[G.R. No. 102965. January 21, 1999.] JAMES REBURIANO and URBANO REBURIANO, petitioners, vs.
course of execution proceedings prejudicial to the rights of a party. These instances, rare though they
HONORABLE COURT OF APPEALS and PEPSI COLA BOTTLING COMPANY OF THE PHILIPPINES,
INC., respondents.
SYNOPSIS
During the pendency of its civil case against petitioners, private respondent shortened its
term of existence to July 8, 1983. The Regional Trial Court was not informed of this fact and of the
SEC's approval of private respondent's Amended Articles of Incorporation. On June 1, 1987, the RTC
rendered a decision in favor of private respondent. Private respondent appealed to the Court of
Appeals seeking a modification of a portion of the trial court's decision and subsequently obtained a
favorable decision. On February 5, 1991, the trial court issued a writ of execution. Petitioners filed a
Motion to Quash Writ of Execution claiming that there was a change in the situation of the parties.
Petitioners raised the question of capacity of private respondent to sue and be sued. They opined that
the change in the situation of the parties renders the execution of the decision inequitable or
impossible. According to petitioners, they refused to execute the judgment since there is no existing
corporation to which they are indebted. The trial court denied petitioners' motion to quash. Petitioners
appealed but private respondent moved to dismiss the appeal on the ground that the trial court's order
denying petitioners' motion to quash writ of execution was not appealable. The trial court, however,
denied private respondent's motion. The Court of Appeals, in its Resolution, dismissed petitioners'
appeal. Petitioners moved for reconsideration, but the same was denied. Hence, this petition.
As a general rule, no appeal lie from the order of the trial court denying petitioners' Motion
to Quash Writ of Execution. There are exceptions, but the instant case does not fall within any of such
exceptions. The change contemplated by the exception is one which occurred subsequent to the
judgment of the trial court. Here the change in the status of private respondent occurred prior to the
rendition of judgment by the trial court. The appellate court likewise correctly denied due course to
the appeal. Parties cannot raise for the first time on appeal from a denial of a Motion to Quash a Writ
of Execution issues which they could have raised but never did during the trial and even on appeal from
the decision of the trial court.
If the question of private respondent's capacity to sue can be raised for the first time in this
case, the Court held that there is no reason why the suit filed by private respondent should not be
allowed to proceed to execution. The law specifically allows a trustee to manage the affairs of the
corporation in liquidation. In addition, Section 145 of the Corporation Law safeguards the rights of a
corporation which is dissolved pending litigation. Consequently, any supervening fact, such as the
dissolution of the corporation, repeal of a law, or any other fact of similar nature would not serve as
an effective bar to the enforcement of such right. Thus, the Court affirmed the decision of the Court of
Appeals.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; MOTIONS; MOTION TO QUASH WRIT OF EXECUTION;
GENERAL RULE, NO APPEAL LIES FROM ORDER THEREOF; EXCEPTIONS THERETO CITED. — The question is
whether the order of the trial court denying petitioners' Motion to Quash Writ of Execution is
appealable. As a general rule, no appeal lies from such an order, otherwise litigation will become
interminable. There are exceptions, but this case does not fall within any of such exceptions.
InLimpin, Jr. v. Intermediate Appellate Court, this Court held: Certain, it is, . . . that execution of
final and executory judgments may no longer be contested and prevented, and no appeal should lie
therefrom; otherwise, cases would be interminable, and there would be negation of the overmastering
need to end litigations. There may, to be sure, be instances when an error may be committed in the
PILOTIN [ CORPO- Busmente Set 4]
may be, do call for correction by a superior court, as where — 1) the writ of execution varies the
judgment; 2) there has been a change in the situation of the parties making execution inequitable or
unjust; 3) execution is sought to be enforced against property exempt from execution; 4) it appears
that the controversy has never been submitted to the judgment of the court; 5) the terms of the
judgment are not clear enough and there remains room for interpretation thereof; or, 6) it appears
that the writ of execution has been improvidently issued, or that it is defective in substance, or is
issued against the wrong party, or that the judgment debt has been paid or otherwise satisfied, or the
writ was issued without authority. In these exceptional circumstances, considerations of justice and
equity dictate that there be some mode available to the party aggrieved of elevating the question to a
higher court. That mode of elevation may be either by appeal (writ of error or certiorari) or by a
special civil action of certiorari, prohibition, or mandamus.
2. ID.; ID.; ID.; ID.; GROUND RELIED UPON BY PETITIONER DOES NOT FALL UNDER ANY OF THE
EXCEPTIONS FOR THE GRANT THEREOF; WRIT OF EXECUTION WILL NOT BE RECALLED BY REASON OF
ANY DEFENSE WHICH COULD HAVE BEEN MADE AT THE TIME OF THE TRIAL. — In this case, petitioners
anchored their Motion to Quash on the claim that there was a change in the situation of the parties.
However, a perusal of the cases which have recognized such a ground as an exception to the general
rule shows that the change contemplated by such exception is one which occurred subsequent to the
judgment of the trial court. Here, the change in the status of private respondent took place in 1983,
when it was dissolved, during the pendency of its case in the trial court. The change occurred prior to
the rendition of judgment by the trial court. It is true that private respondent did not inform the trial
court of the approval of the amended articles of incorporation which shortened its term of existence.
However, it is incredible that petitioners did not know about the dissolution of private respondent
considering the time it took the trial court to decide the case and the fact that petitioner Urbano
Reburiano was a former employee of private respondent. As private respondent says, since petitioner
Reburiano was a former sales manager of the company, it could be reasonably presumed that
petitioners knew of the changes occurring in respondent company. Clearly, the present case does not
fall under the exception relied upon by petitioners and the Court of Appeals correctly denied due
course to the appeal. As has been noted, there are in fact cases which hold that while parties are given
a remedy from a denial of a motion to quash or recall writ of execution, it is equally settled that the
writ will not be recalled by reason of any defense which could have been made at the time of the trial
of the case.
3. ID.; ID.; ID.; ID.; PARTY NOT ALLOWED TO RAISE FOR THE FIRST TIME ON APPEAL FROM
DENIAL THEREOF, ISSUES WHICH IT COULD HAVE RAISED BUT NEVER DID DURING THE TRIAL. — The
Court of Appeals also held that in any event petitioners cannot raise the question of capacity of a
dissolved corporation to maintain or defend actions previously filed by or against it because the matter
had not been raised by petitioners before the trial court nor in their appeal from the decision of the
said court. We agree with this ruling. Rules of fair play, justice, and due process dictate that parties
cannot raise for the first time on appeal from a denial of a Motion to Quash a Writ of Execution issues
which they could have raised but never did during the trial and even on appeal from the decision of the
trial court. aDcHIS
4. COMMERCIAL LAW; CORPORATIONS; COUNSEL OF DISSOLVED CORPORATION MAY BE
CONSIDERED A TRUSTEE TO CONTINUE PENDING LITIGATION PRIOR TO ITS DISSOLUTION; RULING
IN GELANO CASE (103 SCRA 90), CITED. — If the question of private respondent's capacity to sue can be
raised for the first time in this case, we think petitioners are in error in contending that "a dissolved
and non-existing corporation could no longer be represented by a lawyer and concomitantly a lawyer
could not appear as counsel for a non-existing judicial person." In Gelano vs. Court of Appeals, a case
having substantially similar facts as the instant case, this Court held: However, a corporation that has a
pending action and which cannot be terminated within the three-year period after its dissolution is
authorized under Sec. 78 [now §122] of the Corporation Law to convey all its property to trustees to
enable it to prosecute and defend suits by or against the corporation beyond the three-year period.
Although private respondent did not appoint any trustee, yet the counsel who prosecuted and defended
the interest of the corporation in the instant case and who in fact appeared in behalf of the
1
corporation may be considered a trustee of the corporation at least with respect to the matter in
litigation only. Said counsel had been handling the case when the same was pending before the trial
court until it was appealed before the Court of Appeals and finally to this Court. We therefore hold
that there was substantial compliance with Sec. 78 [now §122] of the Corporation Law and such private
respondent Insular Sawmill, Inc. could still continue prosecuting the present case even beyond the
period of three (3) years from the time of dissolution. . . .[T]he trustee may commence a suit which
can proceed to final judgment even beyond the three-year period. No reason can be conceived why a
suit already commenced by the corporation itself during its existence, not by a mere trustee who, by
fiction, merely continues the legal personality of the dissolved corporation should not be accorded
similar treatment allowed — to proceed to final judgment and execution thereof."
5. ID.; ID.; EXECUTION OF JUDGMENT IN FAVOR THEREOF, NOT BARRED BY ANY SUPERVENING
FACT SUCH AS DISSOLUTION THEREOF, REPEAL OF ANY LAW OR ANY OTHER FACT OF SIMILAR NATURE.
— There is, therefore, no reason why the suit filed by private respondent should not be allowed to
proceed to execution. It is conceded by petitioners that the judgment against them and in favor of
private respondent in C.A. G.R. No. 16070 had become final and executory. The only reason for their
refusal to execute the same is that there is no existing corporation to which they are indebted. Such
argument is fallacious. As previously mentioned, the law specifically allows a trustee to manage the
affairs of the corporation in liquidation. Consequently, any supervening fact, such as the dissolution of
the corporation, repeal of a law, or any other fact of similar nature would not serve as an effective bar
to the enforcement of such right. IcDCaS
DECISION
MENDOZA, J p:
In Civil Case No. Q-35598, entitled "Pepsi Cola Bottling Company of the Philippines, Inc.
v. Urbano (Ben) Reburiano and James Reburiano," the Regional Trial Court, Branch 103 rendered
on June 1, 1987 a decision, the dispositive portion of which reads: prcd
ACCORDINGLY, judgment is hereby rendered in favor of plaintiff Pepsi
Cola Bottling Co. of the Philippines, Inc.
