G.R. No.
89252 May 24, 1993
RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.
Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the
amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"),
Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March
1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of
one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a
term of 32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale
of DMC PN No. 2731 to petitioner, with the notation that the said security
was in custodianship of Pilipinas Bank, as per Denominated Custodian
Receipt ("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and
Insular Bank of Asia and America as drawee, in the total amount of
P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro ManilaE DATE
TO Raul Sesbr05
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of
PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our
custody the following securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the
above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days after
its maturity.
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas,
Makati Branch, and handed her a demand letter informing the bank that his placement with
Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and
outstanding, and that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found:
that the security had been issued on 10 April 1980; that it would mature on 6 April 1981;
that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private
respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory
note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate
of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again
asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731.
Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written
instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement"
between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions;
Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to
petitioner.
Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for
the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof,
had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any
liability to petitioner on the promissory note, and explained in turn that it had previously
agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of
the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to
the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest thereon, he filed on 28
September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City,
Branch 21, against private respondents Delta and Pilipinas.5The trial court, in a decision
dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for
lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision
dated 21 March 1989, the Court of Appeals denied the appeal and held:6
Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance. As
correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff
and charging it against DMC PN No. 2731 when its entire
face value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been
motivated with bad faith. Philfinance, therefore, is solely and
legally obligated to return the investment of plaintiff,
together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the
defendants in this case at bar; hence, this Court is without
jurisdiction to pronounce judgement against it. (p. 11,
Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the
same is hereby affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and
contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing
to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the
provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to
pierce the veil of corporate entity between Philfinance, and private respondents Delta and
Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies"
under the leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of
Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the
relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded
in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present purposes to deal with this
third relationship, except to the extent it necessarily impinges upon or intersects the first and
second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect
of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to
petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731
as the same is "non-negotiable" as stamped on its face (Exhibit "6"),
negotiation being defined as the transfer of an instrument from one person to
another so as to constitute the transferee the holder of the instrument (Sec.
30, Negotiable Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive payment (Section
51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had
been validly transferred, in part to him by assignment and that as a result of such transfer,
Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note
assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp
across the face of the Note10 and because maker Delta and payee Philfinance
intended that this Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to Delta as
payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without
Delta's consent, if not against its instructions; and
 (3) assuming (arguendo only) that the partial assignment in favor of petitioner
was valid, petitioner took the Note subject to the defenses available to Delta,
in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No.
143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or
non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant
statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery
alone where the negotiable instrument is in bearer form. A negotiable instrument may,
however, instead of being negotiated, also be assigned or transferred. The legal consequences
of negotiation as distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated; but it may be
assigned or transferred, absent an express prohibition against assignment or transfer written
in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not
destroy its assignability, but the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill, though not negotiable, may be
transferred by assignment; the assignee taking subject to the equities
between the original parties.12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance
from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which
should be quoted in full:
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O.
Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by
your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6,
1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730
and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic]
against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric
Castillo.3
We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before
the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement"
set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be
invoked against an assignee or transferee of the Note who parted with valuable consideration
in good faith and without notice of such prohibition. It is not disputed that petitioner was
such an assignee or transferee. Our conclusion on this point is reinforced by the fact that
what Philfinance and Delta were doing by their exchange of their promissory notes was this:
Delta invested, by making a money market placement with Philfinance, approximately
P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of
that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No.
2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with
not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731
had been effected without the consent of Delta, we note that such consent was not necessary
for the validity and enforceability of the assignment in favor of petitioner.14 Delta's argument
that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted
conventional subrogation, which required its (Delta's) consent, is quite mistaken.
Conventional subrogation, which in the first place is never lightly inferred,15 must be clearly
established by the unequivocal terms of the substituting obligation or by the evident
9 of the new and old obligations on every point.16 Nothing of the sort is present
incompatibility
in the instant8 case.
0
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No.
2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments
and other securities, and more generally, in money market transactions. In Perez v. Court of
Appeals,17 the Court, speaking through Mme. Justice Herrera, made the following important
statement:
There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market
dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other
but through a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtness of any
person or entity. . ., which are issued, endorsed, sold or transferred or in any
manner conveyed to another person or entity, with or without recourse". The
 fundamental function of the money market device in its operation is to match
and bring together in a most impersonal manner both the "fund users" and
the "fund suppliers." The money market is an "impersonal market", free from
personal considerations. "The market mechanism is intended to provide quick
mobility of money and securities."
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be expenditiously
transacted and transferred to any investor/lender without need of notice to
said issuer. In practice, no notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel
institution in the Philippine commercial scene. It has been intended to
facilitate the flow and acquisition of capital on an impersonal basis. And as
specifically required by Presidential Decree No. 678, the investing public must
be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market.18(Citations omitted; emphasis
supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN
No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance
sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no
compensation had as yet taken place and indeed none could have taken place. The essential
requirements of compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
(Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This
was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance,
where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic)
against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49)
days before the "co-terminal maturity" date, that is to say, before any compensation had
taken place. Further, the assignment to petitioner would have prevented compensation had
taken place between Philfinance and Delta, to the extent of P304,533.33, because upon
execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to
be creditors and debtors of each other in their own right to the extent of the amount assigned
by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in
favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN
No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him
only on 14 July 1981, 19 that is, after the maturity not only of the money market placement
made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words, petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity. It is a firmly
settled doctrine that the rights of an assignee are not any greater that the rights of the
assignor, since the assignee is merely substituted in the place of the assignor 20 and that the
assignee acquires his rights subject to the equities — i.e., the defenses — which the debtor
could have set up against the original assignor before notice of the assignment was given to
the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made
by a creditor in favor of a third person, cannot set up against the assignee
the compensation which would pertain to him against the assignor, unless
the assignor was notified by the debtor at the time he gave his consent, that
he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up
the compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico,21 the
Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he
contacted to pay; and if he pay before notice that his debt has been assigned,
the law holds him exonerated, for the reason that it is the duty of the person
 who has acquired a title by transfer to demand payment of the debt, to give
his debt or notice.22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July
1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor
Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731,
petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the
portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale
was effected on 9 February 1981. He could have notified Delta as soon as his money market
placement matured on 13 March 1981 without payment thereof being made by Philfinance; at
that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner
could have notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent
Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before
the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the
record is bare of any indication that Philfinance had itself notified Delta of the assignment to
petitioner, the Court is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when
Pilipinas issued DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you —.23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the
part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of
liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a
confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No.
2731 of a certain face value, to mature on 6 April 1981 and payable to the
order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance;24
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the
DMC PN No. 2731 (or a participation therein to the extent of
P307,933.33) "should this Denominated Custodianship receipt remain
outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or any other time. We note that both in his complaint
and in his testimony before the trial court, petitioner referred merely to the obligation of
private respondent Pilipinas to effect the physical delivery to him of DMC PN No.
2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to
pay the amount represented by a portion of the Note assigned to him by Philfinance, appears
to be a new theory constructed only after the trial court had ruled against him. The solidary
liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under
article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of
the obligation requires solidarity," The record here exhibits no express assumption of solidary
liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any
law which imposed such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas necessarily implies
solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly,
we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta
under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in
respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged
analysis and deliberation, that private respondent Pilipinas had breached its undertaking
under the DCR to petitioner Sesbreño.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance;
the obligation of the depository was owed, however, to petitioner Sesbreño as beneficiary of
the custodianship or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was established as an
integral part of the money market transaction entered into by petitioner with Philfinance.
Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside the control of the
vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent
to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to
petitioner. It will be seen that custodianship agreements are designed to facilitate
transactions in the money market by providing a basis for confidence on the part of the
investors or placers that the instruments bought by them are effectively taken out of the
pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the security or the thing deposited
upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract,
even though a term for such return may have been established in the said
contract.26 Accordingly, any stipulation in the contract of deposit or custodianship that runs
counter to the fundamental purpose of that agreement or which was not brought to the notice
of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-
placer.
We believe that the position taken above is supported by considerations of public policy. If
there is any party that needs the equalizing protection of the law in money market
transactions, it is the members of the general public whom place their savings in such
market for the purpose of generating interest revenues.27 The custodian bank, if it is not
related either in terms of equity ownership or management control to the borrower of the
funds, or the commercial paper dealer, is normally a preferred or traditional banker of such
borrower or dealer (here, Philfinance). The custodian bank would have every incentive to
protect the interest of its client the borrower or dealer as against the placer of funds. The
providers of such funds must be safeguarded from the impact of stipulations privately made
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers
only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security
deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We
must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet
matured and therefore, compensation or offsetting against Philfinance PN No. 143-A
had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas
purported to require and await the instructions of Philfinance, in obvious contravention of its
undertaking under the DCR to effect physical delivery of the Note upon receipt of "written
instructions" from petitioner Sesbreño. The ostensible term written into the DCR (i.e., "should
this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a
defense against petitioner's demand for physical surrender of the Note on at least three
grounds: firstly, such term was never brought to the attention of petitioner Sesbreño at the
time the money market placement with Philfinance was made; secondly, such term runs
counter to the very purpose of the custodianship or depositary agreement as an integral part
of a money market transaction; and thirdly, it is inconsistent with the provisions of Article
1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand
physical delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.
