their appraisal rights could be paid only when the corporation
had unrestricted retained earnings to cover the fair value of the shares, but that it had no
retained earnings at the time of the petitioners demand, as borne out by its Financial
Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of December 31,
1999.
Upon the respondents refusal to pay, the petitioners sued the respondent for collection
and damages in the RTC in Makati City on January 22, 2001. The case, docketed as Civil
Case No. 01-086, was initially assigned to Branch 132.[5]
On June 26, 2002, the petitioners filed their motion for partial summary judgment,
claiming that:
 7) xxx the defendant has an accumulated unrestricted retained
earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of
the Quarter Ending March 31, 2002; xxx

8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed
xxx

9) xxx there is no genuine issue to material fact and therefore, the

plaintiffs are entitled, as a matter of right, to a summary
judgment. xxx [6]

The respondent opposed the motion for partial summary judgment, stating that the
determination of the unrestricted retained earnings should be made at the end of
the fiscal year of the respondent, and that the petitioners did not have a cause of
action against the respondent.
During the pendency of the motion for partial summary judgment, however, the Presiding
Judge of Branch 133 transmitted the records to the Clerk of Court for re-raffling to
any of the RTCs special commercial courts in Makati City due to the case being an
intra-corporate dispute. Hence, Civil Case No. 01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in Manila, Civil
Case No. 01-086 was ultimately transferred to Branch 46 of the RTC in Manila, presided
by Judge Artemio Tipon,[7] pursuant to the Interim Rules of Procedure on Intra-Corporate
Controversies (Interim Rules) requiring intra-corporate cases to be brought in the RTC
exercising jurisdiction over the place where the principal office of the corporation was
found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the
petitioners counsel did not attend, Judge Tipon issued an order,[8] granting the
petitioners motion for partial summary judgment, stating:

As to the motion for partial summary judgment, there is no question

that the 3-man committee mandated to appraise the shareholdings of
plaintiff submitted its recommendation on October 27, 2000fixing the fair
 value of the shares of stocks of the plaintiff at P2.54 per share. Under
Section 82 of the Corporation Code:

The findings of the majority of the appraisers shall be final, and

the award shall be paid by the corporation within thirty (30) days
after the award is made.

The only restriction imposed by the Corporation Code is

That no payment shall be made to any dissenting stockholder

unless the corporation has unrestricted retained earning in its
books to cover such payment.

The evidence submitted by plaintiffs shows that in its quarterly

financial statement it submitted to the Securities and Exchange
Commission, the defendant has retained earnings of P11,975,490 as
of March 21, 2002. This is not disputed by the defendant. Its only argument
against paying is that there must be unrestricted retained earning at the
time the demand for payment is made.

This certainly is a very narrow concept of the appraisal right of a

stockholder. The law does not say that the unrestricted retained earnings
must exist at the time of the demand. Even if there are no retained earnings
at the time the demand is made if there are retained earnings later, the fair
value of such stocks must be paid. The only restriction is that there must be
sufficient funds to cover the creditors after the dissenting stockholder is
paid. No such allegations have been made by the defendant.[9]

On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November 22, 2002,
the petitioners filed a motion for immediate execution and a motion to strike out motion
for reconsideration. In the latter motion, they pointed out that the motion for
reconsideration was prohibited by Section 8 of the Interim Rules. Thus, also on November
22, 2002, Judge Tipon denied the motion for reconsideration and granted the
petitioners motion for immediate execution.[10]

Subsequently, on November 28, 2002, the RTC issued a writ of execution.[11]

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to
challenge the two aforecited orders of Judge Tipon, claiming that:
 A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING
SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE
TIME THE COMPLAINT WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT
VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT
REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY
RETAINED EARNINGS MADE A YEAR AFTER THE COMPLAINT WAS
FILED ARE IRRELEVANT TO THE SPOUSES TURNERS RIGHT TO
RECOVER UNDER THE COMPLAINT, BECAUSE THE WELL-SETTLED
RULE, REPEATEDLY BROUGHT TO JUDGE TIPONS ATTENTION, IS IF
NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED
THE SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF
ACTION MAY HAVE ACCRUED THEREAFTER.

B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND ISSUED
THE QUESTIONED WRIT OF EXECUTION DIRECTING THE EXECUTION
OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES
TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT
UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT AND
THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURTS CATEGORICAL HOLDING IN PROVINCE OF
PANGASINAN VS. COURT OF APPEALS.