1. Ordering the defendants Urbano (Ben) Reburiano and James
Reburiano to pay jointly and severally the plaintiff the sum of P55,000.00, less
whatever empties (cases and bottles) may be returned by said defendants valued
at the rate of P55.00 per empty case with bottles.
2. Costs against the defendants in case of execution.
SO ORDERED.
Private respondent Pepsi Cola Bottling Company of the Philippines, Inc. appealed to the
Court of Appeals seeking the modification of the portion of the decision, which stated the value of
the cases with empty bottles as P55.00 per case, and obtained a favorable decision. On June 26,
1990, judgment was rendered as follows:
WHEREFORE, the decision appealed from is SET ASIDE and another one
is rendered, ordering the defendant-appellees to pay jointly and severally the
plaintiff-appellant the sum of P55,000.00 with interest at the local rate from
January 1982. With costs against defendants-appellees.
PILOTIN [ CORPO- Busmente Set 4]
After the case had been remanded to it and the judgment had become final and
executory, the trial court issued on February 5, 1991 a writ of execution.
It appears that prior to the promulgation of the decision of the trial court, private
respondent amended its articles of incorporation to shorten its term of existence to July 8, 1983.
The amended articles of incorporation was approved by the Securities and Exchange Commission
on March 2, 1984. The trial court was not notified of this fact.
On February 13, 1991, petitioners moved to quash the writ of execution alleging — llibris
3. That when the trial of this case was conducted, when the decision
was rendered by this Honorable Court, when the said decision was appealed to
the Court of Appeals, and when the Court of Appeals rendered its decision, the
private respondent was no longer in existence and had no more juridical
personality and so, as such, it no longer had the capacity to sue and be sued;
4. That after the [private respondent], as a corporation, lost its
existence and juridical personality, Atty. Romualdo M. Jubay had no more client
in this case and so his appearance in this case was no longer possible and
tenable;
5. That in view of the foregoing premises, therefore, the decision
rendered by this Honorable Court and by the Honorable Court of Appeals are
patent nullity, for lack of jurisdiction and lack of capacity to sue and be sued on
the part of the [private respondent];
6. That the above-stated change in the situation of parties, whereby
the [private respondent] ceased to exist since 8 July 1983, renders the execution
of the decision inequitable or impossible. 1
Private respondent opposed petitioners' motion. It argued that the jurisdiction of the
court as well as the respective parties' capacity to sue had already been established during the
initial stages of the case; and that when the complaint was filed in 1982, private respondent was
still an existing corporation so that the mere fact that it was dissolved at the time the case was
yet to be resolved did not warrant the dismissal of the case or oust the trial court of its
jurisdiction. Private respondent further claimed that its dissolution was effected in order to
transfer its assets to a new firm of almost the same name and was thus only for convenience.2
On February 28, 1991, the trial court issued an order 3 denying petitioners' motion to
quash. Petitioners then filed a notice of appeal, but private respondent moved to dismiss the
appeal on the ground that the trial court's order of February 28, 1991 denying petitioners' motion
to quash writ of execution was not appealable. 4 The trial court, however, denied private
respondent's motion and allowed petitioners to pursue their appeal.
In its resolution 5 of September 3, 1991, the appellate court dismissed petitioners'
appeal. Petitioners moved for a reconsideration, but their motion was denied by the appellate
court in its resolution, dated November 26, 1991.
Hence, this petition for review on certiorari. Petitioners pray that the resolutions,
dated September 3, 1991 and November 26, 1991, of the Court of Appeals be set aside and that a
new decision be rendered declaring the order of the trial court denying the motion to quash to be
appealable and ordering the Court of Appeals to give due course to the appeal. 6
On the other hand, private respondent argues that petitioners knew that it had ceased
to exist during the course of the trial of the case but did not act upon this information until the
judgment was about to be enforced against them; hence, the filing of a Motion to Quash and the
present petition are mere dilatory tactics resorted to by petitioners. Private respondent likewise
cites the ruling of this Court in Gelano v. Court of Appeals 7 that the counsel of a dissolved
corporation is deemed a trustee of the same for purposes of continuing such action or actions as
may be pending at the time of the dissolution to counter petitioners' contention that private
2
 respondent lost its capacity to sue and be sued long before the trial court rendered judgment and
hence execution of such judgment could not be complied with as the judgment creditor has
ceased to exist. 8 cdasia
First. The question is whether the order of the trial court denying petitioners' Motion to
Quash Writ of Execution is appealable. As a general rule, no appeal lies from such an order,
otherwise litigation will become interminable. There are exceptions, but this case does not fall
within any of such exceptions.
In Limpin, Jr. v. Intermediate Appellate Court, this Court held: 9
Certain, it is . . . that execution of final and executory judgments may
no longer be contested and prevented, and no appeal should lie therefrom;
otherwise, cases would be interminable, and there would be negation of the
overmastering need to end litigations.
There may, to be sure, be instances when an error may be committed
in the course of execution proceedings prejudicial to the rights of a party. These
instances, rare though they may be, do call for correction by a superior court, as
where —
1) the writ of execution varies the judgment;
2) there has been a change in the situation of the parties making
execution inequitable or unjust;
3) execution is sought to be enforced against property exempt from
execution;
4) it appears that the controversy has never been submitted to the
judgment of the court;
5) the terms of the judgment are not clear enough and there remains
room for interpretation thereof; or,
6) it appears that the writ of execution has been improvidently issued,
or that it is defective in substance, or is issued against the wrong party, or that
the judgment debt has been paid or otherwise satisfied, or the writ was issued
without authority;
In these exceptional circumstances, considerations of justice and
equity dictate that there be some mode available to the party aggrieved of
elevating the question to a higher court. That mode of elevation may be either
by appeal (writ of error or certiorari) or by a special civil action of certiorari,
prohibition, or mandamus.
In this case, petitioners anchored their Motion to Quash on the claim that there was a
change in the situation of the parties. However, a perusal of the cases which have recognized such
a ground as an exception to the general rule shows that the change contemplated by such
exception is one which occurred subsequent to the judgment of the trial court. Here, the change
in the status of private respondent took place in 1983, when it was dissolved, during the pendency
of its case in the trial court. The change occurred prior to the rendition of judgment by the trial
court.
It is true that private respondent did not inform the trial court of the approval of the
amended articles of incorporation which shortened its term of existence. However, it is incredible
that petitioners did not know about the dissolution of private respondent considering the time it
took the trial court to decide the case and the fact that petitioner Urbano Reburiano was a former
employee of private respondent. As private respondent says, 10 since petitioner Reburiano was a
PILOTIN [ CORPO- Busmente Set 4]
former sales manager of the company, it could be reasonably presumed that petitioners knew of
the changes occurring in respondent company. Clearly, the present case does not fall under the
exception relied upon by petitioners and, the Court of Appeals correctly denied due course to the
appeal. As has been noted, there are in fact cases which hold that while parties are given a
remedy from a denial of a motion to quash or recall writ of execution, it is equally settled that
the writ will not be recalled by reason of any defense which could have been made at the time of
the trial of the case. 11
Second. The Court of Appeals also held that in any event petitioners cannot raise the
question of capacity of a dissolved corporation to maintain or defend actions previously filed by or
against it because the matter had not been raised by petitioners before the trial court nor in their
appeal from the decision of the said court. The appellate court stated: cdrep
It appears that said motion to quash writ of execution is anchored on
the ground that plaintiff-appellee Pepsi Bottling Company of the Philippines had
been dissolved as a corporation in 1983, after the filing of this case before the
lower court, hence, it had lost its capacity to sue. However, this was never
raised as an issue before the lower court and the Court of Appeals when the
same was elevated on appeal. The decision of this Court, through its Fourth
Division, dated June 26, 1990, in CA-G.R. CV No. 16070 which, in effect,
modified the appealed decision, consequently did not touch on the issue of lack
of capacity to sue, and has since become final and executory on July 16, 1990,
and has been remanded to the court a quo for execution. It is readily apparent
that the same can no longer be made the basis for this appeal regarding the
denial of the motion to quash writ of execution. It should have been made in the
earlier appeal as the same was already obtaining at that time. 12
We agree with this ruling. Rules of fair play, justice, and due process dictate that
parties cannot raise for the first time on appeal from a denial of a Motion to Quash a Writ of
Execution issues which they could have raised but never did during the trial and even on appeal
from the decision of the trial court. 13
Third. In any event, if the question of private respondent's capacity to sue can be raised
for the first time in this case, we think petitioners are in error in contending that "a dissolved and
non-existing corporation could no longer be represented by a lawyer and concomitantly a lawyer
could not appear as counsel for a non-existing judicial person." 14
Section 122 of the Corporation Code provides in part:
§122. Corporate Liquidation. — Every Corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized
and empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interests, all interests which
the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Petitioners argue that while private respondent Pepsi Cola Bottling Company of the
Philippines, Inc. undertook a voluntary dissolution on July 3, 1983 and the process of liquidation
3
 for three (3) years thereafter, there is no showing that a trustee or receiver was ever appointed.
They contend that §122 of the Corporation Code does not authorize a corporation, after the three-
year liquidation period, to continue actions instituted by it within said period of three years.