In the first place, as already noted, jurisdiction over the person of Philfinance was never
acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly
did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have
been organized as separate corporate entities. Petitioner asks us to pierce their separate
corporate entities, but has been able only to cite the presence of a common Director — Mr.
Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner
has neither alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate affairs of the other
two (2) were administered and managed for the benefit of one. There is simply not enough
evidence of record to justify disregarding the separate corporate personalities of delta and
Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to
petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in
C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby
MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed
petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby
ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so
modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for
damages sustained by arising out of its breach of duty. By failing to deliver the Note to the
petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully
deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted
from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33,
the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of
discharge of the Note by compensation, plus legal interest of six percent (6%)per
annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta
and Pilipinas should be treated as one corporate entity — need not detain us for long.
VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN-EFANN, LOUISE Y. GOCHAN,
ESTEBAN Y. GOCHAN JR., DOMINIC Y. GOCHAN, FELIX O. GOCHAN III,
MERCEDES R. GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-
HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO R. GOCHAN JR., MARION R.
GOCHAN, MACTAN REALTY DEVELOPMENT CORPORATION and FELIX GOCHAN
& SONS REALTY CORPORATION, petitioners, vs. RICHARD G. YOUNG, DAVID G.
YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR., MARY G. YOUNG-HSU
and ALEXANDER THOMAS G. YOUNG as heirs of Alice Gochan; the INTESTATE
ESTATE OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY,
for themselves and on behalf and for the benefit of FELIX GOCHAN & SONS
REALTY CORPORATION, respondents.
DECISION
PANGANIBAN, J.:
A court or tribunals jurisdiction over the subject matter is determined by the allegations
in the complaint. The fact that certain persons are not registered as stockholders in the books
of the corporation will not bar them from filing a derivative suit, if it is evident from the
allegations in the complaint that they are bona fide stockholders. In view of RA 8799, intra-
corporate controversies are now within the jurisdiction of courts of general jurisdiction, no
longer of the Securities and Exchange Commission.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The
Petition assails the February 28, 1996 Decision[1] of the Court of Appeals (CA), as well as its
December 18, 1997 Resolution denying petitioners Motion for Reconsideration. The dispositive
part of the CA Decision reads as follows:
WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without
prejudice to filing the same in the regular courts.
SO ORDERED.[2]
In dismissing the Complaint before the SEC regarding only Alice Gochans heirs but not
the other complainants, the CA effectively modified the December 9, 1994 Order of the hearing
officer[3] of the Securities and Exchange Commission (SEC). The Order, which was affirmed in
full by the SEC en banc, dismissed the entire case.
The Facts
The undisputed facts are summarized by the Court of Appeals as follows:
Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with
the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan,
Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators.
Felix Gochan Sr.s daughter, Alice, mother of [herein respondents], inherited 50 shares of
stock in Gochan Realty from the former.
Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.
In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children,
herein [respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary
Young Hsu and Alexander Thomas Young.
Having earned dividends, these stocks numbered 179 by 20 September 1979.
Five days later (25 September), at which time all the children had reached the age of majority,
their father John Sr., requested Gochan Realty to partition the shares of his late wife by
cancelling the stock certificates in his name and issuing in lieu thereof, new stock certificates
in the names of [herein respondents].
On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first
refusal granted to the remaining stockholders by the Articles of Incorporation.
On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].
On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with
the SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock,
reconveyance of property impressed with trust, accounting, removal of officers and directors
and damages against respondents. A Notice of Lis Pendens was annotated as [sic] real
properties of the corporation.
On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the
SEC ha[d] no jurisdiction over the nature of the action; (2) the [respondents] [were] not the
real parties-in-interest and ha[d] no capacity to sue; and (3) [respondents] causes of action
[were] barred by the Statute of Limitations.
The motion was opposed by herein [respondents].
On 29 March 1994, [petitioners] filed a Motion for cancellation of Notice of Lis
Pendens. [Respondents] opposed the said motion.
On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss
and ordered the cancellation of the notice of lis pendens annotated upon the titles of the
corporate lands. In its order, the SEC opined:
In the instant case, the complaint admits that complainants Richard G. Young, David G.
Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander
Thomas G. Young, who are the children of the late Alice T. Gochan and the late John D.
Young, Sr. are suing in their own right and as heirs of and/or as the beneficial owners of the
shares in the capital stock of FGSRC held in trust for them during his lifetime by the late
John D. Young. Moreover, it has been shown that said complainants ha[d] never been x x x
stockholder[s] of record of FGSRC to confer them with the legal capacity to bring and
maintain their action. Conformably, the case cannot be considered as an intra-corporate
controversy within the jurisdiction of this Commission.
The complainant heirs base what they perceived to be their stockholders rights upon the fact
of their succession to all the rights, property and interest of their father, John D. Young,
Sr. While their heirship is not disputed, their right to compel the corporation to register John
D. Youngs Sr. shares of stock in their names cannot go unchallenged because the devolution
of property to the heirs by operation of law in succession is subject to just obligations of the
deceased before such property passes to the heirs. Conformably, until therefore the estate is
settled and the payment of the debts of the deceased is accomplished, the heirs cannot as a
matter of right compel the delivery of the shares of stock to them and register such transfer in
the books of the corporation to recognize them as stockholders. The complainant heirs
succeed to the estate of [the] deceased John D. Young, Sr. but they do not thereby become
stockholders of the corporation.
Moreover, John D. [Young Sr.s] shares of stocks form part of his estate which is the subject of
Special Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par. 4 of
the complaint]. As complainants clearly claim[,] the Intestate Estate of John D. Young, Sr.
has an interest in the subject matter of the instant case. However, actions for the recovery or
protection of the property [such as the shares of stock in question] may be brought or
defended not by the heirs but by the executor or administrator thereof.
Complainants further contend that the alleged wrongful acts of the corporation and its
directors constitute fraudulent devices or schemes which may be detrimental to the
stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have been suffered by
complainants as stockholders, which they are not. Admittedly, the SEC has no jurisdiction
over a controversy wherein one of the parties involved is not or not yet a stockholder of the
corporation. [SEC vs. CA, 201 SCRA 134].
Further, by the express allegation of the complaint, herein complainants bring this action as
[a] derivative suit on their own behalf and on behalf of respondent FGSRC.
Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange
Commission provides:
Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a
corporation unless the complainant was a stockholder at the time the questioned transaction
occurred as well as at the time the action was filed and remains a stockholder during the
pendency of the action. x x x.
The rule is in accord with well settled jurisprudence holding that a stockholder bringing a
derivative action must have been [so] at the time the transaction or act complained of [took]
place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel
Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory, strict
compliance with the terms thereof thus being a condition precedent, a jurisdictional
requirement to the filing of the instant action.
Otherwise stated, proof of compliance with the requirement must be sufficiently established
for the action to be given due course by this Commission. The failure to comply with this
jurisdictional requirement on derivative action must necessarily result in the dismissal of the
instant complaint. (pp. 77-79, Rollo)
[Respondents] moved for a reconsideration but the same was denied for being pro-forma.
[Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d]
jurisdiction over the case.
[Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30-day
period for appeals.
On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the [respondents]
motion for reconsideration did not interrupt the 30-day period for appeal because said motion
was pro-forma.[4]
Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.
Ruling of the Court of Appeals
The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the
heirs of Alice Gochan were concerned, because they were not yet stockholders of the
corporation. On the other hand, it upheld the capacity of Respondents Cecilia Gochan Uy and
her spouse Miguel Uy. It also held that the intestate Estate of John Young Sr. was an
indispensable party.
The appellate court further ruled that the cancellation of the notice of lis pendens on the
titles of the corporate real estate was not justified. Moreover, it declared that respondents
Motion for Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal
period.
Hence, this Petition.[5]
The Issues
These are the issues presented before us:
 A. Whether or not the Spouses Uy have the personality to file an action before the
SEC against Gochan Realty Corporation.
B. Whether or not the Spouses Uy could properly bring a derivative suit in the name
of Gochan Realty to redress wrongs allegedly committed against it for
which the directors refused to sue.
C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party
in the SEC case considering that the individual heirs shares are still in
the decedent stockholders name.
D. Whether or not the cancellation of [the] notice of lis pendens was justified
considering that the suit did not involve real properties owned by Gochan
Realty.[6]
In addition, the Court will determine the effect of Republic Act No. 8799[7] on this case.
The Courts Ruling
The Petition has no merit. In view of the effectivity of RA 8799, however, the case should
be remanded to the proper regional trial court, not to the Securities and Exchange Commission.
First Issue:
Personality of the Spouses Uy to File a Suit Before the SEC
Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to
bring the suit before the SEC on February 8, 1994, because the latter were no longer
stockholders at the time. Allegedly, the stocks had already been purchased by the
corporation. Petitioners further assert that, being allegedly a simple contract of sale cognizable
by the regular courts, the purchase by Gochan Realty of Cecilia Gochan Uys 210 shares does
not come within the purview of an intra-corporate controversy.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint.[8] For purposes of resolving a motion to dismiss,
Cecilia Uys averment in the Complaint -- that the purchase of her stocks by the corporation
was null and void ab initio is deemed admitted. It is elementary that a void contract produces
no effect either against or in favor of anyone; it cannot create, modify or extinguish the juridical
relation to which it refers.[9] Thus, Cecilia remains a stockholder of the corporation in view of
the nullity of the Contract of Sale. Although she was no longer registered as a stockholder in
the corporate records as of the filing of the case before the SEC, the admitted allegations in the
Complaint made her still a bona fide stockholder of Felix Gochan & Sons Realty Corporation
(FGSRC), as between said parties.
