DELPHER TRADES CORPORATION, and DELPHIN On the ground that it was not given the first option to buy
t given the first option to buy the 3. Assuming arguendo that there has been a transfer of actual
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES
PHILIPPINES, INC., respondents.
The petitioners question the decision of the Intermediate
Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco
and Pelagia Pacheco conveyed a parcel of land to Delpher
Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal
under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot.
No. 1095, Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro Manila) which is
covered by Transfer Certificate of Title No. T-4240 of the
Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and providing
that during the existence or after the term of this lease the
lessor should he decide to sell the property leased shall first
offer the same to the lessee and the letter has the priority to
buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components
International, Inc. assigned its rights and obligations under the
contract of lease in favor of Hydro Pipes Philippines, Inc. with
the signed conformity and consent of lessors Delfin Pacheco and
Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were
annotated at he back of the title, as per stipulation of the parties
(Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher
Trades Corporation whereby the former conveyed to the latter
the leased property (TCT No.T-4240) together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro
Manila (TCT No. 4273) for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.00 (Exhs. C to C-5,
inclusive) (pp. 44-45, Rollo)
leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation
acquired the property from Pelagia Pacheco and Delphin
Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of
the plaintiff. The dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the
valid existence of the plaintiffs preferential right to acquire the
subject property (right of first refusal) and ordering the
defendants and all persons deriving rights therefrom to convey
the said property to plaintiff who may offer to acquire the same
at the rate of P14.00 per square meter, more or less, for Lot
1095 whose area is 27,169 square meters only. Without
pronouncement as to attorney's fees and costs. (Appendix I;
Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the
Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition
for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for
reconsideration, we set aside the resolution denying the petition
and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the
petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private
respondent") will acquire from petitioners a parcel
of industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of the
toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq.
meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first
refusal even if there is no "sale" or transfer of actual ownership
interests by petitioners to third parties; and
ownership interests, private respondent will acquire the
land not under "similar conditions" by which it was transferred
to petitioner Delpher Trades Corporation, as provided in the
same contractual provision invoked by private respondent. (pp.
251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed
of Exchange" of the properties executed by the Pachecos on the
one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the
private respondent's right of first refusal over the leased
property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of
the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was
organized by the children of the two spouses (spouses Pelagia
Pacheco and Benjamin Hernandez and spouses Delfin Pacheco
and Pilar Angeles) who owned in common the parcel of land
leased to Hydro Pipes Philippines in order to perpetuate their
control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real
estate, including Lot No. 1095 which had been leased to Hydro
Pipes Philippines, were transferred to the corporation; that the
leased property was transferred to the corporation by virtue of a
deed of exchange of property; that in exchange for these
properties, Pelagia and Delfin acquired 2,500 unissued no par
value shares of stock which are equivalent to a 55% majority in
the corporation because the other owners only owned 2,000
shares; and that at the time of incorporation, he knew all about
the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines.
In the petitioners' motion for reconsideration, they refer to this
scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there
was actually no transfer of ownership of the subject parcel of
land since the Pachecos remained in control of the property.
Thus, the petitioners allege: "Considering that the beneficial
ownership and control of petitioner corporation remained in the
hands of the original co-owners, there was no transfer of actual
ownership interests over the land when the same was
transferred to petitioner corporation in exchange for the latter's
shares of stock. The transfer of ownership, if anything, was
merely in form but not in substance. In reality, petitioner
corporation is a mere alter ego or conduit of the Pacheco
co-owners; hence the corporation and the co-owners should be
deemed to be the same, there being in substance and in effect
an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the
property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation.
"Hence, such transfer is not within the letter, or even spirit of
the contract. There is a sale when ownership is transferred for a
price certain in money or its equivalent (Art. 1468, Civil Code)
while there is a barter or exchange when one thing is given in
consideration of another thing (Art. 1638, Civil Code)." (pp.
254-255, Rollo)
On the other hand, the private respondent argues that Delpher
Trades Corporation is a corporate entity separate and distinct
from the Pachecos. Thus, it contends that it cannot be said that
Delpher Trades Corporation is the Pacheco's same alter ego or
conduit; that petitioner Delfin Pacheco, having treated Delpher
Trades Corporation as such a separate and distinct corporate
entity, is not a party who may allege that this separate
corporate existence should be disregarded. It maintains that
there was actual transfer of ownership interests over the leased
property when the same was transferred to Delpher Trades
Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation
by subscription or by purchasing stock directly from the
corporation or from individual owners thereof (Salmon, Dexter
& Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa.,
609). In the case at bar, in exchange for their properties, the
Pachecos acquired 2,500 original unissued no par value shares
of stocks of the Delpher Trades Corporation. Consequently, the
Pachecos became stockholders of the corporation by
subscription "The essence of the stock subscription is an
agreement to take and pay for original unissued shares of a
corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in
exchange for their properties.
A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value,
but only an aliquot part of the whole number of such shares of
the issuing corporation. The holder of no-par shares may see
from the certificate itself that he is only an aliquot sharer in the
assets of the corporation. But this character of proportionate
interest is not hidden beneath a false appearance of a given sum
in money, as in the case of par value shares. The capital stock of
a corporation issuing only no-par value shares is not set forth by
a stated amount of money, but instead is expressed to be
divided into a stated number of shares, such as, 1,000 shares.
This indicates that a shareholder of 100 such shares is an aliquot Q (What do you mean by "point of view"?) What are these
sharer in the assets of the corporation, no matter what value benefits to the spouses of this deed of exchange?
they may have, to the extent of 100/1,000 or 1/10. Thus, by
removing the par value of shares, the attention of persons A Continuous control of the property, tax exemption benefits,
interested in the financial condition of a corporation is focused and other inherent benefits in a corporation.
upon the value of assets and the amount of its debts. (Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of
Q What are these advantages to the said spouses from the point
the Philippines, Vol. III, 1980 Edition, p. 107).
of view of taxation in entering in the deed of exchange?
Moreover, there was no attempt to state the true or current
A Having fulfilled the conditions in the income tax law, providing
market value of the real estate. Land valued at P300.00 a square
for tax free exchange of property, they were able to execute the
meter was turned over to the family's corporation for only
deed of exchange free from income tax and acquire a
P14.00 a square meter.
corporation.
It is to be stressed that by their ownership of the 2,500 no par
Q What provision in the income tax law are you referring to?
shares of stock, the Pachecos have control of the corporation.
Their equity capital is 55% as against 45% of the other
stockholders, who also belong to the same family group. A I refer to Section 35 of the National Internal Revenue Code
under par. C-sub-par. (2) Exceptions regarding the provision
which I quote: "No gain or loss shall also be recognized if a
In effect, the Delpher Trades Corporation is a business conduit
person exchanges his property for stock in a corporation of
of the Pachecos. What they really did was to invest their
which as a result of such exchange said person alone or together
properties and change the nature of their ownership from
with others not exceeding four persons gains control of said
unincorporated to incorporated form by organizing Delpher
corporation."
Trades Corporation to take control of their properties and at the
same time save on inheritance taxes.
Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?
As explained by Eduardo Neria:
A Yes, sir
xxx xxx xxx
Q You also, testified during the last hearing that the decision to
ATTY. LINSANGAN:
have no par value share in the defendant corporation was for
the purpose of flexibility. Can you explain flexibility in
Q Mr. Neria, from the point of view of taxation, is there any connection with the ownership of the property in question?
benefit to the spouses Hernandez and Pacheco in connection
with their execution of a deed of exchange on the properties for
A There is flexibility in using no par value shares as the value is
no par value shares of the defendant corporation?
determined by the board of directors in increasing capitalization.
The board can fix the value of the shares equivalent to the
A Yes, sir. capital requirements of the corporation.
COURT:
Q Now also from the point of taxation, is there any flexibility in
the holding by the corporation of the property in question?
Q What do you mean by "point of view"?
A Yes, since a corporation does not die it can continue to hold
A To take advantage for both spouses and corporation in on to the property indefinitely for a period of at least 50 years.
entering in the deed of exchange. On the other hand, if the property is held by the spouse the
property will be tied up in succession proceedings and the
ATTY. LINSANGAN: consequential payments of estate and inheritance taxes when
an owner dies.
Q Now what advantage is this continuity in relation to
ownership by a particular person of certain properties in respect
to taxation?