Petitioners cite the case of National Abaca and Other Fibers Corporation v. Pore, 15 wherein this
Court stated: cdtai
It is generally held, that where a statute continues the existence of a
corporation for a certain period after its dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes defunct upon the
expiration of such period, at least in the absence of a provision to the contrary,
so that no action can afterwards be brought by or against it, and must be
dismissed. Actions pending by or against the corporation when the period
allowed by the statute expires, ordinarily abate. 16
This ruling, however, has been modified by subsequent cases. In Board of Liquidators
v. Kalaw, 17 this Court stated:
. . . The legal interest became vested in the trustee — the Board of
Liquidators. The beneficial interest remained with the sole stockholder — the
government. At no time had the government withdrawn the property, or the
authority to continue the present suit, from the Board of Liquidators. If for this
reason alone, we cannot stay the hand of the Board of Liquidators from
prosecuting this case to its final conclusion. The provision of Section 78 (now
Section 122) of the Corporation Law — the third method of winding up corporate
affairs — finds application. 18
Indeed, in Gelano vs. Court of Appeals, 19 a case having substantially similar facts as
the instant case, this Court held:
However, a corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is authorized under
Sec. 78 [now §122] of the Corporation Law to convey all its property to trustees
to enable it to prosecute and defend suits by or against the corporation beyond
the three-year period. Although private respondent did not appoint any trustee,
yet the counsel who prosecuted and defended the interest of the corporation in
the instant case and who in fact appeared in behalf of the corporation may be
considered a trustee of the corporation at least with respect to the matter in
litigation only. Said counsel had been handling the case when the same was
pending before the trial court until it was appealed before the Court of Appeals
and finally to this Court. We therefore hold that there was substantial
compliance with Sec. 78 [now §122] of the Corporation Law and such private
respondent Insular Sawmill, Inc. could still continue prosecuting the present case
even beyond the period of three (3) years from the time of dissolution.
a corporation is limited to three years from the time the period of dissolution
commences; but there is no time limit within which the trustees must complete
a liquidation placed in their hands. It is provided only (Corp. Law. Sec. 78 [now
Sec. 122]) that the conveyance to the trustees must be made within the three-
year period. It may be found impossible to complete the work of liquidation
within the three-year period or to reduce disputed claims to judgment. The
authorities are to the effect that suits by or against a corporation abate when it
ceased to be an entity capable of suing or being sued (7 R.C.L., Corps., par.
750); but trustees to whom the corporate assets have been conveyed pursuant to
the authority of Sec. 78 [now Sec. 122] may sue and be sued as such in all
matters connected with the liquidation . . . 23
Furthermore, the Corporation Law provides:
§145. Amendment or repeal. — No right or remedy in favor of or
against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either by
the subsequent dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof.
This provision safeguards the rights of a corporation which is dissolved pending litigation.
There is, therefore, no reason why the suit filed by private respondent should not be
allowed to proceed to execution. It is conceded by petitioners that the judgment against them
and in favor of private respondent in C.A. G.R. No. 16070 had become final and executory. The
only reason for their refusal to execute the same is that there is no existing corporation to which
they are indebted. Such argument is fallacious. As previously mentioned, the law specifically
allows a trustee to manage the affairs of the corporation in liquidation. Consequently, any
supervening fact, such as the dissolution of the corporation, repeal of a law, or any other fact of
similar nature would not serve as an effective bar to the enforcement of such right
WHEREFORE, the resolutions, dated September 3, 1991 and November 26, 1991, of the
Court of Appeals are AFFIRMED. LLphil
SO ORDERED.
||| (Reburiano v. Court of Appeals, G.R. No. 102965, [January 21, 1999], 361 PHIL 294-308)
[G.R. No. 147905. May 28, 2007.] B. VAN ZUIDEN BROS., LTD., petitioner, vs. GTVL MANUFACTURING
INDUSTRIES, INC., respondent.

. . . [T]he trustee may commence a suit which can proceed to final

DECISION
judgment even beyond the three-year period. No reason can be conceived why a
suit already commenced by the corporation itself during its existence, not by a
mere trustee who, by fiction, merely continues the legal personality of the
dissolved corporation should not be accorded similar treatment allowed — to
proceed to final judgment and execution thereof." 20 CARPIO, J p:

In the Gelano case, the counsel of the dissolved corporation was considered a trustee. In
The Case
the later case of Clemente v. Court of Appeals, 21 we held that the board of directors may be
permitted to complete the corporate liquidation by continuing as "trustees" by legal implication. Before the Court is a petition for review 1 of the 18 April 2001 Decision 2 of the Court of
For, indeed, as early as 1939, in the case of Sumera v. Valencia, 22 this Court held: Appeals in CA-G.R. CV No. 66236. The Court of Appeals affirmed the Order 3 of the Regional Trial
Court, Branch 258, Parañaque City (trial court) dismissing the complaint for sum of money filed by
It is to be noted that the time during which the corporation, through
B. Van Zuiden Bros., Ltd. (petitioner) against GTVL Manufacturing Industries, Inc. (respondent).
its own officers, may conduct the liquidation of its assets and sue and be sued as

PILOTIN [ CORPO- Busmente Set 4] 4

 The Facts
On 13 July 1999, petitioner filed a complaint for sum of money against respondent,
docketed as Civil Case No. 99-0249. The pertinent portions of the complaint read:
1. Plaintiff, ZUIDEN, is a corporation, incorporated under the laws of
Hong Kong. . . . ZUIDEN is not engaged in business in the Philippines, but is suing
before the Philippine Courts, for the reasons hereinafter stated.
xxx xxx xxx
3. ZUIDEN is engaged in the importation and exportation of several
products, including lace products.
4. On several occasions, GTVL purchased lace products from [ZUIDEN].
5. The procedure for these purchases, as per the instructions of GTVL,
was that ZUIDEN delivers the products purchased by GTVL, to a certain Hong
Kong corporation, known as Kenzar Ltd. (KENZAR), . . . and the products are
then considered as sold, upon receipt by KENZAR of the goods purchased by
GTVL.
KENZAR had the obligation to deliver the products to the Philippines
and/or to follow whatever instructions GTVL had on the matter.
Insofar as ZUIDEN is concerned, upon delivery of the goods to KENZAR
in Hong Kong, the transaction is concluded; and GTVL became obligated to pay
the agreed purchase price.
xxx xxx xxx
7. However, commencing October 31, 1994 up to the present, GTVL
has failed and refused to pay the agreed purchase price for several deliveries
ordered by it and delivered by ZUIDEN, as above-mentioned. DASCIc
xxx xxx xxx
9. In spite [sic] of said demands and in spite [sic] of promises to pay
and/or admissions of liability, GTVL has failed and refused, and continues to fail
and refuse, to pay the overdue amount of U.S.$32,088.02 inclusive of
interest]. 4
Instead of filing an answer, respondent filed a Motion to Dismiss 5 on the ground that
petitioner has no legal capacity to sue. Respondent alleged that petitioner is doing business in the
Philippines without securing the required license. Accordingly, petitioner cannot sue before
Philippine courts.
After an exchange of several pleadings 6 between the parties, the trial court issued an
Order on 10 November 1999 dismissing the complaint.
On appeal, the Court of Appeals sustained the trial court's dismissal of the complaint.
Hence, this petition.
The Court of Appeals' Ruling
In affirming the dismissal of the complaint, the Court of Appeals relied on Eriks Pte.,
Ltd. v. Court of Appeals. 7 In that case, Eriks, an unlicensed foreign corporation, sought to collect
US$41,939.63 from a Filipino businessman for goods which he purchased and received on several
occasions from January to May 1989. The transfers of goods took place in Singapore, for the
PILOTIN [ CORPO- Busmente Set 4]
Filipino's account, F.O.B. Singapore, with a 90-day credit term. Since the transactions involved
were not isolated, this Court found Eriks to be doing business in the Philippines. Hence, this Court
upheld the dismissal of the complaint on the ground that Eriks has no capacity to sue.
The Court of Appeals noted that in Eriks, while the deliveries of the goods were
perfected in Singapore, this Court still found Eriks to be engaged in business in the Philippines.
Thus, the Court of Appeals concluded that the place of delivery of the goods (or the place where
the transaction took place) is not material in determining whether a foreign corporation is doing
business in the Philippines. The Court of Appeals held that what is material are the proponents to
the transaction, as well as the parties to be benefited and obligated by the transaction.
In this case, the Court of Appeals found that the parties entered into a contract of sale
whereby petitioner sold lace products to respondent in a series of transactions. While petitioner
delivered the goods in Hong Kong to Kenzar, Ltd. (Kenzar), another Hong Kong company, the party
with whom petitioner transacted was actually respondent, a Philippine corporation, and not
Kenzar. The Court of Appeals believed Kenzar is merely a shipping company. The Court of Appeals
concluded that the delivery of the goods in Hong Kong did not exempt petitioner from being
considered as doing business in the Philippines.
The Issue
The sole issue in this case is whether petitioner, an unlicensed foreign corporation, has
legal capacity to sue before Philippine courts. The resolution of this issue depends on whether
petitioner is doing business in the Philippines.
The Ruling of the Court
The petition is meritorious.
Section 133 of the Corporation Code provides:
Doing business without license. — No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws. aCcEHS
The law is clear. An unlicensed foreign corporation doing business in the Philippines
cannot sue before Philippine courts. On the other hand, an unlicensed foreign
corporation not doing business in the Philippines can sue before Philippine courts.
In the present controversy, petitioner is a foreign corporation which claims that it is not
doing business in the Philippines. As such, it needs no license to institute a collection suit against
respondent before Philippine courts.
Respondent argues otherwise. Respondent insists that petitioner is doing business in the
Philippines without the required license. Hence, petitioner has no legal capacity to sue before
Philippine courts.
Under Section 3 (d) of Republic Act No. 7042 (RA 7042) or "The Foreign Investments Act
of 1991," the phrase "doing business" includes:
. . . soliciting orders, service contracts, opening offices, whether
called "liaison" offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or more; participating
in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that
5
 extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization: Provided,
however, That the phrase "doing business" shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account.