Upon the respondents application, the CA issued a temporary restraining order

(TRO), enjoining the petitioners, and their agents and representatives from enforcing
the writ of execution. By then, however, the writ of execution had been partially enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent
the execution. Thereupon, the sheriff resumed the enforcement of the writ of execution.

The CA promulgated its assailed decision on March 4, 2003,[12] pertinently holding:

However, it is clear from the foregoing that the Turners appraisal right
is subject to the legal condition that no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment. Thus, the Supreme Court held
that:
 The requirement of unrestricted retained earnings to cover
the shares is based on the trust fund doctrine which means that
the capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate
creditors. The reason is that creditors of a corporation are
preferred over the stockholders in the distribution of corporate
assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any
disposition of corporate funds to the prejudice of creditors is null
and void. Creditors of a corporation have the right to assume that
so long as there are outstanding debts and liabilities, the board of
directors will not use the assets of the corporation to purchase its
own stock.

In the instant case, it was established that there were no unrestricted

retained earnings when the Turners filed their Complaint. In a letter
dated 20 August 2000, petitioner informed the Turners that payment of
their shares could only be made if it had unrestricted earnings in its books
to cover the same. Petitioner reiterated this in a letter dated 2 January 2001
which further informed the Turners that its Financial Statement for fiscal
year 1999 shows that its retained earnings ending December 31, 1999 was at
a deficit in the amount of P72,973,114.00, a matter which has not been
disputed by private respondents. Hence, in accordance with the second
paragraph of sec. 82, BP 68 supra, the Turners right to payment had not yet
accrued when they filed their Complaint on January 22, 2001, albeit their
appraisal right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines,
Inc., the Supreme Court declared that:

Now, before an action can properly be commenced all the

essential elements of the cause of action must be in existence, that
is, the cause of action must be complete. All valid conditions
precedent to the institution of the particular action, whether
prescribed by statute, fixed by agreement of the parties or implied
by law must be performed or complied with before commencing
the action, unless the conduct of the adverse party has been such
as to prevent or waive performance or excuse non-performance of
the condition.

It bears restating that a right of action is the right to presently

enforce a cause of action, while a cause of action consists of the
operative facts which give rise to such right of action. The right of
action does not arise until the performance of all conditions
 precedent to the action and may be taken away by the running of
the statute of limitations, through estoppel, or by other
circumstances which do not affect the cause of action. Performance
or fulfillment of all conditions precedent upon which a right of
action depends must be sufficiently alleged, considering that the
burden of proof to show that a party has a right of action is upon
the person initiating the suit.

The Turners right of action arose only when petitioner had already
retained earnings in the amount of P11,975,490.00 on March 21, 2002; such
right of action was inexistent on January 22, 2001when they filed the
Complaint.

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris,
the Supreme Court ruled:

Subject to certain qualifications, and except as otherwise

provided by law, an action commenced before the cause of action
has accrued is prematurely brought and should be dismissed. The
fact that the cause of action accrues after the action is commenced
and while it is pending is of no moment. It is a rule of law to which
there is, perhaps, no exception, either at law or in equity, that to
recover at all there must be some cause of action at the
commencement of the suit. There are reasons of public policy why
there should be no needless haste in bringing up litigation, and
why people who are in no default and against whom there is as yet
no cause of action should not be summoned before the public
tribunals to answer complaints which are groundless. An action
prematurely brought is a groundless suit. Unless the plaintiff has a
valid and subsisting cause of action at the time his action
is commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-
accrued cause of action is not permissible.

The afore-quoted ruling was reiterated in Young vs Court of Appeals

and Lao vs. Court of Appeals.

The Turners apprehension that their claim for payment may prescribe
if they wait for the petitioner to have unrestricted retained earnings is
misplaced. It is the legal possibility of bringing the action that determines
the starting point for the computation of the period of prescription. Stated
 otherwise, the prescriptive period is to be reckoned from the accrual of
their right of action.

Accordingly, We hold that public respondent exceeded its jurisdiction

when it entertained the herein Complaint and issued the assailed
Orders. Excess of jurisdiction is the state of being beyond or outside the
limits of jurisdiction, and as distinguished from the entire absence of
jurisdiction, means that the act although within the general power of the
judge, is not authorized and therefore void, with respect to the particular
case, because the conditions which authorize the exercise of his general
power in that particular case are wanting, and hence, the judicial power is
not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this

petition.