A The property is not subjected to taxes on succession as the

corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable

about this "estate planning" scheme resorted to by the Pachecos.
"The legal right of a taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted." (Liddell & Co., Inc. v.
The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and

Delpher Trades Corporation cannot be considered a contract of
sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed
their ownership from one form to another. The ownership
remained in the same hands. Hence, the private respondent has
no basis for its claim of a light of first refusal under the lease
contract.

WHEREFORE, the instant petition is hereby GRANTED, The

questioned decision and resolution of the then Intermediate
Appellate Court are REVERSED and SET ASIDE. The amended
complaint in Civil Case No. 885-V-79 of the then Court of First
Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.
 DECISION of mortgage executed before a notary public in accordance with
CAGAYAN FISHING DEVELOPMENT CO., Inc., Plaintiff-Appellant, which the four parcels of land were given as security for the
v. TEODORO SANDIKO, Defendant-Appellee. payment of the promissory note, Exhibit C. All these three
LAUREL, J.: instruments were dated February 15, 1932.

The defendant having failed to pay the sum stated in the

1. CORPORATIONS; TRANSFER MADE TO A NON-EXISTENT promissory note, plaintiff, on January 25, 1934, brought this
This is an appeal from a judgment of the Court of First Instance
CORPORATION; JURIDICAL CAPACITY TO ENTER INTO A action in the Court of First Instance of Manila praying that
of Manila absolving the defendant from the plaintiff’s
CONTRACT. — The transfer made by T to the C. F. D. Co., Inc., judgment be rendered against the defendant for the sum of
complaint.
was, effected on May 31, 1930 and the actual incorporation of P25,300, with interest at the legal rate from the date of the filing
said company was effected later on (October 22, 1930. In other of the complaint, and the costs of the suit. After trial, the court
Manuel Tabora is the registered owner of four parcels of land
words, the transfer was made almost five months before the below, on December 18, 1934, rendered judgment absolving the
situated in the barrio of Linao, town of Aparri, Province of
incorporation of the company. Unquestionably, a duly organized defendant, with costs against the plaintiff. Plaintiff presented a
Cagayan, as evidenced by transfer certificate of title No. 217 of
corporation has the power to purchase and hold such real motion for new trial on January 14, 1935, which motion was
the land records of Cagayan, a copy of which is in evidence as
property as the purposes for which such corporation was denied by the trial court on January 19 of the same year. After
Exhibit 1. To guarantee the payment of a loan in the sum of
formed may permit and for this purpose may enter into such due exception and notice, plaintiff has appealed to this court
P8,000, Manuel Tabora, on August 14, 1929, executed in favor
contracts as may be necessary. But before a corporation may be and makes an assignment of various errors.
of the Philippine National Bank a first mortgage on the four
said to be lawfully organized, many things have to be done.
parcels of land above-mentioned. A second mortgage in favor of
Among other things, the law requires the filing of articles of In dismissing the complaint against the defendant, the court
the same bank was in April of 1930 executed by Tabora over the
incorporation. Although there is a presumption that all the below reached the conclusion that Exhibit B is invalid because of
same lands to guarantee the payment of another loan
requirements of law have been complied with in the case before vice in consent and repugnancy to law. While we do not agree
amounting to P7,000. A third mortgage on the same lands was
us it can not be denied that the plaintiff was not yet with this conclusion, we have however voted to affirm the
executed on April 16, 1930 in favor of Severina Buzon to whom
incorporated when it entered into take contract of sale The judgment appealed from for reasons which we shall presently
Tabora was indebted in the sum of P2,900. These mortgages
contract itself referred to the plaintiff as "una sociodad en vias state.
were registered and annotations thereof appear at the back of
de incorporacion." It was not even a de facto corporation at the
transfer certificate of title No. 217.
time. Not being in legal existence then, it did not possess The transfer made by Tabora to the Cagayan Fishing
juridical capacity to enter into the contract. Development Co., Inc., plaintiff herein, was effected on May 31,
On May 31, 1930, Tabora executed a public document entitled
"Escritura de Traspaso de Propiedad Inmueble" (Exhibit A) by 1930 (Exhibit A) and the actual incorporation of said company
2. ID.; ID.; ID. — Corporation are creatures of the law, and can was effected later on October 22, 1930 (Exhibit 2). In other
virtue of which the four parcels of land owned by him were sold
only, come into existence in the manner prescribed by law. words, the transfer was made almost five months before the
to the plaintiff company, said to be under process of
General laws authorizing the formation of corporations are incorporation of the company. Unquestionably, a duly organized
incorporation, in consideration of one peso (P1) subject to the
general offers to any persons who may bring themselves within corporation has the power to purchase and hold such real
mortgages in favor of the Philippine National Bank and Severina
their provisions; and if conditions precedent are prescribed in property as the purposes for which such corporation was
Buzon and, to the condition that the certificate of title to said
the statute, or certain acts are required to be done, they are formed may permit and for this purpose may enter into such
lands shall not be transferred to the name of the plaintiff
terms of the offer, and must be complied wish substantially contracts as may be necessary (sec. 13, pars. 5 and 9, and sec.
company until the latter has fully and completely paid Tabora’s
before legal corporate existence can be acquired. That a 14, Act No. 1459). But before a corporation may be said to be
indebtedness to the Philippine National Bank.
corporation should have a full and complete organization and lawfully organized, many things have to be done. Among other
existence as an entity before it can enter Into any kind of a things, the law requires the filing of articles of incorporation
The plaintiff company filed its articles of incorporation with the
contract or transact any business, would seem to be (secs. 6 et seq., Act No. 1459). Although there is a presumption
Bureau of Commerce and Industry on October 22, 1930 (Exhibit
self-evident. that all the requirements of law have been complied with (sec.
2). A year later, on October 28, 1931, the board of directors of
the said company adopted a resolution (Exhibit G) authorizing its 334, par. 31, Code of Civil Procedure), in the case before us it
3. ID.; ID.; ID. — A corporation, until organized, has no life and, can not be denied that the plaintiff was not yet incorporated
president, Jose Ventura, to sell the four parcels of land in
therefore, no faculties. It is, as it were, a child in venture sa when it entered into the contract of sale, Exhibit A. The contract
question to Teodoro Sandiko for P42,000. Exhibits B, C and D
mere. This is not saying, that under no circumstances may the itself referred to the plaintiff as "una sociedad en vias de
were thereafter made and executed. Exhibit B is a deed of sale
acts of promoters of a corporation he ratified by the corporation incorporacion." It was not even a de facto corporation at the
executed before a notary public by the terms of which the
if and when subsequently organized. There are, of course, time. Not being in legal existence then, it did not possess
plaintiff sold, ceded and transferred to the defendant all its
exceptions, but under the peculiar facts and circumstances of juridical capacity to enter into the contract.
rights, titles and interest in and to the four parcels of land
the present case the doctrine of ratification should not be
described in transfer certificate of title No. 217 for P25,300; and
extended because to do so would result in injustice or fraud to "Corporations are creatures of the law, and can only come into
the defendant in turn obligated himself to shoulder the three
the candid and unwary. existence in the manner prescribed by law. As has already been
mortgages hereinbefore referred to. Exhibit C is a promissory
note for P25,300 drawn by the defendant in favor of the plaintiff, stated, general laws authorizing the formation of corporations
payable after one year from the date thereof. Exhibit D is a deed are general offers to any persons who may bring themselves
within their provisions; and if conditions precedent are
prescribed in the statute, or certain acts are required to be done,
they are terms of the offer, and must be complied with
substantially before legal corporate existence can be acquired."
(14 C. J., sec. 111, p. 118.)
"That a corporation should have a full and complete
organization and existence as an entity before it can enter into
any kind of a contract or transact any business, would seem to
be self evident. . . . A corporation, until organized, has no being,
franchises or faculties. Nor do those engaged in bringing it into
being have any power to bind it by contract, unless so
authorized by the charter. Until organized as authorized by the
charter there is not a corporation, nor does it possess franchises
or faculties for it or others to exercise, until it acquires a
complete existence." (Gent v. Manufacturers and Merchants’
Mutual Insurance Company, 107 Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A)
was entered into not only between Manuel Tabora and a
non-existent corporation but between Manuel Tabora as owner
of four parcels of land on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporation
on the other hand. For reasons that are self-evident, these
promoters could not have acted as agents for a projected
corporation since that which had no legal existence could have
no agent. A corporation, until organized, has no life and
therefore no faculties. It is, as it were, a child in ventre sa mere.
This is not saying that under no circumstances may the acts of