The series of transactions between petitioner and respondent cannot be classified as
"doing business" in the Philippines under Section 3 (d) of RA 7042. An essential condition to be
considered as "doing business" in the Philippines is the actual performance of specific commercial
acts within the territory of the Philippines for the plain reason that the Philippines has no
jurisdiction over commercial acts performed in foreign territories. Here, there is no showing that
petitioner performed within the Philippine territory the specific acts of doing business mentioned
in Section 3 (d) of RA 7042. Petitioner did not also open an office here in the Philippines, appoint
a representative or distributor, or manage, supervise or control a local business. While petitioner
and respondent entered into a series of transactions implying a continuity of commercial dealings,
the perfection and consummation of these transactions were done outside the Philippines. 8
In its complaint, petitioner alleged that it is engaged in the importation and exportation
of several products, including lace products. Petitioner asserted that on several occasions,
respondent purchased lace products from it. Petitioner also claimed that respondent instructed it
to deliver the purchased goods to Kenzar, which is a Hong Kong company based in Hong Kong.
Upon Kenzar's receipt of the goods, the products were considered sold. Kenzar, in turn, had the
obligation to deliver the lace products to the Philippines. In other words, the sale of lace products
was consummated in Hong Kong.
As earlier stated, the series of transactions between petitioner and respondent
transpired and were consummated in Hong Kong. 9 We also find no single activity which petitioner
performed here in the Philippines pursuant to its purpose and object as a business
organization. 10 Moreover, petitioner's desire to do business within the Philippines is not
discernible from the allegations of the complaint or from its attachments. Therefore, there is no
basis for ruling that petitioner is doing business in the Philippines.
In Eriks, respondent therein alleged the existence of a distributorship agreement
between him and the foreign corporation. If duly established, such distributorship agreement
could support respondent's claim that petitioner was indeed doing business in the Philippines.
Here, there is no such or similar agreement between petitioner and respondent.
We disagree with the Court of Appeals' ruling that the proponents to the transaction
determine whether a foreign corporation is doing business in the Philippines, regardless of the
place of delivery or place where the transaction took place. To accede to such theory makes it
possible to classify, for instance, a series of transactions between a Filipino in the United States
and an American company based in the United States as "doing business in the Philippines," even
when these transactions are negotiated and consummated only within the United States.
An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would constitute
doing business in the importing countries. The mere act of exporting from one's own country,
without doing any specific commercial act within the territory of the importing country, cannot be
deemed as doing business in the importing country. The importing country does not acquire
jurisdiction over the foreign exporter who has not performed any specific commercial act within
the territory of the importing country. Without jurisdiction over the foreign exporter, the
importing country cannot compel the foreign exporter to secure a license to do business in the
importing country. TIcAaH
PILOTIN [ CORPO- Busmente Set 4]
Otherwise, Philippine exporters, by the mere act alone of exporting their products,
could be considered by the importing countries to be doing business in those countries. This will
require Philippine exporters to secure a business license in every foreign country where they
usually export their products, even if they do not perform any specific commercial act within the
territory of such importing countries. Such a legal concept will have a deleterious effect not only
on Philippine exports, but also on global trade.
To be doing or "transacting business in the Philippines" for purposes of Section 133 of
the Corporation Code, the foreign corporation must actually transact business in the Philippines,
that is, perform specific business transactions within the Philippine territory on a continuing basis
in its own name and for its own account. Actual transaction of business within the Philippine
territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to secure a Philippine business license. If a
foreign corporation does not transact such kind of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation
to secure a Philippine business license.
Considering that petitioner is not doing business in the Philippines, it does not need a
license in order to initiate and maintain a collection suit against respondent for the unpaid
balance of respondent's purchases.
WHEREFORE, we GRANT the petition. We REVERSE the Decision dated 18 April 2001 of
the Court of Appeals in CA-G.R. CV No. 66236. No costs.
SO ORDERED.
||| (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. 147905, [May 28,
2007], 551 PHIL 231-240)
[G.R. No. 168266. March 15, 2010.] CARGILL, INC., petitioner, vs. INTRA STRATA ASSURANCE
CORPORATION, respondent.
DECISION
CARPIO, J p:
The Case
This petition for review 1 assails the 26 May 2005 Decision 2 of the Court of Appeals in
CA-G.R. CV No. 48447. aTIEcA
The Facts
Petitioner Cargill, Inc. (petitioner) is a corporation organized and existing under the
laws of the State of Delaware, United States of America. Petitioner and Northern Mindanao
Corporation (NMC) executed a contract dated 16 August 1989 whereby NMC agreed to sell to
petitioner 20,000 to 24,000 metric tons of molasses, to be delivered from 1 January to 30 June
1990 at the price of $44 per metric ton. The contract provides that petitioner would open a Letter
of Credit with the Bank of Philippine Islands. Under the "red clause" of the Letter of Credit, NMC
was permitted to draw up to $500,000 representing the minimum price of the contract upon
presentation of some documents.
The contract was amended three times: first, on 11 January 1990, increasing the
purchase price of the molasses to $47.50 per metric ton; 3 second, on 18 June 1990, reducing the
6
 quantity of the molasses to 10,500 metric tons and increasing the price to $55 per metric
ton; 4 and third, on 22 August 1990, providing for the shipment of 5,250 metric tons of molasses
on the last half of December 1990 through the first half of January 1991, and the balance of 5,250
metric tons on the last half of January 1991 through the first half of February 1991. 5 The third
amendment also required NMC to put up a performance bond equivalent to $451,500, which
represents the value of 10,500 metric tons of molasses computed at $43 per metric ton. The
performance bond was intended to guarantee NMC's performance to deliver the molasses during
the prescribed shipment periods according to the terms of the amended contract.
In compliance with the terms of the third amendment of the contract, respondent Intra
Strata Assurance Corporation (respondent) issued on 10 October 1990 a performance bond 6 in the
sum of P11,287,500 to guarantee NMC's delivery of the 10,500 tons of molasses, and a surety
bond 7 in the sum of P9,978,125 to guarantee the repayment of downpayment as provided in the
contract.
NMC was only able to deliver 219.551 metric tons of molasses out of the agreed 10,500
metric tons. Thus, petitioner sent demand letters to respondent claiming payment under the
performance and surety bonds. When respondent refused to pay, petitioner filed on 12 April 1991
a complaint 8 for sum of money against NMC and respondent. ETHCDS
Petitioner, NMC, and respondent entered into a compromise agreement, 9 which the
trial court approved in its Decision 10 dated 13 December 1991. The compromise agreement
provides that NMC would pay petitioner P3,000,000 upon signing of the compromise agreement
and would deliver to petitioner 6,991 metric tons of molasses from 16-31 December 1991.
However, NMC still failed to comply with its obligation under the compromise agreement. Hence,
trial proceeded against respondent.
On 23 November 1994, the trial court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, judgment is rendered in favor of plaintiff [Cargill, Inc.],
ordering defendant INTRA STRATA ASSURANCE CORPORATION to solidarily pay
plaintiff the total amount of SIXTEEN MILLION NINE HUNDRED NINETY-THREE
THOUSAND AND TWO HUNDRED PESOS (P16,993,200.00), Philippine Currency,
with interest at the legal rate from October 10, 1990 until fully paid, plus
attorney's fees in the sum of TWO HUNDRED THOUSAND PESOS (P200,000.00),
Philippine Currency and the costs of the suit.
The Counterclaim of Intra Strata Assurance Corporation is hereby
dismissed for lack of merit.
SO ORDERED. 11
On appeal, the Court of Appeals reversed the trial court's decision and dismissed the
complaint. Hence, this petition.
The Court of Appeals' Ruling
The Court of Appeals held that petitioner does not have the capacity to file this suit
since it is a foreign corporation doing business in the Philippines without the requisite license. The
Court of Appeals held that petitioner's purchases of molasses were in pursuance of its basic
business and not just mere isolated and incidental transactions. SAHIaD
The Issues
Petitioner raises the following issues:
1. Whether petitioner is doing or transacting business in the Philippines in
contemplation of the law and established jurisprudence;
PILOTIN [ CORPO- Busmente Set 4]
2. Whether respondent is estopped from invoking the defense that petitioner has
no legal capacity to sue in the Philippines;
3. Whether petitioner is seeking a review of the findings of fact of the Court of
Appeals; and
4. Whether the advance payment of $500,000 was released to NMC without the
submission of the supporting documents required in the contract and
the "red clause" Letter of Credit from which said amount was
drawn. 12
The Ruling of the Court
We find the petition meritorious.
Doing Business in the Philippines and Capacity to Sue
The principal issue in this case is whether petitioner, an unlicensed foreign corporation,
has legal capacity to sue before Philippine courts. Under Article 123 13of the Corporation Code, a
foreign corporation must first obtain a license and a certificate from the appropriate government
agency before it can transact business in the Philippines. Where a foreign corporation does
business in the Philippines without the proper license, it cannot maintain any action or proceeding
before Philippine courts as provided under Section 133 of the  Corporation Code: EAICTS
Sec. 133.Doing business without a license. — No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.
Thus, the threshold question in this case is whether petitioner was doing business in the
Philippines. The Corporation Code provides no definition for the phrase "doing business."
Nevertheless, Section 1 of Republic Act No. 5455 (RA 5455), 14 provides that:
. . . the phrase "doing business" shall include soliciting orders,
purchases, service contracts, opening offices, whether called 'liaison' offices or
branches; appointing representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for a period or
periods totalling one hundred eighty days or more; participating in the
management, supervision or control of any domestic business firm, entity or
corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization. (Emphasis
supplied)
This is also the exact definition provided under Article 44 of the  Omnibus Investments Code of
1987.
Republic Act No. 7042 (RA 7042), otherwise known as the  Foreign Investments Act of
1991, which repealed Articles 44-56 of Book II of the  Omnibus Investments Code of 1987,
enumerated not only the acts or activities which constitute "doing business" but also those
activities which are not deemed "doing business." Section 3 (d) of RA 7042 states: CacTIE
[T]he phrase "doing business" shall include "soliciting orders, service
contracts, opening offices, whether called 'liaison' offices or branches;
7
 appointing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management, supervision
or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally incident to, and
in progressive prosecution of, commercial gain or of the purpose and object of
the business organization: Provided, however, That the phrase 'doing business'
shall not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name
and for its own account.