In any event, the present controversy, whether intra-corporate or not, is no longer
cognizable by the SEC, in view of RA 8799, which transferred to regional trial courts the formers
jurisdiction over cases involving intra-corporate disputes.
Action Has Not Prescribed
Petitioners contend that the statute of limitations already bars the Uy spouses action, be
it one for annulment of a voidable contract or one based upon a written contract. The
Complaint, however, contains respondents allegation that the sale of the shares of stock was
not merely voidable, but was void ab initio. Below we quote its relevant portion:
38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not
have unrestricted retained earnings in its books to cover the purchase price of the 208 shares
of stock it was then buying from complainant Cecilia Gochan Uy, thereby rendering said
purchase null and void ab initio for being violative of the trust fund doctrine and contrary to
law, morals good customs, public order and public policy;
Necessarily, petitioners contention that the action has prescribed cannot be
sustained. Prescription cannot be invoked as a ground if the contract is alleged to be void ab
initio.[10] It is axiomatic that the action or defense for the declaration of nullity of a contract
does not prescribe.[11]
Second Issue: Derivative Suit and the Spouses Uy
Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit,
because the spouses and not the corporation were the injured parties. The Court is not
convinced. The following quoted portions of the Complaint readily shows allegations of injury
to the corporation itself:
16. That on information and belief, in further pursuance of the said conspiracy and for the
fraudulent purpose of depressing the value of the stock of the Corporation and to induce the
minority stockholders to sell their shares of stock for an inadequate consideration as
aforesaid, respondent Esteban T. Gochan . . ., in violation of their duties as directors and
officers of the Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the
funds of the Corporation by drawing excessive amounts in the form of salaries and cash
advances. . . and by otherwise charging their purely personal expenses to the Corporation.
xxxxxxxxx
41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy
for her shares of stock constituted an unlawful, premature and partial liquidation and
distribution of assets to a stockholder, resulting in the impairment of the capital of the
Corporation and prevented it from otherwise utilizing said amount for its regular and lawful
business, to the damage and prejudice of the Corporation, its creditors, and of complainants
as minority stockholders;[12]
As early as 1911, this Court has recognized the right of a single stockholder to file
derivative suits. In its words:
[W]here corporate directors have committed a breach of trust either by their frauds, ultra
vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy
the wrong, a single stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
done directly to the corporation and indirectly to the stockholders.[13]
In the present case, the Complaint alleges all the components of a derivative suit. The
allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The
personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on
behalf of the corporation. It merely gives rise to an additional cause of action for damages
against the erring directors. This cause of action is also included in the Complaint filed before
the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit
of the corporation. The reason is that, as earlier discussed, the allegations of the Complaint
make them out as stockholders at the time the questioned transaction occurred, as well as at
the time the action was filed and during the pendency of the action.
Third Issue: Capacity of the Intestate Estate of John D. Young Sr.
Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable
party, as there is no showing that it stands to be benefited or injured by any court judgment.
It would be useful to point out at this juncture that one of the causes of action stated in
the Complaint filed with the SEC refers to the registration, in the name of the other heirs of
Alice Gochan Young, of 6/14th of the shares still registered under the name of John D. Young
Sr. Since all the shares that belonged to Alice are still in his name, no final determination can
be had without his estate being impleaded in the suit. His estate is thus an indispensable party
with respect to the cause of action dealing with the registration of the shares in the names of
the heirs of Alice.
Petitioners further claim that the Estate of John Young Sr. was not properly
represented. They claim that when the estate is under administration, suits for the recovery or
protection of the property or rights of the deceased may be brought only by the administrator
or executor as approved by the court.[14] The rules relative to this matter do not, however, make
any such categorical and confining statement.
Section 3 of Rule 3 of the Rules of Court, which is cited by petitioner in support of their
position, reads:
Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended
by a representative or someone acting in a fiduciary capacity, the beneficiary shall be
included in the title of the case and shall be deemed to be the real party in interest. A
representative may be a trustee of an express trust, a guardian, an executor or administrator,
or a party authorized by law or these Rules. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued without joining the principal except
when the contract involves things belonging to the principal.
Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:
Sec. 2. Executor or administrator may bring or defend actions which survive. - For the recovery
or protection of the property or rights of the deceased, an executor or administrator may
bring or defend, in the right of the deceased, actions for causes which survive.
The above-quoted rules, while permitting an executor or administrator to represent or to
bring suits on behalf of the deceased, do not prohibit the heirs from representing the
deceased. These rules are easily applicable to cases in which an administrator has already been
appointed. But no rule categorically addresses the situation in which special proceedings for
the settlement of an estate have already been instituted, yet no administrator has been
appointed. In such instances, the heirs cannot be expected to wait for the appointment of an
administrator; then wait further to see if the administrator appointed would care enough to file
a suit to protect the rights and the interests of the deceased; and in the meantime do nothing
while the rights and the properties of the decedent are violated or dissipated.
The Rules are to be interpreted liberally in order to promote their objective of securing a
just, speedy and inexpensive disposition of every action and proceeding.[15] They cannot be
interpreted in such a way as to unnecessarily put undue hardships on litigants. For the
protection of the interests of the decedent, this Court has in previous instances[16] recognized
the heirs as proper representatives of the decedent, even when there is already an administrator
appointed by the court. When no administrator has been appointed, as in this case, there is all
the more reason to recognize the heirs as the proper representatives of the deceased. Since the
Rules do not specifically prohibit them from representing the deceased, and since no
administrator had as yet been appointed at the time of the institution of the Complaint with
the SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr. who
represented his estate in the case filed before the SEC.
Fourth Issue
Notice of Lis Pendens
On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties
of the corporation and the other respondents, we still find no reason to disturb the ruling of
the Court of Appeals.
Under the third, fourth and fifth causes of action of the Complaint, there are allegations
of breach of trust and confidence and usurpation of business opportunities in conflict with
petitioners fiduciary duties to the corporation, resulting in damage to the Corporation. Under
these causes of action, respondents are asking for the delivery to the Corporation of possession
of the parcels of land and their corresponding certificates of title. Hence, the suit necessarily
affects the title to or right of possession of the real property sought to be reconveyed. The Rules
of Court[17] allows the annotation of a notice of lis pendens in actions affecting the title or right
of possession of real property.[18] Thus, the Court of Appeals was correct in reversing the SEC
Order for the cancellation of the notice of lis pendens.
The fact that respondents are not stockholders of the Mactan Realty Development
Corporation and the Lapu-Lapu Real Estate Corporation does not make them non-parties to
this case. To repeat, the jurisdiction of a court or tribunal over the subject matter is determined
by the allegations in the Complaint. In this case, it is alleged that the aforementioned
corporations are mere alter egos of the directors-petitioners, and that the former acquired the
properties sought to be reconveyed to FGSRC in violation of the directors-petitioners fiduciary
duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical[19] if, as alleged in the present case, the corporate entity
is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an
alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
Effect of RA 8799
While we sustain the appellate court, the case can no longer be remanded to the SEC. As
earlier stated, RA 8799, which became effective on August 8, 2000, transferred SECs
jurisdiction over cases involving intra-corporate disputes to courts of general jurisdiction or to
the regional trial courts.[20] Section 5.2 thereof reads as follows:
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.
In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,[21] the Court
Administrator and the Securities and Exchange Commission should be directed to cause the
transfer of the records of SEC Case No. 02-94-4674 to the appropriate court of general
jurisdiction.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED,
subject to the modification that the case be remanded to the proper regional trial court. The
December 9, 1994 Order of Securities and Exchange Commission hearing officer dismissing
the Complaint and directing the cancellation of the notice of lis pendens, as well as the March
3, 1995 Order denying complainants motion for reconsideration are REVERSED and SET
ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court Administrator and the SEC
are DIRECTED to cause the actual transfer of the records of SEC Case No. 02-94-4674 to the
appropriate regional trial court.
SO ORDERED.
G.R. No. L-47673 October 10, 1946
KOPPEL (PHILIPPINES), INC., plaintiff-appellant,
vs.
ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.
HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First
Instance of Manila in civil case No. 51218 of said court dismissing said corporation's
complaint for the recovery of the sum of P64,122.51 which it had paid under protest to the
Collector of Internal Revenue on October 30, 1936, as merchant sales tax. The main facts of
the case were stipulated in the court below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the
Solicitor General and undersigned Assistant Attorney of the Bureau of Justice and,
with leave of this Honorable Court, hereby respectfully stipulated and agree to the
following facts, to wit:
I. That plaintiff is a corporation duly organized and existing under and by virtue of
the laws of the Philippines, with principal office therein at the City of Manila, the
capital stock of which is divided into thousand (1,000) shares of P100 each. The
Koppel Industrial Car and Equipment company, a corporation organized and existing
under the laws of the State of Pennsylvania, United States of America, and not
licensed to do business in the Philippines, owned nine hundred and ninety-five (995)
shares out of the total capital stock of the plaintiff from the year 1928 up to and
including the year 1936, and the remaining five (5) shares only were and are owned
one each by officers of the plaintiff corporation.