promoters of a corporation be ratified by the corporation if and
when subsequently organized. There are, of course, exceptions
(Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs.
207 et seq.) , but under the peculiar facts and circumstances of
the present case we decline to extend the doctrine of
ratification which would result in the commission of injustice or
fraud to the candid and unwary. (Massachusetts rule, Abbott v.
Hapgood, 150 Mass., 248; 22 N. E., 907, 908; 5 L. R. A., 586; 15
Am. St. Rep., 193; citing English cases; Koppel v. Massachusetts
Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co. v.
U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the
four parcels of land, which he succeeded in mortgaging to the
Philippine National Bank so that he might have the necessary
funds with which to convert and develop them into fishery. He
appeared to have met with financial reverses. He formed a
corporation composed of himself, his wife, and a few others.
From the articles of incorporation, Exhibit 2, it appears that out
of the P48,700, amount of capital stock subscribed, P45,000 was
subscribed by Manuel Tabora himself and P500 by his wife,
Rufina Q. de Tabora; and out of the P43,300, amount paid on
subscriptions, P42,100 is made to appear as paid by Tabora and
P200 by his wife. Both Tabora and his wife were directors and
the latter was treasurer as well. In fact, to this day, the lands
remain inscribed in Tabora’s name. The defendant always
regarded Tabora as the owner of the lands. He dealt with Tabora
directly. Jose Ventura, president of the plaintiff corporation,
intervened only to sign the contract, Exhibit B, in behalf of the
plaintiff. Even the Philippine National Bank, mortgagee of the
four parcels of land, always treated Tabora as the owner of the
same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and
38641) were brought against Tabora in the Court of First
Instance of Manila and in both cases a writ of attachment
against the four parcels of land was issued. The Philippine
National Bank threatened to foreclose its mortgages. Tabora
approached the defendant Sandiko and succeeded in making
him sign Exhibits B, C, and D and in making him, among other
things, assume the payment of Tabora’s indebtedness to the
Philippine National Bank. The promissory note, Exhibit C, was
made payable to the plaintiff company so that it may not be
attached by Tabora’s creditors, two of whom had obtained writs
of attachment against the four parcels of land.
If the plaintiff corporation could not and did not acquire the four
parcels of land here involved, it follows that it did not possess
any resultant right to dispose of them by sale to the defendant,
Teodoro Sandiko.
Some of the members of this court are also of the opinion that
the transfer from Manuel Tabora to the Cagayan Fishing
Development Company, Inc., which transfer is evidenced by
Exhibit A, was subject to a condition precedent (condicion
suspensiva), namely, the payment of a mortgage debt of the
said Tabora to the Philippine National Bank, and that this
condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. (Art.
1114, Civil Code; Wise & Co. v. Kelly and Lim, 37 Phil., 696;
Manresa, vol. 8, p. 141.) However, having arrived at the
conclusion that the transfer by Manuel Tabora to the Cagayan
Fishing Development Company, Inc. was null because at the
time it was effected the corporation was non-existent, we deem
it unnecessary to discuss this point.
The decision of the lower court is accordingly affirmed, with
costs against the appellant. So ordered.
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ.,
concur.
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of
Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in
his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc.,respondents.
This is petition to set aside all the proceedings had in civil case
No. 381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and
Bradley P. Hall, and the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of incorporation of the Far
Eastern Lumber and Commercial Co., Inc., organized to engage
in a general lumber business to carry on as general contractors,
operators and managers, etc. Attached to the article was an
affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended
thereto.
(2) Immediately after the execution of said articles of
incorporation, the corporation proceeded to do business with
the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were
filed in the office of the Securities and Exchange Commissioner,
for the issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the articles of
incorporation by the aforesaid governmental office, the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman
and Ceferino S. Abella filed before the Court of First Instance of
Leyte the civil case numbered 381, entitled "Fred Brown et al. vs.
Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered
partnership; that they wished to have it dissolved because of
bitter dissension among the members, mismanagement and
fraud by the managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and
Bradley P. Hall, filed a motion to dismiss, contesting the court's
jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered
the dissolution of the company; and at the request of plaintiffs,
appointed of the properties thereof, upon the filing of a P20,000
bond.
(7) The defendants therein (petitioners herein) offered to file a
counter-bond for the discharge of the receiver, but the
respondent judge refused to accept the offer and to discharge
the receiver. Whereupon, the present special civil action was
instituted in this court. It is based upon two main propositions,
to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree
the dissolution of the company, because it being a de
facto corporation, dissolution thereof may only be ordered in
a quo warranto proceeding instituted in accordance with section
19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed.
All the parties are informed that the Securities and Exchange
Commission has not, so far, issued the corresponding certificate
of incorporation. All of them know, or sought to know, that the
personality of a corporation begins to exist only from the
moment such certificate is issued — not before (sec. 11,
Corporation Law). The complaining associates have not
represented to the others that they were incorporated any more
than the latter had made similar representations to them. And
as nobody was led to believe anything to his prejudice and
damage, the principle of estoppel does not apply. Obviously this
is not an instance requiring the enforcement of contracts with
the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that,
inasmuch as the Far Eastern Lumber and Commercial Co., is a de
facto corporation, section 19 of the Corporation Law applies,
and therefore the court had not jurisdiction to take cognizance
of said civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good
faith to be a corporation under this Act and its right to exercise
corporate powers shall not be inquired into collaterally in any
private suit to which the corporation may be a party, but such
inquiry may be had at the suit of the Insular Government on
information of the Attorney-General.
There are least two reasons why this section does not govern
the situation. Not having obtained the certificate of
incorporation, the Far Eastern Lumber and Commercial Co. —
even its stockholders — may not probably claim "in good faith"
to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that
it is the issuance of a certificate of incorporation by the Director
of the Bureau of Commerce and Industry which calls a
corporation into being. The immunity if collateral attack is
granted to corporations "claiming in good faith to be a
corporation under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an
evident attempt to comply with the law the claim to be a
corporation "under this act" could not be made "in good faith."
(Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This
is a litigation between stockholders of the alleged corporation,
for the purpose of obtaining its dissolution. Even the existence
of a de jure corporation may be terminated in a private suit for
its dissolution between stockholders, without the intervention
of the state.
There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does not
affect the court's jurisdiction, and is a matter for decision by the
judge, subject to review on appeal. Whkch brings us to one
principal reason why this petition may not prosper, namely: the
petitioners have their remedy by appealing the order of
dissolution at the proper time.
There is a secondary issue in connection with the appointment
of a receiver. But it must be admitted that receivership is proper
in proceedings for dissolution of a company or corporation, and
it was no error to reject the counter-bond, the court having
declared the dissolution. As to the amount of the bond to be
demanded of the receiver, much depends upon the discretion of
the trial court, which in this instance we do not believe has been
clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs.
The preliminary injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE LOS
SANTOS, Presiding Judge, RTC, Br. 58, Angeles City;
and ANTONIO ANDA, respondents.
This petition for certiorari seeks to annul and set aside the
decision of the Regional Trial Court, Branch 58, Angeles City
which ordered the Municipal Circuit Trial Court, Mabalacat and
Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of
jurisdiction.
The facts are undisputed. On December 19, 1995,
petitioner Reynaldo M. Lozano filed Civil Case No. 1214 for
damages against respondent Antonio Anda before the Municipal
Circuit Trial Court (MCTC), Mabalacat and Magalang,
Pampanga. Petitioner alleged that he was the president of the
Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc.
(KAMAJDA) while respondent Anda was the president of the
Samahang Angeles-Mabalacat Jeepney Operators' and Drivers'
Association, Inc. (SAMAJODA); in August 1995, upon the request
of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner
and private respondent agreed to consolidate their respective
associations and form the Unified Mabalacat-Angeles Jeepney
Operators' and Drivers' Association, Inc. (UMAJODA); petitioner
and private respondent also agreed to elect one set of officers
who shall be given the sole authority to collect the daily dues