Since respondent is relying on Section 133 of the  Corporation Code to bar petitioner
from maintaining an action in Philippine courts, respondent bears the burden of proving that
petitioner's business activities in the Philippines were not just casual or occasional, but so
systematic and regular as to manifest continuity and permanence of activity to constitute doing
business in the Philippines. In this case, we find that respondent failed to prove that petitioner's
activities in the Philippines constitute doing business as would prevent it from bringing an action.
The determination of whether a foreign corporation is doing business in the Philippines
must be based on the facts of each case. 15 In the case of Antam Consolidated, Inc. v. CA, 16 in
which a foreign corporation filed an action for collection of sum of money against petitioners
therein for damages and loss sustained for the latter's failure to deliver coconut crude oil, the
Court emphasized the importance of the element of continuity of commercial activities to
constitute doing business in the Philippines. The Court held: DEICTS
In the case at bar, the transactions entered into by the respondent
with the petitioners are not a series of commercial dealings which signify an
intent on the part of the respondent to do business in the Philippines but
constitute an isolated one which does not fall under the category of "doing
business." The records show that the only reason why the respondent entered
into the second and third transactions with the petitioners was because it
wanted to recover the loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction and in order to give the
latter a chance to make good on their obligation. . . .
. . . The three seemingly different transactions were entered into by
the parties only in an effort to fulfill the basic agreement and in no way indicate
an intent on the part of the respondent to engage in a continuity of transactions
with petitioners which will categorize it as a foreign corporation doing business
in the Philippines. 17
Similarly, in this case, petitioner and NMC amended their contract three times to give a
chance to NMC to deliver to petitioner the molasses, considering that NMC already received the
minimum price of the contract. There is no showing that the transactions between petitioner and
NMC signify the intent of petitioner to establish a continuous business or extend its operations in
the Philippines.
The Implementing Rules and Regulations of RA 7042 provide under Section 1 (f), Rule I,
that "doing business" does not include the following acts:
1. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such
investor;
PILOTIN [ CORPO- Busmente Set 4]
2. Having a nominee director or officer to represent its interests in
such corporation; DTIACH
3. Appointing a representative or distributor domiciled in the
Philippines which transacts business in the representative's or distributor's own
name and account;
4. The publication of a general advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the purpose
of having the same processed by another entity in the Philippines;
6. Consignment by a foreign entity of equipment with a local company
to be used in the processing of products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale
which are not on a continuing basis, such as installing in the Philippines
machinery it has manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar incidental services.
Most of these activities do not bring any direct receipts or profits to the foreign
corporation, consistent with the ruling of this Court in National Sugar Trading Corp. v. CA 18 that
activities within Philippine jurisdiction that do not create earnings or profits to the foreign
corporation do not constitute doing business in the Philippines. 19 In that case, the Court held
that it would be inequitable for the National Sugar Trading Corporation, a state-owned
corporation, to evade payment of a legitimate indebtedness owing to the foreign corporation on
the plea that the latter should have obtained a license first before perfecting a contract with the
Philippine government. The Court emphasized that the foreign corporation did not sell sugar and
derive income from the Philippines, but merely purchased sugar from the Philippine government
and allegedly paid for it in full.
In this case, the contract between petitioner and NMC involved the purchase of molasses
by petitioner from NMC. It was NMC, the domestic corporation, which derived income from the
transaction and not petitioner. To constitute "doing business," the activity undertaken in the
Philippines should involve profit-making. 20Besides, under Section 3 (d) of RA 7042, "soliciting
purchases" has been deleted from the enumeration of acts or activities which constitute "doing
business." SaCDTA
Other factors which support the finding that petitioner is not doing business in the
Philippines are: (1) petitioner does not have an office in the Philippines; (2) petitioner imports
products from the Philippines through its non-exclusive local broker, whose authority to act on
behalf of petitioner is limited to soliciting purchases of products from suppliers engaged in the
sugar trade in the Philippines; and (3) the local broker is an independent contractor and not an
agent of petitioner. 21
As explained by the Court in B. Van Zuiden Bros., Ltd. v. GTVL Marketing Industries,
Inc.: 22
An exporter in one country may export its products to many foreign
importing countries without performing in the importing countries specific
commercial acts that would constitute doing business in the importing countries.
The mere act of exporting from one's own country, without doing any specific
commercial act within the territory of the importing country, cannot be deemed
as doing business in the importing country. The importing country does not
require jurisdiction over the foreign exporter who has not yet performed any
specific commercial act within the territory of the importing country. Without
8
 jurisdiction over the foreign exporter, the importing country cannot compel the
foreign exporter to secure a license to do business in the importing country.
Otherwise, Philippine exporters, by the mere act alone of exporting
their products, could be considered by the importing countries to be doing
business in those countries. This will require Philippine exporters to secure a
business license in every foreign country where they usually export their
products, even if they do not perform any specific commercial act within the
territory of such importing countries. Such a legal concept will have deleterious
effect not only on Philippine exports, but also on global trade. ISAaTH
To be doing or "transacting business in the Philippines" for purposes
of Section 133 of the Corporation Code, the foreign corporation
must actually transact business in the Philippines, that is, perform specific
business transactions within the Philippine territory on a continuing basis in
its own name and for its own account. Actual transaction of business within
the Philippine territory is an essential requisite for the Philippines to acquire
jurisdiction over a foreign corporation and thus require the foreign
corporation to secure a Philippine business license. If a foreign corporation
does not transact such kind of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no jurisdiction to require such
foreign corporation to secure a Philippine business license. 23 (Emphasis
supplied)
In the present case, petitioner is a foreign company merely importing molasses from a
Philippine exporter. A foreign company that merely imports goods from a Philippine exporter,
without opening an office or appointing an agent in the Philippines, is not doing business in the
Philippines.
Review of Findings of Fact
The Supreme Court may review the findings of fact of the Court of Appeals which are in
conflict with the findings of the trial court. 24 We find that the Court of Appeals' finding that
petitioner was doing business is not supported by evidence.
Furthermore, a review of the records shows that the trial court was correct in holding
that the advance payment of $500,000 was released to NMC in accordance with the conditions
provided under the "red clause" Letter of Credit from which said amount was drawn. The Head of
the International Operations Department of the Bank of Philippine Islands testified that the bank
would not have paid the beneficiary if the required documents were not complete. It is a requisite
in a documentary credit transaction that the documents should conform to the terms and
conditions of the letter of credit; otherwise, the bank will not pay. The Head of the International
Operations Department of the Bank of Philippine Islands also testified that they received
reimbursement from the issuing bank for the $500,000 withdrawn by NMC. 25 Thus, respondent
had no legitimate reason to refuse payment under the performance and surety bonds when NMC
failed to perform its part under its contract with petitioner. THcaDA
WHEREFORE, we GRANT the petition. We REVERSE the Decision dated 26 May 2005 of
the Court of Appeals in CA-G.R. CV No. 48447. We REINSTATE the Decision dated 23 November
1994 of the trial court.
SO ORDERED.
||| (Cargill, Inc. v. Intra Strata Assurance Corp. , G.R. No. 168266, [March 15, 2010], 629 PHIL 320-
335)
[G.R. No. 171995. April 18, 2012.] STEELCASE, INC., petitioner, vs. DESIGN INTERNATIONAL
SELECTIONS, INC., respondent.
PILOTIN [ CORPO- Busmente Set 4]
This is a petition for review on certiorari under Rule 45 assailing the March 31, 2005
Decision 1 of the Court of Appeals (CA) which affirmed the May 29, 2000 Order 2 of the Regional
Trial Court, Branch 60, Makati City (RTC), dismissing the complaint for sum of money in Civil Case
No. 99-122 entitled "Steelcase, Inc. v. Design International Selections, Inc."
The Facts
Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation existing under the laws of
Michigan, United States of America (U.S.A.), and engaged in the manufacture of office furniture
with dealers worldwide. 3 Respondent Design International Selections, Inc. (DISI) is a corporation
existing under Philippine Laws and engaged in the furniture business, including the distribution of
furniture. 4
Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement
whereby Steelcase granted DISI the right to market, sell, distribute, install, and service its
products to end-user customers within the Philippines. The business relationship continued
smoothly until it was terminated sometime in January 1999 after the agreement was breached
with neither party admitting any fault. 5
On January 18, 1999, Steelcase filed a complaint 6 for sum of money against DISI
alleging, among others, that DISI had an unpaid account of US$600,000.00. Steelcase prayed that
DISI be ordered to pay actual or compensatory damages, exemplary damages, attorney's fees, and
costs of suit. cISDHE
In its Answer with Compulsory Counterclaims 7 dated February 4, 1999, DISI sought the
following: (1) the issuance of a temporary restraining order (TRO) and a writ of preliminary
injunction to enjoin Steelcase from selling its products in the Philippines except through DISI; (2)
the dismissal of the complaint for lack of merit; and (3) the payment of actual, moral and
exemplary damages together with attorney's fees and expenses of litigation. DISI alleged that the
complaint failed to state a cause of action and to contain the required allegations on Steelcase's
capacity to sue in the Philippines despite the fact that it (Steelcase) was doing business in the
Philippines without the required license to do so. Consequently, it posited that the complaint
should be dismissed because of Steelcase's lack of legal capacity to sue in Philippine courts.
On March 3, 1999, Steelcase filed its Motion to Admit Amended Complaint 8 which was
granted by the RTC, through then Acting Presiding Judge Roberto C. Diokno, in its Order 9 dated
April 26, 1999. However, Steelcase sought to further amend its complaint by filing a Motion to
Admit Second Amended Complaint 10 on March 13, 1999.