II. That plaintiff, at all times material to this case, was and now is duly licensed to
engage in business as a merchant and commercial broker in the Philippines; and was
and is the holder of the corresponding merchant's and commercial broker's privilege
tax receipts.
III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in
lieu of Mr. Alfredo L. Yatco.
IV. That during the period from January 1, 1929, up to and including December 31,
1932, plaintiff transacted business in the Philippines in the following manner, with
the exception of the transactions which are described in paragraphs V and VI of this
stipulation:
When a local buyer was interested in the purchase of railway materials, machinery,
and supplies, it asked for price quotations from plaintiff. Atypical form of such
request is attached hereto and made a part hereof as Exhibit A. (Exhibit A represents
typical transactions arising from written requests for quotations, while Exhibits B to
G, inclusive, are typical transactions arising from verbal requests for quotation.)
Plaintiff then cabled for the quotation desired for Koppel Industrial Car and
Equipment Company. A sample of the pertinent cable is hereto attached and made a
part hereof as Exhibit B. Koppel Industrial Car and Equipment Company answered
by cable quoting its cost price, usually A. C. I. F. Manila cost price, which was later
followed by a letter of confirmation. A sample of the said cable quotation and of the
letter of confirmation are hereto attached and made a part hereof as Exhibits C and
C-1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment Company.
Copy of the plaintiff's letter to purchaser is hereto attached and made a part hereof
as Exhibit D. On the basis of these quotations, orders were placed by the local
purchasers, copies of which orders are hereto attached as Exhibits E and E-1.
A cable was then sent to Koppel Industrial Car and Equipment company giving
instructions to ship the merchandise to Manila forwarding the customer's order.
Sample of said cable is hereto attached as Exhibit F. The bills of lading were usually
made to "order" and indorsed in blank with notation to the effect that the buyer be
notified of the shipment of the goods covered in the bills of lading; commercial
invoices were issued by Koppel Industrial Car and Equipment Company in the names
of the purchasers and certificates of insurance were likewise issued in their names,
or in the name of Koppel Industrial Car and Equipment Company but indorsed in
blank and attached to drafts drawn by Koppel Industrial Car and Equipment
Company on the purchasers, which were forwarded through foreign banks to local
banks. Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2 and
I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed, but
said Exhibits I-1, I-2 and I-3 have no connection with the transaction covered by
Exhibits B to G, inclusive. The purchasers secured the shipping papers by
arrangement with the banks, and thereupon received and cleared the shipments. If
the merchandise were of European origin, and if there was not sufficient time to
forward the documents necessary for clearance, through foreign banks to local
banks, to the purchasers, the Koppel Industrial Car and Equipment company did, in
many cases, send the documents directly from Europe to plaintiff with instructions to
turn these documents over to the purchasers. In many cases, where sales was
effected on the basis of C. I. F. Manila, duty paid, plaintiff advanced the sums
required for the payment of the duty, and these sums, so advanced, were in every
case reimbursed to plaintiff by Koppel Industrial Car and Equipment Company. The
price were payable by drafts agreed upon in each case and drawn by Koppel
Industrial Car and Equipment Company on respective purchasers through local
banks, and payments were made to the banks by the purchasers on presentation and
delivery to them of the above-mentioned shipping documents or copies thereof. A
sample of said drafts is hereto attached as Exhibit G. Plaintiff received by way of
compensation a percentage of the profits realized on the above transactions as fixed
in paragraph 6 of the plaintiff's contract with Koppel Industrial Car and Equipment
Company, which contract is hereto attached as Exhibit H, and suffered its
corresponding share in the losses resulting from some of the transactions.
That the total gross sales from January 1, 1929, up to and including December 31,
1932, effected in the foregoing manner and under the above specified conditions,
amount to P3, 596,438.84.
V. That when a local sugar central was interested in the purchase of railway
materials, machinery and supplies, it secured quotations from, and placed the
corresponding orders with, the plaintiff in substantially the same manner as outlined
in paragraph IV of this stipulation, with the only difference that the purchase orders
which were agreed to by the central and the plaintiff are similar to the sample hereto
attached and made a part hereof as Exhibit I. Typical samples of the bills of lading
covering the herein transaction are hereto attached and made a part hereto as
Exhibits I-1, I-2 and I-3. The value of the sales carried out in the manner mentioned
in this paragraph is P133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines,
placed an option with Koppel Industrial Car and Equipment Company, through
plaintiff, to purchase within three months a pair of Atlas-Diesel Marine Engines.
Koppel Industrial Car and Equipment Company purchased said Diesel Engines in
Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of
$16,508.32 on the Koppel Industrial Car and Equipment Company, which paid the
amount covered by the draft. Later, Miguel J. Ossorio definitely called the deal off,
and as Koppel Industrial Car and Equipment Company could not ship to or draw on
said Mr. Miguel J. Ossorio, it in turn drew another draft on plaintiff for the same
amount at six months sight, with the understanding that Koppel Industrial Car and
Equipment Company would reimburse plaintiff when said engines were disposed of.
Plaintiff honored the draft and debited the said sum of $16,508.32 to merchandise
account. The engines were left stored at Stockholm, Sweden. On April 1, 1930, a new
local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines
were sold to him for $21,000 (P42,000) C. I. F. Hongkong. The engines were shipped
to Hongkong and a draft for $21,000 was drawn by Koppel Industrial Car and
Equipment Company on Mr. Cesar Barrios. After the draft was fully paid by Mr.
Barrios, Koppel Industrial Car and Equipment Company reimbursed plaintiff with
cost price of $16,508.32 and credited it with $1,152.95 as its share of the profit on
the transaction. Exhibits J and J-1 are herewith attached and made integral parts of
this stipulation with particular reference to paragraph VI hereof.
VII. That plaintiff's share in the profits realized out of these transactions described in
paragraphs IV, V and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and
that plaintiff within the time provided by law returned the aforesaid amount
P132,201.30 for the purpose of the commercial broker's 4 per cent tax and paid
thereon the sum P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the
merchants' sales tax of 1% per cent on the amount of P3,772,403.82, representing
the total gross value of the sales mentioned in paragraphs IV, V and VI hereof,
including the 25 per cent surcharge for the late payment of the said tax, which tax
and surcharge were determined after the amount of P5,288.05 mentioned in
paragraph VI hereof was deducted.
IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in
order to avoid further penalties, levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled plaintiff's protest, and
defendant has failed and refused and still fails and refuses, notwithstanding
demands by plaintiff, to return to the plaintiff said sum of P64,122.51 or any part
thereof.
xxx xxx xxx
That the parties hereby reserve the right to present additional
evidence in support of their respective contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA
Solicitor General
(Sgd.) ANTONIO CAÑIZARES
Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila
Both parties adduced some oral evidence in clarification of or addition to their agreed
statement of facts. A preponderance of evidence has established, besides the facts
thus stipulated, the following:
(a) The shares of stock of plaintiff corporation were and are all owned by
Koppel Industries Car and Equipment Company of Pennsylvania, U. S. A.,
exceptive which were necessary to qualify the Board of Directors of said
plaintiff corporation;
(b) In the transactions involved herein the plaintiff corporation acted as the
representative of Koppel Industrial Car and Equipment Company only, and
not as the agent of both the latter company and the respective local
purchasers — plaintiff's principal witness, A.H. Bishop, its resident Vice-
President, in his testimony invariably referred to Koppel Industrial Car and
Equipment Co. as "our principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except
that at the bottom of page 10 to the top of page 11, the witness stated that
they had "several principal" abroad but that "our principal abroad was, for
the years in question, Koppel Industrial Car and Equipment Company," and
on page 68, he testified that what he actually said was ". . . but
our principal abroad" and not "our principal abroad" — as to which it is very
significant that neither this witness nor any other gave the name of even a
single other principal abroad of the plaintiff corporation;
(c) The plaintiff corporation bore alone incidental expenses — as, for
instance, cable expenses-not only those of its own cables but also those of its
"principal" (t.s.n., pp. 52, 53);
(d) the plaintiff's "share in the profits" realized from the transactions in which
it intervened was left virtually in the hands of Koppel Industrial Car and
Equipment Company (t.s.n., p. 51);
(e) Where drafts were not paid by the purchasers, the local banks were
instructed not to protest them but to refer them to plaintiff which was fully
empowered by Koppel Industrial Car and Equipment company to instruct the
banks with regards to disposition of the drafts and documents (t.s.n., p. 50;
Exhibit G);lawphil.net
(f) Where the goods were European origin, consular invoices, bill of lading,
and, in general, the documents necessary for clearance were sent directly to
plaintiff (t.s.n., p. 14);
(g) If the plaintiff had in stock the merchandise desired by local buyers, it
immediately filled the orders of such local buyers and made delivery in the
Philippines without the necessity of cabling its principal in America either for
price quotations or confirmation or rejection of that agreed upon between it
and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel Industrial Car and Equipment
Company were incomplete or insufficient to fill the local buyer's orders,
plaintiff used to make good the deficiencies by deliveries from its own local
stock, but in such cases it charged its principal only the actual cost of the
merchandise thus delivered by it from its stock and in such transactions
plaintiff did not realize any profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were all perfected in the Philippines.