from the members of the consolidated association; elections
were held on October 29, 1995 and both petitioner and private
respondent ran for president; petitioner won; private
respondent protested and, alleging fraud, refused to recognize
the results of the election; private respondent also refused to
abide by their agreement and continued collecting the dues
from the members of his association despite several demands to
desist. Petitioner was thus constrained to file the complaint to
restrain private respondent from collecting the dues and to
order him to pay damages in the amount of P25,000.00 and
attorney's fees of P500.00.[1]
Private respondent moved to dismiss the complaint for
lack of jurisdiction, claiming that jurisdiction was lodged with the
Securities and Exchange Commission (SEC). The MCTC denied
the motion on February 9, 1996.[2] It denied reconsideration on
March 8, 1996.[3]
Private respondent filed a petition for certiorari before the
Regional Trial Court, Branch 58, Angeles City.[4] The trial court
found the dispute to be intracorporate, hence, subject to the
jurisdiction of the SEC, and ordered the MCTC to dismiss Civil
Case No. 1214 accordingly.[5] It denied reconsideration on May
31, 1996.[6]
Hence this petition. Petitioner claims that:
"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
AND SERIOUS ERROR OF LAW IN CONCLUDING THAT THE
SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION
OVER A CASE OF DAMAGES BETWEEN HEADS/PRESIDENTS OF
TWO (2) ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC]
APPROVED AND REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION."[7]
The jurisdiction of the Securities and Exchange
Commission (SEC) is set forth in Section 5 of Presidential Decree
No. 902-A. Section 5 reads as follows:
"Section 5. x x x [T]he Securities and Exchange Commission [has]
original and exclusive jurisdiction to hear and decide cases
involving:
(a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners,
members of associations or organizations registered with the
Commission.
(b) Controversies arising out of intracorporate or partnership
relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members, or associates, respectively; and between such
corporation, partnership or association and the state insofar as
it concerns their individual franchise or right to exist as such
entity.
(c) Controversies in the election or appointment of directors,
trustees, officers or managers of such corporations, partnerships
or associations.
(d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where
the corporation, partnership or association possesses sufficient
property to cover all its debts but foresees the impossibility of
meeting them when they respect very fall due or in cases where
the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the management of a
Rehabilitation Receiver or Management Committee created
pursuant to this Decree."
The grant of jurisdiction to the SEC must be viewed in the light
of its nature and function under the law.[8] This jurisdiction is
determined by a concurrence of two elements: (1) the status or
relationship of the parties; and (2) the nature of the question
that is the subject of their controversy.[9]
The first element requires that the controversy must arise
out of intracorporate or partnership relations between and
among stockholders, members, or associates; between any or all
of them and the corporation, partnership or association of
which they are stockholders, members or associates,
respectively; and between such corporation, partnership or
association and the State in so far as it concerns their individual
franchises.[10] The second element requires that the dispute
among the parties be intrinsically connected with the regulation
of the corporation, partnership or association or deal with the
internal affairs of the corporation, partnership or
association.[11] After all, the principal function of the SEC is the
supervision and control of corporations, partnerships and
associations with the end in view that investments in these
entities may be encouraged and protected, and their activities
pursued for the promotion of economic development.[12]
There is no intracorporate nor partnership relation
between petitioner and private respondent. The controversy
between them arose out of their plan to consolidate their
respective jeepney drivers' and operators' associations into a
single common association. This unified association was,
however, still a proposal. It had not been approved by the SEC,
neither had its officers and members submitted their articles of
consolidation in accordance with Sections 78 and 79 of the
Corporation Code. Consolidation becomes effective not upon
mere agreement of the members but only upon issuance of the
certificate of consolidation by the SEC.[13] When the SEC, upon
processing and examining the articles of consolidation, is
satisfied that the consolidation of the corporations is not
inconsistent with the provisions of the Corporation Code and
existing laws, it issues a certificate of consolidation which makes
the reorganization official.[14] The new consolidated corporation
comes into existence and the constituent corporations dissolve
and cease to exist.[15]
The KAMAJDA and SAMAJODA to which petitioner and
private respondent belong are duly registered with the SEC, but
these associations are two separate entities. The dispute
between petitioner and private respondent is not within the
KAMAJDA nor the SAMAJODA. It is between members of
separate and distinct associations. Petitioner and private
respondent have no intracorporate relation much less do they
have an intracorporate dispute. The SEC therefore has no
jurisdiction over the complaint.
The doctrine of corporation by estoppel[16] advanced by
private respondent cannot override jurisdictional
requirements. Jurisdiction is fixed by law and is not subject to
the agreement of the parties.[17] It cannot be acquired through
or waived, enlarged or diminished by, any act or omission of the
parties, neither can it be conferred by the acquiescence of the
court.[18]
Corporation by estoppel is founded on principles of equity
and is designed to prevent injustice and unfairness.[19] It applies
when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third
persons. Where there is no third person involved and the
conflict arises only among those assuming the form of a
corporation, who therefore know that it has not been registered,
there is no corporation by estoppel.[20]
IN VIEW WHEREOF, the petition is granted and the
decision dated April 18, 1996 and the order dated May 31, 1996
of the Regional Trial Court, Branch 58, Angeles City are set
aside.The Municipal Circuit Trial Court of Mabalacat and
Magalang, Pampanga is ordered to proceed with dispatch in
resolving Civil Case No. 1214. No costs.
SO ORDERED.
Regalado, (Ch
SEVENTH DAY ADVENTIST V
SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN
PHILIPPINES v. NORTHEASTERN MINDANAO MISSION OF
SEVENTH DAY ADVENTIST, GR NO. 150416, 2006-07-21
Facts:
That we Felix Cosio
Felisa Cuysona... do hereby grant, convey and forever quit claim
by way of Donation or gift unto the South Philippine [Union]
Mission of Seventh Day Adventist Church of Bayugan, Esperanza,
Agusan, all the rights, title, interest, claim and demand both at
law and as well in... possession as in expectancy of in and to all
the place of land and portion situated in the Barrio of Bayugan,
Municipality of Esperanza, Province of Agusan, Philippines
The donation was allegedly accepted by one Liberato Rayos, an
elder of the Seventh Day Adventist Church, on behalf of the
donee.
Twenty-one years later, however, on February 28, 1980, the
same parcel of land was sold by the spouses Cosio to the
Seventh Day Adventist Church of Northeastern Mindanao
Mission (SDA-NEMM).
petitioners asserted ownership over the property. This was
opposed by respondents who argued that at the time of the
donation, SPUM-SDA Bayugan could not legally be a donee
because, not having been incorporated yet, it... had no juridical
personality.
Neither were petitioners members of the local church then,
hence, the donation could not have been made particularly to
them.
tr
After trial, the trial court rendered a decision[7] on November
20, 1992 upholding the sale in favor of respondents.
On appeal, the CA affirmed the RTC decision but deleted the
award of moral damages and attorney's fees.
Issues:
should SDA-NEMM's ownership of the lot covered by TCT No.
4468 be upheld?[9] We answer in the affirmative.
Ruling:
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person who
accepts it. The donation could not have been made in favor of
an entity yet inexistent at the time it was made. Nor could it
have been accepted... as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of
SDA members but a supposed SPUM-SDA Bayugan (the local
church) which, at the time, had neither juridical personality nor
capacity to accept such gift.
Declaring themselves a de facto corporation, petitioners allege
that they should benefit from the donation.
But there are stringent requirements before one can qualify as a
de facto corporation:
(a) the existence of a valid law under which it may be
incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.
there is no proof that there was an attempt to incorporate at
that time.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a
de facto corporation.
Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they
even attempt to... organize[14] to comply with legal
requirements.
Corporate existence begins only from the moment a certificate
of incorporation is issued. No such certificate was ever issued to
petitioners or their supposed predecessor-in-interest at the time
of the donation. Petitioners obviously could not have claimed
succession to an... entity that never came to exist.
were not even members of the local church then, thus, they
could not even claim that the donation was particularly for
them.
Principles:
"The de facto doctrine thus effects a compromise between two
conflicting public interest[s]-the one opposed to an
unauthorized assumption of corporate privileges; the other in
favor of doing justice to the parties and of establishing a general
assurance... of security in business dealing with
corporations."[17]
Generally, the doctrine exists to protect the public dealing with
supposed corporate entities, not to favor the defective or
non-existent corporation.