In his Order 11 dated November 15, 1999, Acting Presiding Judge Bonifacio Sanz Maceda
dismissed the complaint, granted the TRO prayed for by DISI, set aside the April 26, 1999 Order of
the RTC admitting the Amended Complaint, and denied Steelcase's Motion to Admit Second
Amended Complaint. The RTC stated that in requiring DISI to meet the Dealer Performance
Expectation and in terminating the dealership agreement with DISI based on its failure to improve
its performance in the areas of business planning, organizational structure, operational
effectiveness, and efficiency, Steelcase unwittingly revealed that it participated in the operations
of DISI. It then concluded that Steelcase was "doing business" in the Philippines, as contemplated
by Republic Act (R.A.) No. 7042 (The Foreign Investments Act of 1991), and since it did not have
the license to do business in the country, it was barred from seeking redress from our courts until
it obtained the requisite license to do so. Its determination was further bolstered by the
appointment by Steelcase of a representative in the Philippines. Finally, despite a showing that
DISI transacted with the local customers in its own name and for its own account, it was of the
opinion that any doubt in the factual environment should be resolved in favor of a pronouncement
that a foreign corporation was doing business in the Philippines, considering the twelve-year
period that DISI had been distributing Steelcase products in the Philippines. IEaHSD
9
 Steelcase moved for the reconsideration of the questioned Order but the motion was
denied by the RTC in its May 29, 2000 Order. 12
Aggrieved, Steelcase elevated the case to the CA by way of appeal, assailing the
November 15, 1999 and May 29, 2000 Orders of the RTC. On March 31, 2005, the CA rendered its
Decision affirming the RTC orders, ruling that Steelcase was a foreign corporation doing or
transacting business in the Philippines without a license. The CA stated that the following acts of
Steelcase showed its intention to pursue and continue the conduct of its business in the
Philippines: (1) sending a letter to Phinma, informing the latter that the distribution rights for its
products would be established in the near future and directing other questions about orders for
Steelcase products to Steelcase International; (2) cancelling orders from DISI's customers,
particularly Visteon, Phils., Inc. (Visteon); (3) continuing to send its products to the Philippines
through Modernform Group Company Limited (Modernform), as evidenced by an Ocean Bill of
Lading; and (4) going beyond the mere appointment of DISI as a dealer by making several
impositions on management and operations of DISI. Thus, the CA ruled that Steelcase was barred
from access to our courts for being a foreign corporation doing business here without the requisite
license to do so.
Steelcase filed a motion for reconsideration but it was denied by the CA in its Resolution
dated March 23, 2006. 13
Hence, this petition.
The Issues
Steelcase filed the present petition relying on the following grounds:
I
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT FOUND
THAT STEELCASE HAD BEEN "DOING BUSINESS" IN THE PHILIPPINES WITHOUT A
LICENSE.
II
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT FINDING
THAT RESPONDENT WAS ESTOPPED FROM CHALLENGING STEELCASE'S LEGAL
CAPACITY TO SUE, AS AN AFFIRMATIVE DEFENSE IN ITS ANSWER. cACDaH
The issues to be resolved in this case are:
(1) Whether or not Steelcase is doing business in the Philippines without a
license; and
(2) Whether or not DISI is estopped from challenging the Steelcase's legal
capacity to sue.
The Court's Ruling
The Court rules in favor of the petitioner.
Steelcase is an unlicensed foreign
corporation NOT doing business in
the Philippines
Anent the first issue, Steelcase argues that Section 3 (d) of R.A. No. 7042 or the Foreign
Investments Act of 1991 (FIA) expressly states that the phrase "doing business" excludes the
appointment by a foreign corporation of a local distributor domiciled in the Philippines which
transacts business in its own name and for its own account. Steelcase claims that it was not doing
business in the Philippines when it entered into a dealership agreement with DISI where the
PILOTIN [ CORPO- Busmente Set 4]
latter, acting as the former's appointed local distributor, transacted business in its own name and
for its own account. Specifically, Steelcase contends that it was DISI that sold Steelcase's furniture
directly to the end-users or customers who, in turn, directly paid DISI for the furniture they
bought. Steelcase further claims that DISI, as a non-exclusive dealer in the Philippines, had the
right to market, sell, distribute and service Steelcase products in its own name and for its own
account. Hence, DISI was an independent distributor of Steelcase products, and not a mere agent
or conduit of Steelcase.
On the other hand, DISI argues that it was appointed by Steelcase as the latter's
exclusive distributor of Steelcase products. DISI likewise asserts that it was not allowed by
Steelcase to transact business in its own name and for its own account as Steelcase dictated the
manner by which it was to conduct its business, including the management and solicitation of
orders from customers, thereby assuming control of its operations. DISI further insists that
Steelcase treated and considered DISI as a mere conduit, as evidenced by the fact that Steelcase
itself directly sold its products to customers located in the Philippines who were classified as part
of their "global accounts." DISI cited other established circumstances which prove that Steelcase
was doing business in the Philippines including the following: (1) the sale and delivery by
Steelcase of furniture to Regus, a Philippine client, through Modernform, a Thai corporation
allegedly controlled by Steelcase; (2) the imposition by Steelcase of certain requirements over the
management and operations of DISI; (3) the representations made by Steven Husak as Country
Manager of Steelcase; (4) the cancellation by Steelcase of orders placed by Philippine clients; and
(5) the expression by Steelcase of its desire to maintain its business in the Philippines. Thus,
Steelcase has no legal capacity to sue in Philippine Courts because it was doing business in the
Philippines without a license to do so. SHaATC
The Court agrees with the petitioner.
The rule that an unlicensed foreign corporations doing business in the Philippine do not
have the capacity to sue before the local courts is well-established. Section 133 of the  
Corporation Code of the Philippines explicitly states:
Sec. 133. Doing business without a license. — No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.
The phrase "doing business" is clearly defined in Section 3 (d) of R.A. No. 7042 (Foreign
Investments Act of 1991), to wit:
d) The phrase "doing business" shall include soliciting orders, service
contracts, opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management, supervision
or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally incident to, and
in progressive prosecution of, commercial gain or of the purpose and object of
the business organization: Provided, however, Thatthe phrase "doing business"
shall not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
10
 distributor domiciled in the Philippines which transacts business in its own
name and for its own account; (Emphases supplied) ATESCc
This definition is supplemented by its Implementing Rules and Regulations, Rule I,
Section 1 (f) which elaborates on the meaning of the same phrase:
f." Doing business" shall include soliciting orders, service contracts,
opening offices, whether liaison offices or branches; appointing representatives
or distributors, operating under full control of the foreign corporation, domiciled
in the Philippines or who in any calendar year stay in the country for a period
totalling one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally
incident to and in progressive prosecution of commercial gain or of the purpose
and object of the business organization.
The following acts shall not be deemed "doing business" in the Philippines:
1. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such
investor;
2. Having a nominee director or officer to represent its interest in such
corporation;
3. Appointing a representative or distributor domiciled in the
Philippines which transacts business in the representative's or distributor's
own name and account;
4. The publication of a general advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the purpose
of having the same processed by another entity in the Philippines;
6. Consignment by a foreign entity of equipment with a local company
to be used in the processing of products for export; cEISAD
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale
which are not on a continuing basis, such as installing in the Philippines
machinery it has manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar incidental services.
(Emphases supplied)
From the preceding citations, the appointment of a distributor in the Philippines is not
sufficient to constitute "doing business" unless it is under the full control of the foreign
corporation. On the other hand, if the distributor is an independent entity which buys and
distributes products, other than those of the foreign corporation, for its own name and its own
account, the latter cannot be considered to be doing business in the Philippines. 14 It should be
kept in mind that the determination of whether a foreign corporation is doing business in the
Philippines must be judged in light of the attendant circumstances. 15
In the case at bench, it is undisputed that DISI was founded in 1979 and is independently
owned and managed by the spouses Leandro and Josephine Bantug.16 In addition to Steelcase
products, DISI also distributed products of other companies including carpet tiles, relocatable
PILOTIN [ CORPO- Busmente Set 4]
walls and theater settings. 17 The dealership agreement between Steelcase and DISI had been
described by the owner himself as:
. . . basically a buy and sell arrangement whereby we would inform
Steelcase of the volume of the products needed for a particular project and
Steelcase would, in turn, give 'special quotations' or discounts after considering
the value of the entire package. In making the bid of the project, we would then
add out profit margin over Steelcase's prices. After the approval of the bid by
the client, we would thereafter place the orders to Steelcase. The latter, upon
our payment, would then ship the goods to the Philippines, with us shouldering
the freight charges and taxes. 18 [Emphasis supplied]
This clearly belies DISI's assertion that it was a mere conduit through which Steelcase
conducted its business in the country. From the preceding facts, the only reasonable conclusion
that can be reached is that DISI was an independent contractor, distributing various products of
Steelcase and of other companies, acting in its own name and for its own account. SHTEaA
The CA, in finding Steelcase to be unlawfully engaged in business in the Philippines,
took into consideration the delivery by Steelcase of a letter to Phinma informing the latter that
the distribution rights for its products would be established in the near future, and also its
cancellation of orders placed by Visteon. The foregoing acts were apparently misinterpreted by
the CA. Instead of supporting the claim that Steelcase was doing business in the country, the said
acts prove otherwise. It should be pointed out that no sale was concluded as a result of these
communications. Had Steelcase indeed been doing business in the Philippines, it would have
readily accepted and serviced the orders from the abovementioned Philippine companies. Its
decision to voluntarily cease to sell its products in the absence of a local distributor indicates its
refusal to engage in activities which might be construed as "doing business."