WHEREFORE, upon the premises, the petition is GRANTED. The

assailed Orders and the corresponding Writs of Garnishment
are NULLIFIED. Civil Case No. 02-104692 is hereby
ordered DISMISSED without prejudice to refiling by the private
respondents of the action for enforcement of their right to payment as
withdrawing stockholders.

SO ORDERED.

The petitioners now come to the Court for a review on certiorari of the CAs
decision, submitting that:

I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN THE
REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN
GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN
GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
JUDGMENT;

II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN THE
PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF
THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY
 JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF THE JUDGMENT;

III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF
SUBSTANCE NOT THEREFORE DETERMINED BY THIS HONORABLE
COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW
OR WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in
entertaining the petitioners complaint in Civil Case No. 01-086, and in rendering the
summary judgment and issuing writ of execution.

A.
Stockholders Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to demand
payment of the fair value of his or her shares. This right, known as the right of appraisal,
is expressly recognized in Section 81 of the Corporation Code, to wit:

Section 81. Instances of appraisal right. - Any stockholder of a

corporation shall have the right to dissent and demand payment of the fair
value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect

of changing or restricting the rights of any stockholder or class of shares, or
of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other

disposition of all or substantially all of the corporate property and assets as
provided in the Code; and

3. In case of merger or consolidation. (n)

 Clearly, the right of appraisal may be exercised when there is a fundamental
change in the charter or articles of incorporation substantially prejudicing the rights of
the stockholders. It does not vest unless objectionable corporate action is taken. [13] It
serves the purpose of enabling the dissenting stockholder to have his interests purchased
and to retire from the corporation.[14]

Under the common law, there were originally conflicting views on whether a corporation
had the power to acquire or purchase its own stocks. In England, it was held invalid for a
corporation to purchase its issued stocks because such purchase was an indirect method
of reducing capital (which was statutorily restricted), aside from being inconsistent with
the privilege of limited liability to creditors.[15] Only a few American jurisdictions adopted
by decision or statute the strict English rule forbidding a corporation from purchasing its
own shares. In some American states where the English rule used to be adopted, statutes
granting authority to purchase out of surplus funds were enacted, while in others, shares
might be purchased even out of capital provided the rights of creditors were not
prejudiced.[16] The reason underlying the limitation of share purchases sprang from the
necessity of imposing safeguards against the depletion by a corporation of its assets and
against the impairment of its capital needed for the protection of creditors.[17]

Now, however, a corporation can purchase its own shares, provided payment is made out
of surplus profits and the acquisition is for a legitimate corporate purpose.[18] In
the Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation shall

have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation,

arising out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment

for their shares under the provisions of this Code. (n)
 The Corporation Code defines how the right of appraisal is exercised, as well as the
implications of the right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted

against the proposed corporate action by making a written demand on
the corporation within 30 days after the date on which the vote was
taken for the payment of the fair value of his shares. The failure to make
the demand within the period is deemed a waiver of the appraisal
right.[19]

2. If the withdrawing stockholder and the corporation cannot agree on

the fair value of the shares within a period of 60 days from the date the
stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom
shall be named by the stockholder, another by the corporation, and the
third by the two thus chosen. The findings and award of the majority of
the appraisers shall be final, and the corporation shall pay their award
within 30 days after the award is made. Upon payment by the
corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his or her shares to the corporation.[20]

3. All rights accruing to the withdrawing stockholders shares, including

voting and dividend rights, shall be suspended from the time of demand
for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the
shares by the corporation, except the right of such stockholder to
receive payment of the fair value of the shares.[21]

4. Within 10 days after demanding payment for his or her shares, a

dissenting stockholder shall submit to the corporation the certificates of
stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the
corporation, terminate his rights under this Title X of the Corporation
Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of
the transferor as a dissenting stockholder under this Title shall cease
and the transferee shall have all the rights of a regular stockholder; and
all dividend distributions that would have accrued on such shares shall
be paid to the transferee.[22]

5. If the proposed corporate action is implemented or effected, the

corporation shall pay to such stockholder, upon the surrender of the
 certificates of stock representing his shares, the fair value thereof as of
the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.[23]

Notwithstanding the foregoing, no payment shall be made to any dissenting

stockholder unless the corporation has unrestricted retained earnings in its books to
cover the payment. In case the corporation has no available unrestricted retained
earnings in its books, Section 83 of the Corporation Code provides that if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders. Under the
doctrine, the capital stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets.[24]The creditors of a corporation have the right to assume
that the board of directors will not use the assets of the corporation to purchase its own
stock for as long as the corporation has outstanding debts and liabilities. [25] There can be
no distribution of assets among the stockholders without first paying corporate debts.
Thus, any disposition of corporate funds and assets to the prejudice of creditors is null
and void.[26]