PRISCILO B. PAZ,*Petitioner, v. NEW INTERNATIONAL
ENVIRONMENTAL UNIVERSALITY, INC., Respondent.
Assailed in this petition for review on certiorari1 are the
Decision2 dated January 31, 2012 and the Resolution3 dated
October 2, 2012 of the Court of Appeals (CA) in CA-G.R. CV No.
00903-MIN, which affirmed the Decision4 dated May 19, 2006 of
the Regional Trial Court of Davao City, Branch 33 (RTC) in Civil
Case No. 29,292-2002, declaring petitioner Captain Priscilo B.
Paz (petitioner) liable for breach of contract.
The Facts
On March 1, 2000, petitioner, as the officer-in-charge of the
Aircraft Hangar at the Davao International Airport, Davao City,
entered into a Memorandum of Agreement5 (MOA) with Captain
Allan J. Clarke (Capt. Clarke), President of International
Environmental University, whereby for a period of four (4) years,
unless pre-terminated by both parties with six (6) months
advance notice, the former shall allow the latter to use the
aircraft hangar space at the said Airport "exclusively for
company aircraft/helicopter."6 Said hangar space was previously
leased to Liberty Aviation Corporation, which assigned the same
to petitioner.7
On August 19, 2000, petitioner complained in a
letter8 addressed to "MR. ALLAN J. CLARKE, International
Environmental Universality, Inc. x x x" that the hangar space was
being used "for trucks and equipment, vehicles maintenance
and fabrication," instead of for "company helicopter/aircraft"
only, and thereby threatened to cancel the MOA if the "welding,
grinding, and fabrication jobs" were not stopped immediately.9
On January 16, 2001, petitioner sent another letter10 to "MR.
ALLAN J. CLARKE, International Environmental Universality, Inc. x
x x," reiterating that the hangar space "must be for aircraft use
only," and that he will terminate the MOA due to the safety of
the aircrafts parked nearby. He further offered a vacant space
along the airport road that was available and suitable for Capt.
Clarke's operations.11
On July 19, 2002, petitioner sent a third letter,12 this time,
addressed to "MR. ALLAN JOSEPH CLARKE, CEO, New
International Environmental University, Inc. x x x," demanding
that the latter vacate the premises due to the damage caused by
an Isuzu van driven by its employee to the left wing of an aircraft
parked inside the hangar space, which Capt. Clarke had
supposedly promised to buy, but did not.13
On July 23, 2002, petitioner sent a final letter14 addressed to
"MR. ALLAN J. CLARKE, Chairman, CEO, New International
Environmental University, Inc. x x x," strongly demanding the
latter to immediately vacate the hangar space. He further
informed Capt. Clarke that the company will "apply for
immediate electrical disconnection with the Davao Light and
Power Company (DLPC)[,] so as to compel [the latter] to desist
from continuing with [the] works" thereon.15
On September 4, 2002, respondent New International
Environmental Universality, Inc.16 (respondent) filed a
complaint17 against petitioner for breach of contract before the
RTC, docketed as Civil Case No. 29, 292-2002,18 claiming that: (a)
petitioner had disconnected its electric and telephone lines; (b)
upon petitioner's instruction, security guards prevented its
employees from entering the leased premises by blocking the
hangar space with barbed wire; and (c) petitioner violated the
terms of the MOA when he took over the hangar space without
giving respondent the requisite six (6)-month advance notice of
termination.19
In his defense, petitioner alleged, among others, that: (a)
respondent had no cause of action against him as the MOA was
executed between him and Capt. Clarke in the latter's personal
capacity; (b) there was no need to wait for the expiration of the
MOA because Capt. Clarke performed highly risky works in the
leased premises that endangered other aircrafts within the
vicinity; and (c) the six (6)-month advance notice of termination
was already given in the letters he sent to Capt. Clarke.20
On March 25, 2003, the RTC issued a Writ of Preliminary
Injunction21 ordering petitioner to: (a) immediately remove all
his aircrafts parked within the leased premises; (b) allow entry
of respondent by removing the steel gate installed thereat; and
(c) desist and refrain from committing further acts of
dispossession and/or interference in respondent's occupation of
the hangar space.
For failure of petitioner to comply with the foregoing writ,
respondent filed on October 24, 2003 a petition for indirect
contempt22 before the RTC, docketed as Civil Case No.
30,030-2003, which was tried jointly with Civil Case No. 29,
292-2002.23
The RTC Ruling
After due trial, the RTC rendered a Decision24 dated May 19,
2006 finding petioner: (a) guilty of indirect contempt for
contumaciously disregarding its Order25 dated March 6, 2003, by
not allowing respondent to possess occupy the leased premises
pending final decision in the main case; and (b) liable for breach
of contract for illegally terminating the MOA even before the
expiration of the term thereof.26 He was, thus, ordered to pay a
fine of P5,000.00, and to pay respondent nominal damages of
P100,000.00 and attorney's fees of P50,000.00 with legal
interest, and costs of suit.27
On the challenge to respondent's juridical personality, the RTC
quoted the Order28 dated April 11, 2005 of the SEC explaining
that respondent was issued a Certificate of Incorporation on
September 3, 2001 as New International Environmental
Universality, Inc. but that, subsequently, when it amended its
Articles of Incorporation on November 14, 2001 and July 11,
2002, the SEC Extension Office in Davao City erroneously used
the name New International Environmental University, Inc.29 The
latter name was used by respondent when it filed its amended
complaint on September 11, 2002 and the petition for indirect
contempt against petitioner on October 24, 2003 believing that
it was allowed to do so, as it was only on April 11, 2005 when
the SEC directed it to revert to its correct name.30
The RTC further declared that the MOA, which was "made and
executed by and between CAPT. [PRISCILO] B. PAZ,
Officer-In-Charge of Aircraft Hangar at Davao International
Airport, Davao City, Philippines, hereinafter called as FIRST
PARTY [a]nd CAPT. ALLAN J. CLARKE[,] President of
INTERNATIONAL ENVIRONMENTAL UNIVERSITY with office
address at LIBERTY AVIATION HANGAR, Davao International
Airport, Davao City, Philippines, hereinafter called as SECOND
PARTY,"31 was executed by the parties not only in their personal
capacities but also in representation of their respective
corporations or entities.32
On the issue of the violation of the terms of the MOA, the RTC
found respondent to have been effectively evicted from the
leased premises between July and August of 2002, or long
before the expiration of the term thereof in 2004, when
petitioner: (a) placed a gate/fence that prevented ingress to and
egress from the leased premises; (b) parked a plane inside and
outside the leased premises; (c) disconnected the electrical and
telephone connections of respondent; and (d) locked
respondent's employees out.33 Despite the service of the
injunctive writ upon petitioner, respondent was not allowed to
possess and occupy the leased premises, as in fact, the trial
court even had to order on March 8, 2004 the inventory of the
items locked inside the bodega of said premises that was kept
off-limits to respondent. Hence, petitioner was declared guilty of
indirect contempt.34
Aggrieved, petitioner elevated his case on appeal before the CA,
arguing that the trial court should have dismissed outright the
cases against him for failure of respondent to satisfy the
essential requisites of being a party to an action, i.e., legal
personality, legal capacity to sue or be sued, and real interest in
the subject matter of the action.35
The CA Ruling
Finding that the errors ascribed by petitioner to the trial court
only touched the civil action for breach of contract, the
appellate court resolved the appeal against him in a
Decision36 dated January 31, 2012, and affirmed the RTC's
finding of petitioner's liability for breach of contract.37
The CA ruled that, while there was no corporate entity at the
time of the execution of the MOA on March 1, 2000 when Capt.
Clarke signed as "President of International Environmental
University," petitioner is nonetheless estopped from denying
that he had contracted with respondent as a corporation, having
recognized the latter as the "Second Party" in the MOA that "will
use the hangar space exclusively
for company aircraft/helicopter."38 Petitioner was likewise
found to have issued checks to respondent from May 3, 2000 to
October 13, 2000, which belied his claim of contracting with
Capt. Clarke in the latter's personal capacity.39
Petitioner moved for the reconsideration40 of the foregoing
Decision, raising as an additional issue the death41 of Capt.
Clarke which allegedly warranted the dismissal of the
case.42 However, the motion was denied in a Resolution43 dated
October 2, 2012 where the CA held that Capt. Clarke was merely
an agent of respondent, who is the real party in the case. Thus,
Capt. Clarke's death extinguished only the agency between him
and respondent, not the appeal against petitioner.44
Undaunted, petitioner is now before the Court via the instant
petition,45 claiming that: (a) the CA erred in not settling his
appeal for both the breach of contract and indirect contempt
cases in a single proceeding and, consequently, the review of
said cases before the Court should be consolidated,46 and (b) the
CA should have dismissed the cases against him for (1) lack of
jurisdiction of the trial court in view of the failure to implead
Capt. Clarke as an indispensable party;47 (2) lack of legal capacity
and personality on the part of respondent;48 and (3) lack of
factual and legal bases for the assailed RTC Decision.49
The Court's Ruling
The petition lacks merit.
First, on the matter of the consolidation50 of the instant case
with G.R. No. 202826 entitled "Priscilo B. Paz v. New
International Environmental University,'' the petition for review
of the portion of the RTC Decision finding petitioner guilty of
indirect contempt,51 the Court had earlier denied said motion in
a Resolution52 dated July 24, 2013 on the ground that G.R. No. a business relationship gone sour. In his third letter dated July
202826 had already been denied53 with finality.54 Thus, any 19, 2002, petitioner lamented the fact that Capt. Clarke's alleged
further elucidation on the issue would be a mere superfluity. promise to buy an aircraft had not materialized.67 He likewise
insinuated that Capt. Clarke's real motive in staying in the leased
Second, whether or not Capt. Clarke should have been premises was the acquisition of petitioner's right to possess and
impleaded as an indispensable party was correctly resolved by use the hangar space.68 Be that as it may, it is settled that courts
the CA which held that the former was merely an agent of have no power to relieve parties from obligations they
respondent.55 While Capt. Clarke's name and signature appeared voluntarily assumed, simply because their contracts turn out to
on the MOA, his participation was, nonetheless, limited to being be disastrous deals or unwise investments.69
a representative of respondent. As a mere representative, Capt.
Clarke acquired no rights whatsoever, nor did he incur any The lower courts, therefore, did not err in finding petitioner
liabilities, arising from the contract between petitioner and liable for breach of contract for effectively evicting respondent
respondent. Therefore, he was not an indispensable party to the from the leased premises even before the expiration of the term
case at bar.56 of the lease. The Court reiterates with approval the ratiocination
of the RTC that, if it were true that respondent was violating the
It should be emphasized, as it has been time and again, that this terms and conditions of the lease, "[petitioner] should have
Court is not a trier of facts, and is thus not duty-bound to gone to court to make the [former] refrain from its 'illegal'
analyze again and weigh the evidence introduced in and activities or seek rescission of the [MOA], rather than taking the
considered by the tribunals.57When supported by substantial law into his own hands."70
evidence, the findings of fact by the CA are conclusive and
binding on the parties and are not reviewable by this Court, WHEREFORE, the petition is DENIED. The Decision dated
unless the case falls under any of the exceptions,58 none of January 31, 2012 and the Resolution dated October 2, 2012 of
which was established herein. the Court of Appeals in CA-G.R. CV No. 00903-MIN are