Another point being raised by DISI is the delivery and sale of Steelcase products to a
Philippine client by Modernform allegedly an agent of Steelcase. Basic is the rule in corporation
law that a corporation has a separate and distinct personality from its stockholders and from other
corporations with which it may be connected. 19 Thus, despite the admission by Steelcase that it
owns 25% of Modernform, with the remaining 75% being owned and controlled by Thai
stockholders, 20it is grossly insufficient to justify piercing the veil of corporate fiction and declare
that Modernform acted as the alter ego of Steelcase to enable it to improperly conduct business in
the Philippines. The records are bereft of any evidence which might lend even a hint of credence
to DISI's assertions. As such, Steelcase cannot be deemed to have been doing business in the
Philippines through Modernform.
Finally, both the CA and DISI rely heavily on the Dealer Performance Expectation
required by Steelcase of its distributors to prove that DISI was not functioning independently from
Steelcase because the same imposed certain conditions pertaining to business planning,
organizational structure, operational effectiveness and efficiency, and financial stability. It is
actually logical to expect that Steelcase, being one of the major manufacturers of office systems
furniture, would require its dealers to meet several conditions for the grant and continuation of a
distributorship agreement. The imposition of minimum standards concerning sales, marketing,
finance and operations is nothing more than an exercise of sound business practice to increase
sales and maximize profits for the benefit of both Steelcase and its distributors. For as long as
these requirements do not impinge on a distributor's independence, then there is nothing wrong
with placing reasonable expectations on them. STcDIE
All things considered, it has been sufficiently demonstrated that DISI was an
independent contractor which sold Steelcase products in its own name and for its own account. As
a result, Steelcase cannot be considered to be doing business in the Philippines by its act of
appointing a distributor as it falls under one of the exceptions under R.A. No. 7042.
11
 DISI is estopped from
challenging Steelcase's legal
capacity to sue
Regarding the second issue, Steelcase argues that assuming arguendo that it had been
"doing business" in the Philippines without a license, DISI was nonetheless estopped from
challenging Steelcase's capacity to sue in the Philippines. Steelcase claims that since DISI was
aware that it was doing business in the Philippines without a license and had benefited from such
business, then DISI should be estopped from raising the defense that Steelcase lacks the capacity
to sue in the Philippines by reason of its doing business without a license.
On the other hand, DISI argues that the doctrine of estoppel cannot give Steelcase the
license to do business in the Philippines or permission to file suit in the Philippines. DISI claims
that when Steelcase entered into a dealership agreement with DISI in 1986, it was not doing
business in the Philippines. It was after such dealership was put in place that it started to do
business without first obtaining the necessary license. Hence, estoppel cannot work against it.
Moreover, DISI claims that it suffered as a result of Steelcase's "doing business" and that it never
benefited from the dealership and, as such, it cannot be estopped from raising the issue of lack of
capacity to sue on the part of Steelcase.
The argument of Steelcase is meritorious.
If indeed Steelcase had been doing business in the Philippines without a license, DISI
would nonetheless be estopped from challenging the former's legal capacity to sue. cSTCDA
It cannot be denied that DISI entered into a dealership agreement with Steelcase and
profited from it for 12 years from 1987 until 1999. DISI admits that it complied with its obligations
under the dealership agreement by exerting more effort and making substantial investments in
the promotion of Steelcase products. It also claims that it was able to establish a very good
reputation and goodwill for Steelcase and its products, resulting in the establishment and
development of a strong market for Steelcase products in the Philippines. Because of this, DISI
was very proud to be awarded the "Steelcase International Performance Award" for meeting sales
objectives, satisfying customer needs, managing an effective company and making a profit. 21
Unquestionably, entering into a dealership agreement with Steelcase charged DISI with
the knowledge that Steelcase was not licensed to engage in business activities in the Philippines.
This Court has carefully combed the records and found no proof that, from the inception of the
dealership agreement in 1986 until September 1998, DISI even brought to Steelcase's attention
that it was improperly doing business in the Philippines without a license. It was only towards the
latter part of 1998 that DISI deemed it necessary to inform Steelcase of the impropriety of the
conduct of its business without the requisite Philippine license. It should, however, be noted that
DISI only raised the issue of the absence of a license with Steelcase after it was informed that it
owed the latter US$600,000.00 for the sale and delivery of its products under their special credit
arrangement.
By acknowledging the corporate entity of Steelcase and entering into a dealership
agreement with it and even benefiting from it, DISI is estopped from questioning Steelcase's
existence and capacity to sue. This is consistent with the Court's ruling in Communication
Materials and Design, Inc. v. Court of Appeals 22where it was written:
Notwithstanding such finding that ITEC is doing business in the
country, petitioner is nonetheless estopped from raising this fact to bar ITEC
from instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in
Philippine Courts although not authorized to do business here against a
Philippine citizen or entity who had contracted with and benefited by said
corporation. To put it in another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering
PILOTIN [ CORPO- Busmente Set 4]
into a contract with it. And the doctrine of estoppel to deny corporate
existence applies to a foreign as well as to domestic corporations. One who has
dealt with a corporation of foreign origin as a corporate entity is estopped to
deny its corporate existence and capacity: The principle will be applied to
prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes chiefly in cases where such
person has received the benefits of the contract. cSDHEC
The rule is deeply rooted in the time-honored axiom of Commodum
ex injuria sua non habere debet — no person ought to derive any advantage
of his own wrong. This is as it should be for as mandated by law, "every
person must in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith."
Concededly, corporations act through agents, like directors and
officers. Corporate dealings must be characterized by utmost good faith and
fairness. Corporations cannot just feign ignorance of the legal rules as in most
cases, they are manned by sophisticated officers with tried management skills
and legal experts with practiced eye on legal problems. Each party to a
corporate transaction is expected to act with utmost candor and fairness and,
thereby allow a reasonable proportion between benefits and expected burdens.
This is a norm which should be observed where one or the other is a foreign
entity venturing in a global market.
xxx xxx xxx
By entering into the "Representative Agreement" with ITEC, petitioner
is charged with knowledge that ITEC was not licensed to engage in business
activities in the country, and is thus estopped from raising in defense such
incapacity of ITEC, having chosen to ignore or even presumptively take
advantage of the same. 23 (Emphases supplied)
The case of Rimbunan Hijau Group of Companies v. Oriental Wood Processing
Corporation 24 is likewise instructive:
Respondent's unequivocal admission of the transaction which gave rise
to the complaint establishes the applicability of estoppel against it. Rule 129,
Section 4 of the Rules on Evidence provides that a written admission made by a
party in the course of the proceedings in the same case does not require proof.
We held in the case of Elayda v. Court of Appeals, that an admission made in the
pleadings cannot be controverted by the party making such admission and are
conclusive as to him. Thus, our consistent pronouncement, as held in cases such
as Merril Lynch Futures v. Court of Appeals, is apropos: HDTSIE
The rule is that a party is estopped to challenge the
personality of a corporation after having acknowledged the same by
entering into a contract with it. And the 'doctrine of estoppel to
deny corporate existence applies to foreign as well as to domestic
corporations;' "one who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its existence and
capacity." The principle "will be applied to prevent a person
contracting with a foreign corporation from later taking advantage
of its noncompliance with the statutes, chiefly in cases where such
person has received the benefits of the contract . . ."
All things considered, respondent can no longer invoke petitioner's lack
of capacity to sue in this jurisdiction. Considerations of fair play dictate that
12
 after having contracted and benefitted from its business transaction with
Rimbunan, respondent should be barred from questioning the latter's lack of
license to transact business in the Philippines.
In the case of Antam Consolidated, Inc. v. CA, this Court noted that it
is a common ploy of defaulting local companies which are sued by unlicensed
foreign corporations not engaged in business in the Philippines to invoke the
latter's lack of capacity to sue. This practice of domestic corporations is
particularly reprehensible considering that in requiring a license, the law never
intended to prevent foreign corporations from performing single or isolated acts
in this country, or to favor domestic corporations who renege on their
obligations to foreign firms unwary enough to engage in solitary transactions
with them. Rather, the law was intended to bar foreign corporations from
acquiring a domicile for the purpose of business without first taking the steps
necessary to render them amenable to suits in the local courts. It was to prevent
the foreign companies from enjoying the good while disregarding the bad.
As a matter of principle, this Court will not step in to shield
defaulting local companies from the repercussions of their business dealings.
While the doctrine of lack of capacity to sue based on failure to first acquire
a local license may be resorted to in meritorious cases, it is not a magic
incantation. It cannot be called upon when no evidence exists to support its
invocation or the facts do not warrant its application. In this case, that the
respondent is estopped from challenging the petitioners' capacity to sue has
been conclusively established, and the forthcoming trial before the lower court
should weigh instead on the other defenses raised by the
respondent. 25 (Emphases supplied) SDHCac
As shown in the previously cited cases, this Court has time and again upheld the
principle that a foreign corporation doing business in the Philippines without a license may still
sue before the Philippine courts a Filipino or a Philippine entity that had derived some benefit
from their contractual arrangement because the latter is considered to be estopped from
challenging the personality of a corporation after it had acknowledged the said corporation by
entering into a contract with it. 26
In Antam Consolidated, Inc. v. Court of Appeals, 27 this Court had the occasion to draw
attention to the common ploy of invoking the incapacity to sue of an unlicensed foreign
corporation utilized by defaulting domestic companies which seek to avoid the suit by the former.
The Court cannot allow this to continue by always ruling in favor of local companies, despite the
injustice to the overseas corporation which is left with no available remedy.
During this period of financial difficulty, our nation greatly needs to attract more
foreign investments and encourage trade between the Philippines and other countries in order to
build and strengthen our economy. While it is essential to uphold the sound public policy behind
the rule that denies unlicensed foreign corporations doing business in the Philippines access to our
courts, it must never be used to frustrate the ends of justice by becoming an all-encompassing
shield to protect unscrupulous domestic enterprises from foreign entities seeking redress in our
country. To do otherwise could seriously jeopardize the desirability of the Philippines as an
investment site and would possibly have the deleterious effect of hindering trade between
Philippine companies and international corporations.