B.
Petitioners cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books at
the time the petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that
the respondents legal obligation to pay the value of the petitioners shares did not yet
arise. Thus, the CA did not err in holding that the petitioners had no cause of action, and
in ruling that the RTC did not validly render the partial summary judgment.
A cause of action is the act or omission by which a party violates a right of another.[27] The
essential elements of a cause of action are: (a) the existence of a legal right in favor of the
plaintiff; (b) a correlative legal duty of the defendant to respect such right; and (c) an act
or omission by such defendant in violation of the right of the plaintiff with a resulting
injury or damage to the plaintiff for which the latter may maintain an action for the
recovery of relief from the defendant.[28] Although the first two elements may exist, a
cause of action arises only upon the occurrence of the last element, giving the plaintiff the
right to maintain an action in court for recovery of damages or other appropriate relief.[29]
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be
based on a cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the
beginning for being without any cause of action.

The RTC concluded that the respondents obligation to pay had accrued by its having the
unrestricted retained earnings after the making of the demand by the petitioners. It based
its conclusion on the fact that the Corporation Code did not provide that the unrestricted
retained earnings must already exist at the time of the demand.

The RTCs construal of the Corporation Code was unsustainable, because it did not
take into account the petitioners lack of a cause of action against the respondent. In order
to give rise to any obligation to pay on the part of the respondent, the petitioners should
first make a valid demand that the respondent refused to pay despite having unrestricted
retained earnings. Otherwise, the respondent could not be said to be guilty of any
actionable omission that could sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing of
the complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners
right of action could only spring from an existing cause of action. Thus, a complaint
whose cause of action has not yet accrued cannot be cured by an amended or
supplemental pleading alleging the existence or accrual of a cause of action during the
pendency of the action.[30] For, only when there is an invasion of primary rights, not
before, does the adjective or remedial law become operative.[31] Verily, a premature
invocation of the courts intervention renders the complaint without a cause of action and
dismissible on such ground.[32] In short, Civil Case No. 01-086, being a groundless suit,
should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more than
sufficient to cover the petitioners claims on June 26, 2002 (when they filed
their motion for partial summary judgment) did not rectify the absence of the cause
of action at the time of the commencement of Civil Case No. 01-086. The motion
for partial summary judgment, being a mere application for relief other than by a
pleading,[33] was not the same as the complaint in Civil Case No. 01-086. Thereby,
the petitioners did not meet the requirement of the Rules of Court that a cause of
 action must exist at the commencement of an action, which is commenced by the
filing of the original complaint in court.[34]
The petitioners claim that the respondents petition for certiorari sought only the
annulment of the assailed orders of the RTC (i.e., granting the motion for partial summary
judgment and the motion for immediate execution); hence, the CA had no right to direct
the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.

Although the respondents petition for certiorari targeted only the RTCs orders granting
the motion for partial summary judgment and the motion for immediate execution, the
CAs directive for the dismissal of Civil Case No. 01-086 was not an abuse of discretion,
least of all grave, because such dismissal was the only proper thing to be done under the
circumstances. According to Surigao Mine Exploration Co., Inc. v. Harris:[35]

Subject to certain qualification, and except as otherwise provided by law, an

action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while the case is
pending is of no moment. It is a rule of law to which there is, perhaps no
exception, either in law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are reasons of
public policy why there should be no needless haste in bringing up
litigation, and why people who are in no default and against whom there is
as yet no cause of action should not be summoned before the public
tribunals to answer complaints which are groundless. An action
prematurely brought is a groundless suit. Unless the plaintiff has a valid
and subsisting cause of action at the time his action is commenced,
the defect cannot be cured or remedied by the acquisition or accrual
of one while the action is pending, and a supplemental complaint or an
amendment setting up such after-accrued cause of action is not permissible.

Lastly, the petitioners argue that the respondents recourse of a special action
for certiorari was the wrong remedy, in view of the fact that the granting of the motion for
partial summary judgment constituted only an error of law correctible by appeal, not of
jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction,
for it exceeded its jurisdiction by taking cognizance of the complaint that was not based
on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156

entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as
Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.

Costs of suit to be paid by the petitioners.

SO ORDERED.