hereby AFFIRMED.
The CA had correctly pointed out that, from the very language
itself of the MOA entered into by petitioner whereby he SO ORDERED.
obligated himself to allow the use of the hangar space
"for company aircraft/helicopter," petitioner cannot deny that
he contracted with respondent.59 Petitioner further
acknowledged this fact in his final letter dated July 23, 2002,
where he reiterated and strongly demanded the former to
immediately vacate the hangar space his "company is
occupying/utilizing."60
Section 2161 of the Corporation Code62 explicitly provides that
one who assumes an obligation to an ostensible corporation, as
such, cannot resist performance thereof on the ground that
there was in fact no corporation. Clearly, petitioner is bound by
his obligation under the MOA not only on estoppel but by
express provision of law. As aptly raised by respondent in its
Comment63 to the instant petition, it is futile to insist that
petitioner issued the receipts for rental payments in
respondent's name and not with Capt. Clarke's, whom petitioner
allegedly contracted in the latter's personal capacity, only
because it was upon the instruction of an employee.64 Indeed, it
is disputably presumed that a person takes ordinary care of his
concerns,65 and that all private transactions have been fair and
regular.66 Hence, it is assumed that petitioner, who is a pilot,
knew what he was doing with respect to his business with
respondent.
Petitioner's pleadings, however, abound with clear indications of
ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS
ALBANO, LILY REYES, JANET BAY, JESUS R. GALANG, AND
RANDY HAGOS, Petitioners,
vs.
FRANCISCO R. CO, JR., Respondent.
To warrant the substituted service of the summons and copy of
the complaint, the serving officer must first attempt to effect
the same upon the defendant in person. Only after the attempt
at personal service has become futile or impossible within a
reasonable time may the officer resort to substituted service.
The Case
Petitioners – defendants in a suit for libel brought by respondent
– appeal the decision promulgated on March 8, 20021 and the
resolution promulgated on January 13, 2003,2 whereby the
Court of Appeals (CA) respectively dismissed their petition for
certiorari, prohibition and mandamus and denied their motion
for reconsideration. Thereby, the CA upheld the order the
Regional Trial Court (RTC), Branch 51, in Manila had issued on
March 12, 2001 denying their motion to dismiss because the
substituted service of the summons and copies of the complaint
on each of them had been valid and effective.3
Antecedents
On July 3, 2000, respondent, a retired police officer assigned at
the Western Police District in Manila, sued Abante Tonite, a
daily tabloid of general circulation; its Publisher Allen A.
Macasaet; its Managing Director Nicolas V. Quijano; its
Circulation Manager Isaias Albano; its Editors Janet Bay, Jesus R.
Galang and Randy Hagos; and its Columnist/Reporter Lily Reyes
(petitioners), claiming damages because of an allegedly libelous
article petitioners published in the June 6, 2000 issue of Abante
Tonite. The suit, docketed as Civil Case No. 00-97907, was
raffled to Branch 51 of the RTC, which in due course issued
summons to be served on each defendant, including Abante
Tonite, at their business address at Monica Publishing
Corporation, 301-305 3rd Floor, BF Condominium Building,
Solana Street corner A. Soriano Street, Intramuros, Manila.4
In the morning of September 18, 2000, RTC Sheriff Raul Medina
proceeded to the stated address to effect the personal service of
the summons on the defendants. But his efforts to personally
serve each defendant in the address were futile because the
defendants were then out of the office and unavailable. He
returned in the afternoon of that day to make a second attempt
at serving the summons, but he was informed that petitioners
were still out of the office. He decided to resort to substituted
service of the summons, and explained why in his sheriff’s the summons personally on each of them in accordance with
return dated September 22, 2005,5 to wit: Section 6 and Section 7, Rule 14 of the Rules of Court. They
further moved to drop Abante Tonite as a defendant by virtue of
SHERIFF’S RETURN its being neither a natural nor a juridical person that could be
impleaded as a party in a civil action.
This is to certify that on September 18, 2000, I caused the
service of summons together with copies of complaint and its At the hearing of petitioners’ motion to dismiss, Medina
annexes attached thereto, upon the following: testified that he had gone to the office address of petitioners in
the morning of September 18, 2000 to personally serve the
summons on each defendant; that petitioners were out of the
1. Defendant Allen A. Macasaet, President/Publisher of
office at the time; that he had returned in the afternoon of the
defendant AbanteTonite, at Monica Publishing Corporation,
same day to again attempt to serve on each defendant
Rooms 301-305 3rd Floor, BF Condominium Building, Solana
personally but his attempt had still proved futile because all of
corner A. Soriano Streets, Intramuros, Manila, thru his secretary
petitioners were still out of the office; that some competent
Lu-Ann Quijano, a person of sufficient age and discretion
persons working in petitioners’ office had informed him that
working therein, who signed to acknowledge receipt thereof.
Macasaet and Quijano were always out and unavailable, and
That effort (sic) to serve the said summons personally upon said
that Albano, Bay, Galang, Hagos and Reyes were always out
defendant were made, but the same were ineffectual and
roving to gather news; and that he had then resorted to
unavailing on the ground that per information of Ms. Quijano
substituted service upon realizing the impossibility of his finding
said defendant is always out and not available, thus, substituted
petitioners in person within a reasonable time.
service was applied;
On March 12, 2001, the RTC denied the motion to dismiss, and
2. Defendant Nicolas V. Quijano, at the same address, thru his
directed petitioners to file their answers to the complaint within
wife Lu-Ann Quijano, who signed to acknowledge receipt
the remaining period allowed by the Rules of Court,6 relevantly
thereof. That effort (sic) to serve the said summons personally
stating:
upon said defendant were made, but the same were ineffectual
and unavailing on the ground that per information of (sic) his
wife said defendant is always out and not available, thus, Records show that the summonses were served upon Allen A.
substituted service was applied; Macasaet, President/Publisher of defendant AbanteTonite,
through LuAnn Quijano; upon defendants Isaias Albano, Janet
Bay, Jesus R. Galang, Randy Hagos and Lily Reyes, through Rene
3. Defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy
Esleta, Editorial Assistant of defendant Abante Tonite (p. 12,
Hagos and Lily Reyes, at the same address, thru Rene Esleta,
records). It is apparent in the Sheriff’s Return that on several
Editorial Assistant of defendant AbanteTonite, a person of
occasions, efforts to served (sic) the summons personally upon
sufficient age and discretion working therein who signed to
all the defendants were ineffectual as they were always out and
acknowledge receipt thereof. That effort (sic) to serve the said
unavailable, so the Sheriff served the summons by substituted
summons personally upon said defendants were made, but the
service.
same were ineffectual and unavailing on the ground that per
information of (sic) Mr. Esleta said defendants is (sic) always
roving outside and gathering news, thus, substituted service was Considering that summonses cannot be served within a
applied. reasonable time to the persons of all the defendants, hence
substituted service of summonses was validly applied. Secretary
of the President who is duly authorized to receive such
Original copy of summons is therefore, respectfully returned
document, the wife of the defendant and the Editorial Assistant
duly served.
of the defendant, were considered competent persons with
sufficient discretion to realize the importance of the legal papers
Manila, September 22, 2000. served upon them and to relay the same to the defendants
named therein (Sec. 7, Rule 14, 1997 Rules of Civil Procedure).
On October 3, 2000, petitioners moved for the dismissal of the
complaint through counsel’s special appearance in their behalf, WHEREFORE, in view of the foregoing, the Motion to Dismiss is
alleging lack of jurisdiction over their persons because of the hereby DENIED for lack of merit..
invalid and ineffectual substituted service of summons. They
contended that the sheriff had made no prior attempt to serve
Accordingly, defendants are directed to file their Answers to the
complaint within the period still open to them, pursuant to the
rules.
SO ORDERED.
Petitioners filed a motion for reconsideration, asserting that the
sheriff had immediately resorted to substituted service of the
summons upon being informed that they were not around to
personally receive the summons, and that Abante Tonite, being
neither a natural nor a juridical person, could not be made a
party in the action.
On June 29, 2001, the RTC denied petitioners’ motion for
reconsideration.7 It stated in respect of the service of summons,
as follows:
The allegations of the defendants that the Sheriff immediately
resorted to substituted service of summons upon them when he
was informed that they were not around to personally receive
the same is untenable. During the hearing of the herein motion,
Sheriff Raul Medina of this Branch of the Court testified that on
September 18, 2000 in the morning, he went to the office
address of the defendants to personally serve summons upon
them but they were out. So he went back to serve said
summons upon the defendants in the afternoon of the same day,
but then again he was informed that the defendants were out
and unavailable, and that they were always out because they
were roving around to gather news. Because of that information
and because of the nature of the work of the defendants that
they are always on field, so the sheriff resorted to substituted
service of summons. There was substantial compliance with the
rules, considering the difficulty to serve the summons personally
to them because of the nature of their job which compels them
to be always out and unavailable. Additional matters regarding
the service of summons upon defendants were sufficiently
discussed in the Order of this Court dated March 12, 2001.
Regarding the impleading of Abante Tonite as defendant, the
RTC held, viz:
"Abante Tonite" is a daily tabloid of general circulation. People
all over the country could buy a copy of "Abante Tonite" and
read it, hence, it is for public consumption. The persons who
organized said publication obviously derived profit from it. The
information written on the said newspaper will affect the person,
natural as well as juridical, who was stated or implicated in the
news. All of these facts imply that "Abante Tonite" falls within
the provision of Art. 44 (2 or 3), New Civil Code. Assuming
arguendo that "Abante Tonite" is not registered with the
Securities and Exchange Commission, it is deemed a corporation
by estoppels considering that it possesses attributes of a
juridical person, otherwise it cannot be held liable for damages
and injuries it may inflict to other persons.
Undaunted, petitioners brought a petition for certiorari,
prohibition, mandamusin the CA to nullify the orders of the RTC
dated March 12, 2001 and June 29, 2001.
Ruling of the CA
On March 8, 2002, the CA promulgated its questioned
decision,8 dismissing the petition for certiorari, prohibition,
mandamus, to wit:
We find petitioners’ argument without merit. The rule is that
certiorari will prosper only if there is a showing of grave abuse of
discretion or an act without or in excess of jurisdiction
committed by the respondent Judge. A judicious reading of the
questioned orders of respondent Judge would show that the
same were not issued in a capricious or whimsical exercise of
judgment. There are factual bases and legal justification for the
assailed orders. From the Return, the sheriff certified that
"effort to serve the summons personally xxx were made, but the
same were ineffectual and unavailing xxx.
and upholding the trial court’s finding that there was a
substantial compliance with the rules that allowed the
substituted service.
Furthermore, the CA ruled:
Anent the issue raised by petitioners that "Abante Tonite is