Those described in paragraph IV of the agreed statement of facts went through the
following process: (1) "When a local buyer was interested in the purchase of railway
materials, machinery, and supplies, it asked for price quotations from plaintiff"; (2)
"Plaintiff then cabled for the quotation desired from Koppel Industrial Car and
Equipment Company"; (3) "Plaintiff, however, quoted to the purchaser a selling price
above the figures quoted by Koppel Industrial Car and Equipment Company"; (4) "On
the basis of these quotations, orders were placed by the local purchasers . . ."
Those described in paragraph V of said agreed statement of facts were transacted "in
substantially the same manner as outlined in paragraph IV."
As to the single transaction described in paragraph VI of the same agreed statement
of facts, discarding the Ossorio option which anyway was called off, "On April 1,
1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the
 same engines were sold to him for $21,000(P42,000) C.I.F. Hongkong." (Emphasis
supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
possession of any of the materials or equipment applying to said orders or perform
any acts or duties outside the scope of a broker; and in no sense shall this contract
be construed as granting to the broker the power to represent the principal as its
agent or to make commitments on its behalf.
The Court of First Instance held for the defendant and dismissed plaintiff's complaint with
costs to it.
Upon this appeal, seven errors are assigned to said judgment as follows:.
1. That the court a quo erred in not holding that appellant is a domestic corporation
distinct and separate from, and not a mere branch of Koppel Industrial Car and
Equipment Co.;
2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated
January 31, 1931, Exhibit M;
3. the court a quo erred in not holding that a character of a broker is determined by
the nature of the transaction and not by the basis or measure of his compensation;
4. The court a quo erred in not holding that appellant acted as a commercial broker
in the transactions covered under paragraph VI of the agreed statement of facts;
5. The court a quo erred in not holding that appellant acted as a commercial broker
in the transactions covered under paragraph v of the agreed statement of facts;
6. The court a quo erred in not holding that appellant acted as a commercial broker
in the sole transaction covered under paragraph VI of the agreed statement of facts;
7. the court a quo erred in dismissing appellant's complaint.
The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach
("hechura") of Koppel industrial Car and Equipment Company. The lower court did not deny
legal personality to Koppel (Philippines), Inc. for any and all purposes, but in effect its
conclusion was that, in the transactions involved herein, the public interest and convenience
would be defeated and what would amount to a tax evasion perpetrated, unless resort is had
to the doctrine of "disregard of the corporate fiction."
I. In its first assignment of error appellant submits that the trial court erred in not holding
that it is a domestic corporation distinct and separate from and not a mere branch of Koppel
Industrial Car and Equipment Company. It contends that its corporate existence as
Philippine corporation can not be collaterally attacked and that the Government is estopped
from so doing. As stated above, the lower court did not deny legal personality to appellant for
any and all purposes, but held in effect that in the transaction involved in this case the
public interest and convenience would be defeated and what would amount to a tax evasion
perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction." In
other words, in looking through the corporate form to the ultimate person or corporation
behind that form, in the particular transactions which were involved in the case submitted to
its determination and judgment, the court did so in order to prevent the contravention of the
local internal revenue laws, and the perpetration of what would amount to a tax evasion,
inasmuch as it considered — and in our opinion, correctly — that appellant Koppel
(Philippines), Inc. was a mere branch or agency or dummy ("hechura") of Koppel Industrial
Car and Equipment Co. The court did not hold that the corporate personality of Koppel
(Philippines), Inc., would also be disregarded in other cases or for other purposes. It would
have had no power to so hold. The courts' action in this regard must be confined to the
transactions involved in the case at bar "for the purpose of adjudging the rights and liabilities
of the parties in the case. They have no jurisdiction to do more." (1 Flethcer, Cyclopedia of
Corporation, Permanent ed., p. 124, section 41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in the present state of authority, it is that a
corporation will be looked upon as a legal entity as a general rule, and until sufficient
reason to the contrary appears; but, when the notion of legal entity is used to defeat
public convinience, justify wrong, protect fraud, or defend crime, the law will regard
the corporation as an association of persons. (1 Fletcher Cyclopedia of Corporation
[Permanent Edition], pp. 135, 136; United States vs. Milwaukee Refrigeration Transit
Co., 142 Fed., 247, 255, per Sanborn, J.)
In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or
subsidiary of Koppel Industrial Car and Equipment Co., a Pennsylvania corporation not
licensed to do business in the Philippines but actually doing business here through the
plaintiff; that the said foreign corporation holds 995 of the 1,000 shares of the plaintiff's
capital stock, the remaining five shares being held by the officers of the plaintiff herein in
order to permit the incorporation thereof and to enable its aforesaid officers to act as directors
of the plaintiff corporation; and that plaintiff was organized as a Philippine corporation for the
purpose of evading the payment by its parent foreign corporation of merchants' sales tax on
the transactions involved in this case and others of similar nature."
By most courts the entity is normally regarded but is disregarded to prevent injustice,
or the distortion or hiding of the truth, or to let in a just defense. (1 Fletcher,
Cyclopedia of Corporation, Permanent Edition, pp. 139,140; emphasis supplied.)
Another rule is that, when the corporation is the mere alter ego, or business conduit
of a person, it may de disregarded." (1 Fletcher, Cyclopedia of Corporation,
Permanent Edition, p. 136.)
Manifestly, the principle is the same whether the "person" be natural or artificial.
A very numerous and growing class of cases wherein the corporate entity is
disregarded is that (it is so organized and controlled, and its affairs are so conducted,
as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation)." (1 Fletcher, Cyclopedia of Corporation, Permanent ed., pp. 154, 155.)
While we recognize the legal principle that a corporation does not lose its entity by
the ownership of the bulk or even the whole of its stock, by another corporation
(Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685)
yet it is equally well settled and ignore corporate forms." (Colonial Trust Co. vs.
Montello Brick Works, 172 Fed., 310.)
Where it appears that two business enterprises are owned, conducted and controlled
by the same parties, both law and equity will, when necessary to protect the rights of
third persons, disregard the legal fiction that two corporations are distinct entities,
and treat them as identical. (Abney vs. Belmont Country Club Properties, Inc., 279
Pac., 829.)
. . . the legal fiction of distinct corporate existence will be disregarded in a case where
a corporation is so organized and controlled and its affairs are so conducted, as to
make it merely an instrumentality or adjunct of another corporation. (Hanter vs.
Baker Motor Vehicle Co., 190 Fed., 665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme
Court of the United States disregarded the artificial personality of the subsidiary coal
company in order to avoid that the parent corporation, the Lehigh Valley R. Co., should be
able, through the fiction of that personality, to evade the prohibition of the Hepburn Act
against the transportation by railroad companies of the articles and commodities described
therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of the express prohibitions of the
commodities clause, it must be held that while the right of a railroad company as a
stockholder to use its stock ownership for the purpose of a bona fide separate
administration of the affairs of a corporation in which it has a stock interest may not
be denied, the use of such stock ownership in substance for the purpose of
destroying the entity of a producing, etc., corporation, and commingling its affairs in
administration with the affairs of the railroad company, so as to make the two
corporations virtually one, brings the railroad company so voluntarily acting as to
such producing, etc., corporation within the prohibitions of the commodities clause.
In other words, that by operation and effect of the commodities clause there is duty
cast upon a railroad company proposing to carry in interstate commerce the product
of a producing, etc., corporation in which it has a stock interest, not to abuse such
power so as virtually to do by indirection that which the commodities clause
prohibits, — a duty which plainly would be violated by the unnecessary commingling
of the affairs of the producing company with its own, so as to cause them to be one
and inseparable.
Corrobarative authorities can be cited in support of the same proposition, which we deem
unnecessary to mention here.
From the facts hereinabove stated, as established by a preponderance of the evidence ,
particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed
statement of facts, we find that, in so far as the sales involved herein are concerned, Koppel
(Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and
purposes one and the same; or, to use another mode of expression, that, as regards those
transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To
our mind, this is conclusively borne out by the fact, among others, that the amount of he so-
called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole,
unbridled control of Koppel Industrial Car and Equipment Company. If, in their relations with
each other, Koppel (Philippines), Inc., was considered and intended to function as a bona
fide separate corporation, we can not conceive how this arrangement could have been
adopted, for if there was any factor in its business as to which it would in that case naturally
have been opposed to being thus controlled, it must have been precisely the amount
of profit which it could endeavor and hope to earn. No group of businessmen could be
expected to organize a mercantile corporation — the ultimate end of which could only be
profit — if the amount of that profit were to be subjected to such a unilateral control of
another corporation, unless indeed the former has previously been designed by the
incorporators to serve as a mere subsidiary, branch or agency of the latter. Evidently, Koppel
Industrial Car and Equipment Company made us of its ownership of the overwhelming
majority — 99.5% — of the capital stock of the local corporation to control the operations of
the latter to such an extent that it had the final say even as to how much should be allotted
to said local entity in the so-called sharing in the profits. We can not overlook the fact that in
the practical working of corporate organizations of the class to which these two entities
belong, the holder or holders of the controlling part of the capital stock of the corporation,
particularly where the control is determined by the virtual ownership of the totality of the
shares, dominate not only the selection of the Board of Directors but, more often than not,
also the action of that Board. Applying this to the instant case, we can not conceive how the
Philippine corporation could effectively go against the policies, decisions, and desires of the
American corporation with regards to the scheme which was devised through the
instrumentality of the contract Exhibit H, as well as all the other details of the system which
was adopted in order to avoid paying the 1½ per cent merchants sales tax. Neither can we
conceive how the Philippine corporation could avoid following the directions of the American
corporation held 99.5 per cent of the capital stock of the Philippine corporation. In the
present instance, we note that Koppel (Philippines), Inc., was represented in the Philippines
by its "resident Vice-President." This fact necessarily leads to the inference that the
corporation had at least a Vice-President, and presumably also a President, who were not
resident in the Philippines but in America, where the parent corporation is domiciled. If
Koppel (Philippines), Inc., had been intended to operate as a regular domestic corporation in
the Philippines, where it was formed, the record and the evidence do not disclose any reason
why all its officers should not reside and perform their functions in the Philippines.