neither a natural or juridical person who may be a party in a civil
case," and therefore the case against it must be dismissed
and/or dropped, is untenable.
The respondent Judge, in denying petitioners’ motion for
reconsideration, held that:
xxxx
Abante Tonite’s newspapers are circulated nationwide, showing
ostensibly its being a corporate entity, thus the doctrine of
corporation by estoppel may appropriately apply.
An unincorporated association, which represents itself to be a
corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relies in good
faith on such representation.
There being no grave abuse of discretion committed by the
respondent Judge in the exercise of his jurisdiction, the relief of
prohibition is also unavailable.
WHEREFORE, the instant petition is DENIED. The assailed Orders
of respondent Judge are AFFIRMED.
SO ORDERED.9
On January 13, 2003, the CA denied petitioners’ motion for
reconsideration.10
Issues
Petitioners hereby submit that:
1. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN
HOLDING THAT THE TRIAL COURT ACQUIRED JURISDICTION
OVER HEREIN PETITIONERS.
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR BY
SUSTAINING THE INCLUSION OF ABANTE TONITE AS PARTY IN
THE INSTANT CASE.11
Ruling
The petition for review lacks merit.
Jurisdiction over the person, or jurisdiction in personam –the
power of the court to render a personal judgment or to subject
the parties in a particular action to the judgment and other
rulings rendered in the action – is an element of due process
that is essential in all actions, civil as well as criminal, except in
actions in rem or quasi in rem. Jurisdiction over the defendantin
an action in rem or quasi in rem is not required, and the court
acquires jurisdiction over an actionas long as it acquires
jurisdiction over the resthat is thesubject matter of the action.
The purpose of summons in such action is not the acquisition of
jurisdiction over the defendant but mainly to satisfy the
constitutional requirement of due process.12
The distinctions that need to be perceived between an action in
personam, on the one hand, and an action inrem or quasi in rem,
on the other hand, are aptly delineated in Domagas v.
Jensen,13 thusly:
The settled rule is that the aim and object of an action
determine its character. Whether a proceeding is in rem, or in
personam, or quasi in rem for that matter, is determined by its
nature and purpose, and by these only. A proceeding in
personam is a proceeding to enforce personal rights and
obligations brought against the person and is based on the
jurisdiction of the person, although it may involve his right to, or
the exercise of ownership of, specific property, or seek to
compel him to control or dispose of it in accordance with the
mandate of the court. The purpose of a proceeding in personam
is to impose, through the judgment of a court, some
responsibility or liability directly upon the person of the
defendant. Of this character are suits to compel a defendant to
specifically perform some act or actions to fasten a pecuniary
liability on him. An action in personam is said to be one which
has for its object a judgment against the person, as distinguished
from a judgment against the property to determine its state. It
has been held that an action in personam is a proceeding to
enforce personal rights or obligations; such action is brought
against the person. As far as suits for injunctive relief are
concerned, it is well-settled that it is an injunctive act in
personam. In Combs v. Combs, the appellate court held that
proceedings to enforce personal rights and obligations and in
which personal judgments are rendered adjusting the rights and
obligations between the affected parties is in personam. Actions
for recovery of real property are in personam.
On the other hand, a proceeding quasi in rem is one brought
against persons seeking to subject the property of such persons
to the discharge of the claims assailed. In an action quasi in rem,
an individual is named as defendant and the purpose of the
proceeding is to subject his interests therein to the obligation or
loan burdening the property. Actions quasi in rem deal with the
status, ownership or liability of a particular property but which
are intended to operate on these questions only as between the
particular parties to the proceedings and not to ascertain or cut
off the rights or interests of all possible claimants. The
judgments therein are binding only upon the parties who joined
in the action.
As a rule, Philippine courts cannot try any case against a
defendant who does not reside and is not found in the
Philippines because of the impossibility of acquiring jurisdiction
over his person unless he voluntarily appears in court; but when
the case is an action in rem or quasi in rem enumerated in
Section 15, Rule 14 of the Rules of Court, Philippine courts have
jurisdiction to hear and decide the case because they have
jurisdiction over the res, and jurisdiction over the person of the
non-resident defendant is not essential. In the latter instance,
extraterritorial service of summons can be made upon the
defendant, and such extraterritorial service of summons is not
for the purpose of vesting the court with jurisdiction, but for the
purpose of complying with the requirements of fair play or due
process, so that the defendant will be informed of the pendency
of the action against him and the possibility that property in the
Philippines belonging to him or in which he has an interest may
be subjected to a judgment in favor of the plaintiff, and he can
thereby take steps to protect his interest if he is so minded. On
the other hand, when the defendant in an action in personam
does not reside and is not found in the Philippines, our courts
cannot try the case against him because of the impossibility of
acquiring jurisdiction over his person unless he voluntarily
appears in court.14
As the initiating party, the plaintiff in a civil action voluntarily
submits himself to the jurisdiction of the court by the act of
filing the initiatory pleading. As to the defendant, the court
acquires jurisdiction over his person either by the proper service
of the summons, or by a voluntary appearance in the action.15
Upon the filing of the complaint and the payment of the
requisite legal fees, the clerk of court forthwith issues the
corresponding summons to the defendant.16 The summons is
directed to the defendant and signed by the clerk of court under
seal. It contains the name of the court and the names of the
parties to the action; a direction that the defendant answers
within the time fixed by the Rules of Court; and a notice that
unless the defendant so answers, the plaintiff will take judgment
by default and may be granted the relief applied for.17 To be
attached to the original copy of the summons and all copies
thereof is a copy of the complaint (and its attachments, if any)
and the order, if any, for the appointment of a guardian ad
litem.18
The significance of the proper service of the summons on the
defendant in an action in personam cannot be overemphasized.
The service of the summons fulfills two fundamental objectives,
namely: (a) to vest in the court jurisdiction over the person of
the defendant; and (b) to afford to the defendant the
opportunity to be heard on the claim brought against him.19 As
to the former, when jurisdiction in personam is not acquired in a
civil action through the proper service of the summons or upon
a valid waiver of such proper service, the ensuing trial and
judgment are void.20 If the defendant knowingly does an act
inconsistent with the right to object to the lack of personal
jurisdiction as to him, like voluntarily appearing in the action, he
is deemed to have submitted himself to the jurisdiction of the
court.21 As to the latter, the essence of due process lies in the
reasonable opportunity to be heard and to submit any evidence
the defendant may have in support of his defense. With the
proper service of the summons being intended to afford to him
the opportunity to be heard on the claim against him, he may
also waive the process.21 In other words, compliance with the
rules regarding the service of the summons is as much an issue
of due process as it is of jurisdiction.23
Under the Rules of Court, the service of the summons should
firstly be effected on the defendant himself whenever
practicable. Such personal service consists either in handing a
copy of the summons to the defendant in person, or, if the
defendant refuses to receive and sign for it, in tendering it to
him.24 The rule on personal service is to be rigidly enforced in
order to ensure the realization of the two fundamental
objectives earlier mentioned. If, for justifiable reasons, the
defendant cannot be served in person within a reasonable time,
the service of the summons may then be effected either (a) by
leaving a copy of the summons at his residence with some
person of suitable age and discretion then residing therein, or (b)
by leaving the copy at his office or regular place of business with
some competent person in charge thereof.25 The latter mode of
service is known as substituted service because the service of
the summons on the defendant is made through his substitute.
It is no longer debatable that the statutory requirements of
substituted service must be followed strictly, faithfully and fully,
and any substituted service other than that authorized by
statute is considered ineffective.26 This is because substituted
service, being in derogation of the usual method of service, is
extraordinary in character and may be used only as prescribed
and in the circumstances authorized by statute.27 Only when the
defendant cannot be served personally within a reasonable time
may substituted service be resorted to. Hence, the impossibility
of prompt personal service should be shown by stating the
efforts made to find the defendant himself and the fact that
such efforts failed, which statement should be found in the
proof of service or sheriff’s return.28 Nonetheless, the requisite
showing of the impossibility of prompt personal service as basis
for resorting to substituted service may be waived by the
defendant either expressly or impliedly.29
There is no question that Sheriff Medina twice attempted to
serve the summons upon each of petitioners in person at their
office address, the first in the morning of September 18, 2000
and the second in the afternoon of the same date. Each attempt
failed because Macasaet and Quijano were "always out and not
available" and the other petitioners were "always roving outside
and gathering news." After Medina learned from those present
in the office address on his second attempt that there was no
likelihood of any of petitioners going to the office during the
business hours of that or any other day, he concluded that
further attempts to serve them in person within a reasonable
time would be futile. The circumstances fully warranted his
conclusion. He was not expected or required as the serving
officer to effect personal service by all means and at all times, Also, Abante Tonite according to the officers is not incorporated
considering that he was expressly authorized to resort to so it should bedropped as a party to the suit.May Abante Tonite
substituted service should he be unable to effect the personal be sued even if it is not incorporated?YES. The
service within a reasonable time. In that regard, what was a non-incorporation of AbanteTonite was of no consequence for,
reasonable time was dependent on the circumstances obtaining. otherwise, anyonewho suffers damage from the publication of
While we are strict in insisting on personal service on the the articles in the pages of its tabloids would be leftwithout
defendant, we do not cling to such strictness should the recourse.Corporation by estoppel results when a corporation
circumstances already justify substituted service instead. It is the represented itself to the reading publicas such despite its not
spirit of the procedural rules, not their letter, that governs.30 being incorporated. It is founded on principles of equity and is
designed toprevent injustice and unfairness.
In reality, petitioners’ insistence on personal service by the
serving officer was demonstrably superfluous. They had actually
received the summonses served through their substitutes, as
borne out by their filing of several pleadings in the RTC,
including an answer with compulsory counterclaim ad cautelam
and a pre-trial brief ad cautelam. They had also availed
themselves of the modes of discovery available under the Rules
of Court. Such acts evinced their voluntary appearance in the
action.