Other facts appearing from the evidence, and presently to be stated, strengthen our
conclusion, because they can only be explained if the local entity is considered as a mere
subsidiary, branch or agency of the parent organization. Plaintiff charged the parent
corporation no more than actual cost — without profit whatsoever — for merchandise
allegedly of its own to complete deficiencies of shipments made by said parent corporation
(t.s.n., pp. 53, 54) — a fact which could not conceivably have been the case if plaintiff had
acted in such transactions as an entirely independent entity doing business — for profit, of
course — with the American concern. There has been no attempt even to explain, if the latter
situation really obtained, why these two corporations should have thus departed from the
ordinary course of business. Plaintiff was charged by the American corporation with the cost
even of the latter's cable quotations — from ought that appears from the evidence, this can
only be comprehended by considering plaintiff as such a subsidiary, branch or agency of the
parent entity, in which case it would be perfectly understandable that for convenient
accounting purposes and the easy determination of the profits or losses of the parent
corporation's Philippines should be charged against the Philippine office and set off against
its receipts, thus separating the accounts of said branch from those which the central
organization might have in other countries. The reference to plaintiff by local banks, under a
standing instruction of the parent corporation, of unpaid drafts drawn on Philippine
customers by said parent corporation, whenever said customers dishonored the drafts, and
the fact that the American corporation had previously advised said banks that plaintiff in
those cases was "fully empowered to instruct (the banks) with regard to the disposition of the
drafts and documents" (t.s.n., p. 50), in the absence of any other satisfactory explanation
naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the
American concern, rather than an independent corporation acting as a broker. For, without
such positive explanation, this delegation of power is indicative of the relations between
central and branch offices of the same business enterprise, with the latter acting under
instructions already given by the former. Far from disclosing a real separation between the
two entities, particularly in regard to the transactions in question, the evidence reveals such
commongling and interlacing of their activities as to render even incomprehensible certain
accounting operations between them, except upon the basis that the Philippine corporation
was to all intents and purposes a mere subsidiary, branch, or agency of the American parent
entity. Only upon this basis can it be comprehended why it seems not to matter at all how
much profit would be allocated to plaintiff, or even that no profit at all be so allocated to it, at
any given time or after any given period.
As already stated above, under the evidence the sales in the Philippines of the railway
materials, machinery and supplies imported here by Koppel Industrial Car and Equipment
Company could have been as conviniently and efficiently transacted and handled — if not
more so — had said corporation merely established a branch or agency in the Philippines and
obtained license to do business locally; and if it had done so and said sales had been effected
by such branch or agency, there seems to be no dispute that the 1½ per cent merchants'
sales tax then in force would have been collectible. So far as we can discover, there would be
only one, but very important, difference between the two schemes — a difference in tax
liability on the ground that the sales were made through another and distinct corporation, as
alleged broker, when we have seen that this latter corporation is virtually owned by the
former, or that they practically one and the same, is to sanction a circumvention of our tax
laws, and permit a tax evasion of no mean proportions and the consequent commission of a
grave injustice to the Government. Not only this; it would allow the taxpayer to do by
indirection what the tax laws prohibited to be done directly (non-payment of legitimate taxes),
paraphrasing the United States Supreme Court in United States vs. Lehigh Valley R.
Co., supra.
The act of one corporation crediting or debiting the other for certain items, expenses or even
merchandise sold or disposed of, is perfectly compatible with the idea of the domestic entity
being or acting as a mere branch, agency or subsidiary of the parent organization. Such
operations were called for any way by the exigencies or convenience of the entire business.
Indeed, accounting operation such as these are invitable, and have to be effected in the
ordinary course of business enterprise extends its trade to another land through a branch
office, or through another scheme amounting to the same thing.
If plaintiff were to act as broker in the Philippines for any other corporation, entity or person,
distinct from Koppel Industrial Car and Equipment company, an entirely different question
will arise, which, however, we are not called upon, nor in a position, to decide.
As stated above, Exhibit H contains to the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
possession of any of the materials or equipment applying to said orders or perform
any acts or duties outside the scope of a broker; and in no sense shall this contract
be construed as granting to the broker the power to represent the principal as its
agent or to make commitments on its behalf.
The foregoing paragraph, construed in the light of other facts noted elsewhere in this
decision, betrays, we think a deliberate intent, through the medium of a scheme devised with
great care, to avoid the payment of precisely the 1½ per cent merchants' sales tax in force in
the Philippines before, at the time of, and after, the making of the said contract Exhibit H. If
this were to be allowed, the payment of a tax, which directly could not have been avoided,
could be evaded by indirection, consideration being had of the aforementioned peculiar
relations between the said American and local corporations. Such evasion, involving as it
would, a violation of the former Internal Revenue Law, would even fall within the penal
sanction of section 2741 of the Revised Administrative Code. Which only goes to show the
illegality of the whole scheme. We are not here concerned with the impossibility of collecting
the merchants' sales tax, as a mere incidental consequence of transactions legal in
themselves and innocent in their purpose. We are dealing with a scheme the primary, not to
say the sole, object of which the evasion of the payment of such tax. It is this aim of the
scheme that makes it illegal.
We have said above that the contracts of sale involved herein were all perfected in the
Philippines. From the facts stipulated in paragraph IV of the agreed statement of facts, it
clearly appears that the Philippine purchasers had to wait for Koppel Industrial Car and
Equipment Company to communicate its cost prices to Koppel (Philippines), Inc., were
perfected in the Philippines. In those cases where no such price quotations from the
American corporation were needed, of course, the sales effected in those cases described in
paragraph V of the agreed statement of facts were, as expressed therein, transacted "in
substantially the same manner as outlined in paragraph VI." Even the single transaction
described in paragraph VI of the agreed statement of facts was also perfected in the
Philippines, because the contracting parties were here and the consent of each was given
here. While it is true that when the contract was thus perfected in the Philippines the pair of
Atlas-Diesel Marine Engines were in Sweden and the agreement was to deliver them C.I.F.
Hongkong, the contract of sale being consensual — perfected by mere consent — (Civil Code,
article 1445; 10 Manresa, 4th ed., p. 11), the location of the property and the place of delivery
did not matter in the question of where the agreement was perfected.
In said paragraph VI, we read the following, as indicating where the contract was perfected,
considering beforehand that one party, Koppel (Philippines),Inc., which in contemplation of
law, as to that transaction, was the same Koppel Industrial Car Equipment Co., was in the
Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was
found and the same engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong .
. . (Emphasis supplied.)
Under the revenue law in force when the sales in question took place, the merchants' sales
tax attached upon the happening of the respective sales of the "commodities, goods, wares,
and merchandise" involved, and we are clearly of opinion that such "sales" took place upon
the perfection of the corresponding contracts. If such perfection took place in the Philippines,
the merchants' sales tax then in force here attached to the transactions.
Even if we should consider that the Philippine buyers in the cases covered by paragraph IV
and V of the agreed statement of facts, contracted with Koppel Industrial Car and Equipment
company, we will arrive at the same final result. It can not be denied in that case that said
American corporation contracted through Koppel (Philippines), Inc., which was in the
Philippines. The real transaction in each case of sale, in final effect, began with an offer of
sale from the seller, said American corporation, through its agent, the local corporation, of
the railway materials, machinery, and supplies at the prices quoted, and perfected or
completed by the acceptance of that offer by the local buyers when the latter, accepting those
prices, placed their orders. The offer could not correctly be said to have been made by the
local buyers when they asked for price quotations, for they could not rationally be taken to
have bound themselves to buy before knowing the prices. And even if we should take into
consideration the fact that the american corporation contracted, at least partly, through
correspondence, according to article 54 of the Code of Commerce, the respective contracts
were completed from the time of the acceptance by the local buyers, which happened in the
Philippines.
Contracts executed through correspondence shall be completed from the time an
answer is made accepting the proposition or the conditions by which the latter may be
modified." (Code of Commerce, article 54; emphasis supplied.)
A contract is as a rule considered as entered into at the place where the place it is
performed. So where delivery is regarded as made at the place of delivery." (13 C. J.,
580-81, section 581.)
(In the consensual contract of sale delivery is not needed for its perfection.)
II. Appellant's second assignment of error can be summarily disposed of. It is clear that the
ruling of the Secretary of Finance, Exhibit M, was not binding upon the trial court, much less
upon this tribunal, since the duty and power of interpreting the laws is primarily a function
of the judiciary. (Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be
excused from abiding by this legal principle, nor can it properly be heard to say that it relied
on the Secretary's ruling and that, therefore, the courts should not now apply an
interpretation at variance therewith. The rule of stare decisis is undoubtedly entitled to more
respect in the construction of statutes than the interpretations given by officers of the
administrative branches of the government, even those entrusted with the administration of
particular laws. But this court, in Philippine Trust Company and Smith, Bell and Co. vs.
Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in
the business field, is desirable. But idolatrous reverence for precedent, simply as
precedent, no longer rules. More important than anything else is that court should be
right. . . .
III. In the view we take of the case, and after the disposition made above of the first
assignment of error, it becomes unnecessary to make any specific ruling on the third, fourth,
fifth, sixth, and seventh assignments of error, all of which are necessarily disposed of
adversely to appellant's contention.
Wherefore, he judgment appealed from is affirmed, with costs of both instances against
appellant. So ordered.
Separate Opinions
PERFECTO, J., concurring:
We fully agree with the well-written decision penned by Mr. Justice Hilado in this case. We
only wish to add that the ingenious device of evading the payment of taxes, is not a new one.
It is only one of the manifold manifestations of the shrewdness of the masterminds behind
some powerful corporations who, without ay compunction, do not stop at adopting any
scheme by which the controlling capitalists may get even richer and richer, sometimes at
government expense, sometimes by squeezing credulous or ignorant small shareholders,
sometimes with the exploitation of the helpless public at large, and sometimes at great
sacrifice of all the three entities.
The system of corporation combines, of holding and subsidiary corporations, of spreading and
interlocking companies, has no well developed and has grown so powerful that even the
wisest government had been unable to defend itself and protect the people from the crushing
tentacles of the moneyed octopuses. It is true that in the United States of America anti trusts
laws were enacted but, notwithstanding their ability and wisdom, the Americans were unable
to stave off the effects of the bankruptcy of the pyramid of holding and interlocking
companies built around the tragic figure of Samuel Insull.
That Philippine Government, that Filipino consumers, that Filipino public at large, had
already been victims of the evil effects of such a system has been conclusively proved in the
scandalous illegalities and irregularities disclosed in the investigation made by the first
National Assembly, through its Committee on Rate Reducing of Public Utilities. In said
investigation, it was revealed that, by a system of holding and interlocking companies, by
their manipulation of books of accounts, our government was defrauded of enormous
amounts in taxes and millions of pesos were unjustly squeezed from the public.
It is high time that alarm be sounded so that our government and our public may avoid being
further victimized and this country turned into a puppet at the mercy of moneyed tycoons
who are not stopped by any scruple to attain their unquenchable thristiness for more money
and for power and domination. All liberal-minded people must fight not only against political
imperialism, but also against economic or financial imperialism, in fact, against any kind of
imperialism. The call for eternal vigilance must be heeded by all, including tribunals, if the
survival of our people must not be jeopardized by artful corporations and unscrupulous
financiers.
MARUBENI CORPORATION, RYOICHI TANAKA, RYOHEI KIMURA and SHOICHI
ONE, petitioners, vs. FELIX LIRAG, respondent.
DECISION
PARDO, J.:
The case is an appeal via certiorari to annul and set aside the decision[1] of the Court of
Appeals finding petitioners Ryoichi Tanaka, Ryohei Kimura and Shoichi One, as officers of
petitioner Marubeni Corporation, jointly and severally liable with the corporation for the
commission claimed by respondent Felix Lirag in the amount of six million (P6,000,000.00)
pesos arising from an oral consultancy agreement.
Petitioner Marubeni Corporation (hereafter, Marubeni) is a foreign corporation organized
and existing under the laws of Japan. It was doing business in the Philippines through its duly
licensed, wholly owned subsidiary, Marubeni Philippines Corporation. Petitioners Ryoichi
Tanaka, Ryohei Kimura and Shoichi One were officers of Marubeni assigned to its Philippine
branch.[2]
On January 27, 1989, respondent Felix Lirag filed with the Regional Trial Court, Makati a
complaint[3] for specific performance and damages claiming that petitioners owed him the sum
of P6,000,000.00 representing commission pursuant to an oral consultancy agreement with
Marubeni. Lirag claimed that on February 2, 1987, petitioner Ryohei Kimura hired his
consultancy group for the purpose of obtaining government contracts of various
projects. Petitioner Kimura authorized him to work on the following projects: (1) National
Telephone Project, (2) Regional Telecommunications Project; (3) Cargo Handling Equipment; (4)
Maritime Communications; (5) Philippine National Railways Depot; and (6) Bureau of Posts
(Phase II).[4] Petitioners promised to pay him six percent (6%) consultancy fee based on the total
costs of the projects obtained.
The consultancy agreement was not reduced into writing because of the mutual
trust between Marubeni and the Lirag family.[5] Their close business and personal relationship
dates back to 1960, when respondents family was engaged in the textile fabric manufacturing
business, in which Marubeni supplied the needed machinery, equipment, spare parts and raw
materials.[6]
In compliance with the agreement, respondent Lirag made representations with various
government officials, arranged for meetings and conferences, relayed pertinent information as
well as submitted feasibility studies and project proposals, including pertinent documents
required by petitioners. As petitioners had been impressed with respondents performance, six
(6) additional projects were given to his group under the same undertaking.[7]
One of the projects handled by respondent Lirag, the Bureau of Post project, amounting
to P100,000,000.00 was awarded to the Marubeni-Sanritsu tandem.[8] Despite respondents
repeated formal verbal demands for payment of the agreed consultancy fee, petitioners did not
pay. In response to the first demand letter, petitioners promised to reply within fifteen (15)
days, but they did not do so.
Pursuant to the consultancy agreement, respondent claimed a commission of six percent
(6%) of the total contract price, or a total of P6,000,000.00, or in the alternative, that he be paid
the same amount by way of damages or as the reasonable value of the services he rendered to
petitioners, and further claimed twenty percent (20%) of the amount recoverable as attorneys
fees and the costs of suit.
In their answer, petitioners denied the consultancy agreement. Petitioner Ryohei Kimura
did not have the authority to enter into such agreement in behalf of Marubeni. Only Mr.
Morihiko Maruyama, the general manager, upon issuance of a special power of attorney by the
principal office in Tokyo, Japan, could enter into any contract in behalf of the corporation. Mr.
Maruyama did not discuss with respondent Lirag any of the matters alleged in the complaint,
nor agreed to the payment of commission. Moreover, Marubeni did not participate in the
bidding for the Bureau of Post project, nor benefited from the supposed project. Thus,
petitioners moved for the dismissal of the complaint.
Petitioner Shoichi One submitted a separate answer raising similar arguments.
With regard to petitioner Ryohei Kimura, the trial court did not acquire jurisdiction over
his person because he was recalled to the principal office in Tokyo, Japan before the complaint
and the summons could be served on him.
During the pre-trial conferences held on September 18 and October 16, 1989 and on
January 24, March 15 and May 17, 1990, no amicable settlement was reached. Trial on the
merits ensued.
On April 29, 1993, the trial court promulgated a decision and ruled that respondent is
entitled to a commission. Respondent was led to believe that there existed an oral consultancy
agreement. Hence, he performed his part of the agreement and helped petitioners get the
project. The dispositive portion of the decision reads:
WHEREFORE, defendants are ordered, jointly and severally, to pay to the plaintiff: (1) the
amount of P6,000,000.00, with interest at the legal rate (12% per annum) from January 10,
1989 until fully paid; (2) 20% of this amount to serve as reimbursement of plaintiffs attorneys
fees; and (3) to pay the cost of the suit.
SO ORDERED.
Makati, Metro Manila, April 29, 1993.
[Original Signed]
SALVADOR P. DE GUZMAN, Jr.