Nor can we sustain petitioners’ contention that Abante Tonite

could not be sued as a defendant due to its not being either a
natural or a juridical person. In rejecting their contention, the CA
categorized Abante Tonite as a corporation by estoppel as the
result of its having represented itself to the reading public as a
corporation despite its not being incorporated. Thereby, the CA
concluded that the RTC did not gravely abuse its discretion in
holding that the non-incorporation of Abante Tonite with the
Securities and Exchange Commission was of no consequence, for,
otherwise, whoever of the public who would suffer any damage
from the publication of articles in the pages of its tabloids would
be left without recourse. We cannot disagree with the CA,
considering that the editorial box of the daily tabloid disclosed
that basis, nothing in the box indicated that Monica Publishing
Corporation had owned Abante Tonite.

WHEREFORE, the Court AFFIRMS the decision promulgated on

March 8, 2002; and ORDERS petitioners to pay the costs of suit.

SO ORDERED.

MACASAET vs. FRANCISCO R. CO, JR.G.R. No. 156759, June 5,

2013DID YOU KNOW THAT ABANTE TONITE IS NOT
INCORPORATED?A retired police officer sued Abante Tonite, its
publisher Macasaet and other officers. Sherifftried to serve the
summons but all the officers/defendants were out. Sheriff
resorted to substitutedservice.The officers of Abante Tonite
moved for the dismissal of the case on the ground of lack
ofjurisdiction over their persons. They insisted that the
summons should have been served personallyon each of them.