Pairing Judge[9]
 On May 26, 1993, petitioners interposed an appeal from the decision to the Court of
Appeals.[10]
After due proceedings, on October 9, 1997, the Court of Appeals promulgated a decision
affirming the decision of the trial court. The Court of Appeals ruled that preponderance of
evidence favored the existence of a consultancy agreement between the parties. It upheld the
factual findings of the trial court, thus:
Plaintiffs evidence details the efforts he exerted after having been extended an appointment
by Marubeni as its consultant. He tendered a thanksgiving dinner for the defendants at the
Nandau Restaurant; he and Napoleon Rama visited Marubenis Morihiko Maruyama in the
latters office during which they discussed the BOP II project. He arranged several conferences
between the Marubeni officials and Postmaster General Angelito Banayo. In one meeting
which took place in the office of Mr. Banayo at Liwasang Bonifacio, a Mr. Ida, the General
Manager of Sanritsu, was conspicuously present. Mr. Banayo testified that Mr. Ida told him
that Sanritsu was representing Marubeni in the BOP II project (tsn., 6/11/90, pp. 15-17;
5/15/91, pp. 10-12). At least thirty (30) conferences between plaintiff and defendants took
place at the Marubeni offices, lasting at least two hours each meeting. Eventually, the bid
was awarded by the Bureau of Post to Sanritsu. Aware that Sanritsu represented Marubeni,
and in fact Marubeni assigned Sanritsu to enter its bid, plaintiff sent his bill for his services
to the defendants in a letter dated April 20, 1988. This was followed by a letter dated
September 26, 1990 of plaintiffs counsel. This time Mr. Tanaka asked for 15 days within
which to contact their Head Office to seek instructions.[11]
The Court of Appeals relied on the doctrine of admission by silence [12] in upholding the
existence of a consultancy agreement, noting that petitioner Tanakas reaction to respondents
September 26, 1988 demand letter was not consistent with their claim that there was no
consultancy agreement. On the contrary, it lent credence to respondents claim that they had
an existing consultancy agreement. Petitioner Tanakas response dated October 13, 1988 to the
demand letter of September 26, 1988 reads:
Referring to your letter dated September 26, 1988, we are pleased to inform you that the
issue is currently being reviewed by us and we would like to reply to you within fifteen (15)
days.[13]
The Court of Appeals observed that if indeed there were no consultancy agreement, it
would have been easy for petitioners to simply deny respondents claim. Yet, they did not do
so. The conglomeration of these circumstances bolstered the existence of the oral consultancy
agreement. The dispositive portion of the decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED.[14]
Hence, this appeal.[15]
In this appeal, petitioners raise the following issues: (1) whether or not there was a
consultancy agreement between petitioners and respondent; and corollary to this, (2) whether
or not respondent is entitled to receive a commission if there was, in fact, a consultancy
agreement.[16]
We find the appeal meritorious.
In deciding this appeal, we rely on the rule that a party who has the burden of proof in a
civil case must establish his case by a preponderance of evidence.[17] When the evidence of the
parties is in equipoise, or when there is a doubt as to where the preponderance of evidence lies,
the party with the burden of proof fails and the petition must thus be denied.[18]
As a general rule, factual findings of the Court of Appeals are conclusive on the parties
and are not reviewed by the Supreme Courtand they carry even more weight when the Court of
Appeals affirmed the factual findings of the trial court. It is not the function of the Supreme
Court to weigh anew the evidence passed upon by the Court of Appeals. [19] Moreover, only
questions of law may be raised before the Supreme Court in a petition for review under Rule
45 of the Revised Rules of Court.[20]
However, the rule is subject to exceptions,[21] such as when the conclusion is grounded on
speculations, surmises, or conjectures,[22] as in the instant case.
An assiduous scrutiny of the testimonial and documentary evidence extant leads us to the
conclusion that the evidence could not support a solid conclusion that a consultancy
agreement, oral or written, was agreed between petitioners and
respondent. Respondent attempted to fortify his own testimony by presenting several
corroborative witnesses. However, what was apparent in the testimonies of these witnesses was
the fact that they learned about the existence of the consultancy agreement only because that
was what respondent told them.[23]
In civil cases, he who alleges a fact has the burden of proving it; a mere allegation is not
evidence.[24] He must establish his cause by a preponderance of evidence,[25] which respondent
failed to establish in the instant case.
Assuming for the sake of argument that an oral consultancy agreement has been perfected
between the parties, respondent Lirag could not still claim fees on the project that has not been
awarded to Marubeni.
If respondents contentions were to be taken as truth, he would be entitled to 6% consulting
fee based on the total cost of the projects obtained,[26] or on success basis.[27] However, even
respondent admitted that the Bureau of Post project was not awarded to Marubeni, but to
Sanritsu.[28]Marubeni did not even join the bidding for the Bureau of Post project.
Respondent could not claim from Sanritsu because of the absence of any agreement
between him and the latter. When asked to clarify whether he has an existing consultancy
agreement with Sanritsu, respondent answered in the negative, thus:
COURT:
One clarificatory question-
Do you have any consultancy service contract with Marubeni/San Ritsu do you have?
A: No, sir. I have only Consultancy Agreement on verbal basis with Marubeni.[29]
Hence, how could he be entitled to the 6% commission, when it was not his client who
won in the bidding?
Respondent tried to justify his commission of roughly about P6,000,000.00 in the guise
that Marubeni and Sanritsu are sister corporations, thereby implying the need to pierce the
veil of corporate fiction. Respondent claimed that Marubeni as the supplier and real contractor
of the project hired and sub-contracted the project to Sanritsu.
 We believe that this line of reasoning is too far-fetched. Not because two foreign companies
came from the same country and closely worked together on certain projects would the
conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established. It cannot be presumed. The separate personality of the
corporation may be disregarded only when the corporation is used as a cloak or cover for fraud
or illegality, or to work injustice, or where necessary for the protection of creditors.[30] We could
not just rely on respondents testimony regarding the existence of the Marubeni-Sanritsu
tandem to justify his claim for payment of commission. This conclusion is too conjectural to be
believed.
Aside from the self-serving testimony of respondent regarding the existence of a close
working relationship between Marubeni and Sanritsu, there was nothing that would support
the conclusion that Sanritsu was an agent of Marubeni. Mr. Lito Banayo, whom respondent
presented to corroborate his testimony on this particular issue said, thus:
ATTY. VALERO
My question is- do you know for a fact whether the impression you have about Japanese
Trading Firm working through Agents was the relationship between Marubeni and San
Ritsu when Mr. Iida said that they were working together?
A: I did not know for a fact because I did not see any contract between Marubeni and San
Ritsu presented to me.[31]
Contrary to the trial courts finding that petitioners led respondent to believe that they
hired respondents services as consultant, the evidence proved otherwise. Petitioner Shoichi
One, one of the officers of Marubeni Phils., testified that at the onset, Marubeni Phils. informed
respondent that it had no authority to commit to anything, as it all depended on the decision
of the principal headquarters in Tokyo, Japan. However, respondent Lirag insisted on providing
assistance to Marubeni to get coveted government contracts because Marubeni might
encounter difficulties due to discrimination from the government.[32] Despite such knowledge,
respondent said that its alright with him as he believes Marubeni was an old time friend so he
wanted to work for those projects.[33] Hence, how could petitioners be guilty of misleading
respondent on the acceptance of the latters offer of consultancy service?
With regard to the Court of Appeals ratiocination that petitioner Tanakas response dated
October 13, 1988 to the demand letter of September 26, 1988, amounted to an implied
admission of the consultancy agreement, the records showed that, to the contrary, this fact
strengthened petitioners allegation that Marubeni Phils. lacked the requisite authority to enter
into any binding agreement.
As explained by petitioner Shoichi One, Marubeni Phils. could enter into a consultancy
agreement only after submitting a recommendation to the principal headquarters in Tokyo,
Japan. If the office in Tokyo, Japan agrees to hire consultants, it would then give a power of
attorney to its general manager in Manila authorizing the latter to enter into such agreement.
In the instant case, the parties did not reach the second stage as the headquarters in
Tokyo, Japan did not see it fit to hire a consultant as they decided not to participate in the
bidding. Hence, no consultancy agreement was perfected, whether oral or written. There was
no absolute acceptance of respondents offer of consultancy services.
Assuming arguendo that the petitioner accepted respondents offer of consultancy services,
we could not give legal imprimatur to the agreement. The service rendered by respondent
contemplated the exploitation of personal influence and solicitation on a public officer.
Respondent said that petitioners sought out his services because they needed somebody
who can help them penetrate and establish goodwill with the government.[34] Petitioners found
it difficult to arrange a meeting with Postmaster General Angelito Banayo because of petitioners
reputation of engaging in questionable transactions.[35] Suddenly, through the intervention of
respondent, the postmaster general became accessible to petitioners. This became possible
because of respondents close personal relationship with the postmaster general, his trusted
and long-time friend.[36]Respondent testified, to wit:
Q: In other words you are saying that Marubeni and San Ritsu representatives had a
conference with the Post Master General Banayo in connection with this Project?
A: Yes and I was the one who made the arrangement.[37]
In another instance, respondent said, thus:
WITNESS:
What we have done by that first, Mr. Banayo went to Tokyo and when he was in Tokyo we
were able to arrange the Marubeni representative in Tokyo to meet and talk with Mr.
Banayo in Tokyo
COURT:
Mr?
A. Banayo, the Post Master General and representatives of Marubeni in Tokyo - this was
done because of my intervention.[38]
Any agreement entered into because of the actual or supposed influence which the party
has, engaging him to influence executive officials in the discharge of their duties, which
contemplates the use of personal influence and solicitation rather than an appeal to the
judgment of the official on the merits of the object sought is contrary to public
policy.[39] Consequently, the agreement, assuming that the parties agreed to the consultancy,
is null and void as against public policy.[40] Therefore, it is unenforceable before a court of
justice.[41]
In light of the foregoing, we rule that the preponderance of evidence established no
consultancy agreement between petitioners and respondent from which the latter could anchor
his claim for a six percent (6%) consultancy fee on a project that was not awarded to petitioners.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals[42] is hereby
SET ASIDE. Civil Case No. 89-3037 filed before the Regional Trial Court, Branch 143, Makati
City is hereby DISMISSED.
No costs.
SO ORDERED.