WHEREFORE, the March 31, 2005 Decision of the Court of Appeals and its March 23,
2006 Resolution are hereby REVERSED and SET ASIDE. The dismissal order of the Regional Trial
Court dated November 15, 1999 is set aside. Steelcase's Second Amended Complaint is
ordered ADMITTED. The case is REMANDED to the RTC for appropriate action. cITAaD
SO ORDERED.
PILOTIN [ CORPO- Busmente Set 4]
||| (Steelcase, Inc. v. Design International Selections, Inc., G.R. No. 171995, [April 18, 2012], 686
PHIL 59-75)
[G.R. No. 158805. April 16, 2009.] VALLEY GOLF & COUNTRY CLUB, INC., petitioner, vs. ROSA O.
VDA. DE CARAM, respondent.
May a non-stock corporation seize and dispose of the membership share of a fully-paid
member on account of its unpaid debts to the corporation when it is authorized to do so under the
corporate by-laws but not by the Articles of Incorporation? Such is the central issue raised in this
petition, which arose after petitioner Valley Golf & Country Club (Valley Golf) sold the
membership share of a member who had been delinquent in the payment of his monthly
dues. CHATcE
I.
The facts that preceded this petition are simple. Valley Golf & Country Club (Valley
Golf) is a duly constituted non-stock, non-profit corporation which operates a golf course. The
members and their guests are entitled to play golf on the said course and otherwise avail of the
facilities and privileges provided by Valley Golf. 1 The shareholders are likewise assessed monthly
membership dues.
In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram), 2 the husband of the
present respondent, subscribed to, purchased and paid for in full, one share (Golf Share) in the
capital stock of Valley Golf. He was issued Stock Certificate No. 389 dated 26 January 1961 for the
Golf Share. 3 The Stock Certificate likewise indicates a par value of P9,000.00.
Valley Golf would subsequently allege that beginning 25 January 1980, Caram stopped
paying his monthly dues, which were continually assessed until 31 June 1987. Valley Golf claims to
have sent five (5) letters to Caram concerning his delinquent account within the period from 27
January 1986 until 3 May 1987, all forwarded to P.O. Box No. 1566, Makati Commercial Center
Post Office, the mailing address which Caram allegedly furnished Valley Golf. 4 The first letter
informed Caram that his account as of 31 December 1985 was delinquent and that his club
privileges were suspended pursuant to Section 3, Article VII of the by-laws of Valley
Golf. 5 Despite such notice of delinquency, the second letter, dated 26 August 1986, stated that
should Caram's account remain unpaid for 45 days, his name would be "included in the delinquent
list to be posted on the club's bulletin board." 6 The third letter, dated 25 January 1987, again
informed Caram of his delinquent account and the suspension of his club privileges. 7 The fourth
letter, dated 7 March 1987, informed Caram that should he fail to settle his delinquencies, then
totaling P7,525.45, within ten (10) days from receipt thereof Valley Golf would exercise its right
to sell the Golf Share to satisfy the outstanding amount, again pursuant to the provisions of the
by-laws. 8 The final letter, dated 3 May 1987, issued a final deadline until 31 May 1987 for Caram
to settle his account, or otherwise face the sale of the Golf Share to satisfy the claims of Valley
Golf. 9 aIHSEc
The Golf Share was sold at public auction on 11 June 1987 for P25,000.00 after the
Board of Directors had authorized the sale in a meeting on 11 April 1987, and the Notice of
Auction Sale was published in the 6 June 1987 edition of the Philippine Daily Inquirer. 10
As it turned out, Caram had died on 6 October 1986. Respondent initiated intestate
proceedings before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle her husband's
estate. 11 Unaware of the pending controversy over the Golf Share, the Caram family and the RTC
included the same as part of Caram's estate. The RTC approved a project of partition of Caram's
estate on 29 August 1989. The Golf Share was adjudicated to respondent, who paid the
corresponding estate tax due, including that on the Golf Share.
It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the
sale of the Golf Share following their inquiry with Valley Golf about the share. After a series of
correspondence, the Caram heirs were subsequently informed, in a letter dated 15 October 1990,
13
 that they were entitled to the refund of P11,066.52 out of the proceeds of the sale of the Golf
Share, which amount had been in the custody of Valley Golf since 11 June 1987. 12
Respondent filed an action for reconveyance of the share with damages before the
Securities and Exchange Commission (SEC) against Valley Golf. 13 On 15 November 1996, SEC
Hearing Officer Elpidio S. Salgado rendered a decision in favor of respondent, ordering Valley Golf
to convey ownership of the Golf Share or in the alternative to issue one fully paid share of stock of
Valley Golf the same class as the Golf Share to respondent. Damages totaling P90,000.00 were
also awarded to respondent. 14
The SEC hearing officer noted that under Section 67, paragraph 2 of the Corporation
Code, a share stock could only be deemed delinquent and sold in an extrajudicial sale at public
auction only upon the failure of the stockholder to pay the unpaid subscription or balance for the
share. The section could not have applied in Caram's case since he had fully paid for the Golf
Share and he had been assessed not for the share itself but for his delinquent club dues.
Proceeding from the foregoing premises, the SEC hearing officer concluded that the auction sale
had no basis in law and was thus a nullity. IEDHAT
The SEC hearing officer did entertain Valley Golf's argument that the sale of the Golf
Share was authorized under the by-laws. However, it was ruled that pursuant to Section 6 of the
Corporation Code, "a provision creating a lien upon shares of stock for unpaid debts, liabilities, or
assessments of stockholders to the corporation, should be embodied in the Articles of
Incorporation, and not merely in the by-laws, because Section 6 (par. 1) prescribes that the shares
of stock of a corporation may have such rights, privileges and restrictions as may be stated in the
articles of incorporation." 15 It was observed that the Articles of Incorporation of Valley Golf did
not impose any lien, liability or restriction on the Golf Share or, for that matter, even any
conditionality that the Golf Share would be subject to assessment of monthly dues or a lien on the
share for non-payment of such dues. 16 In the same vein, it was opined that since Section 98 of
the Corporation Code provides that restrictions on transfer of shares should appear in the articles
of incorporation, by-laws and the certificate of stock to be valid and binding on any purchaser in
good faith, there was more reason to apply the said rule to club delinquencies to constitute a lien
on golf shares. 17
The SEC hearing officer further held that the delinquency in monthly club dues was
merely an ordinary debt enforceable by judicial action in a civil case. The decision generally
affirmed respondent's assertion that Caram was not properly notified of the delinquencies, citing
Caram's letter dated 7 July 1978 to Valley Golf about the change in his mailing address. He also
noted that Valley Golf had sent most of the letters after Caram's death. In all, the decision
concluded that the sale of the Golf Share was effectively a deprivation of property without due
process of law.
On appeal to the SEC en banc, 18 said body promulgated a decision 19 on 9 May 2000,
affirming the hearing officer's decision in toto. Again, the SEC found that Section 67 of the
Corporation Code could not justify the sale of the Golf Share since it applies only to unpaid
subscriptions and not to delinquent membership dues. The SEC also cited a general rule,
formulated in American jurisprudence, that a corporation has no right to dispose of shares of
stock for delinquent assessments, dues, service fees and other unliquidated charges unless there
is an express grant to do so, either by the statute itself or by the charter of a corporation. 20 Said
rule, taken in conjunction with Section 6 of the Corporation Code, militated against the validity of
the sale of the Golf Share, the SEC stressed. In view of these premises, which according to the SEC
entailed the nullity of the sale, the body found it unnecessary to rule on whether there was valid
notice of the sale at public auction. aEcSIH
Valley Golf elevated the SEC's decision to the Court of Appeals by way of a petition for
review. 21 On 4 April 2003, the appellate court rendered a decision 22affirming the decisions of
the SEC and the hearing officer, with modification consisting of the deletion of the award of
attorney's fees. This time, Valley Golf's central argument was that its by-laws, rather than Section
67 of the Corporation Code, authorized the auction sale of the Golf Share. Nonetheless, the Court
PILOTIN [ CORPO- Busmente Set 4]
of Appeals found that the by-law provisions cited by Valley Golf are "of doubtful validity", as they
purportedly conflict with Section 6 of the Code, which mandates that "rights, privileges or
restrictions attached to a share of stock should be stated in the articles of incorporation." 23 It
noted that what or who had become delinquent was "was Mr. Caram himself and not his golf
share", and such being the case, the unpaid account "should have been filed as a money claim in
the proceedings for the settlement of his estate, instead of the petitioner selling his golf share to
satisfy the account." 24
The Court of Appeals also adopted the findings of the hearing officer that the notices
had not been properly served on Caram or his heirs, thus effectively depriving respondent of
property without due process of law. While it upheld the award of damages, the appellate court
struck down the award of attorney's fees since there was no discussion on the basis of such award
in the body of the decisions of both the hearing officer and the SEC. 25
There is one other fact of note, mentioned in passing by the SEC hearing officer 26 but
ignored by the SEC en banc and the Court of Appeals. Valley Golf's third and fourth demand letters
dated 25 January 1987 and 7 March 1987, respectively, were both addressed to "Est. of Fermin Z.
Caram, Jr." The abbreviation "Est." can only be taken to refer to "Estate". Unlike the first two
demand letters, the third and fourth letters were sent after Caram had died on 6 October 1986.
However, the fifth and final demand letter, dated 3 May 1987 or twenty-eight (28) days before the
sale, was again addressed to Fermin Caram himself and not to his estate, as if he were still alive.
The foregoing particular facts are especially significant to our disposition of this case. TEHIaA
II.
In its petition before this Court, Valley Golf concedes that Section 67 of the Corporation
Code, which authorizes the auction sale of shares with delinquent subscriptions, is not applicable
in this case. Nonetheless, it argues that the by-laws of Valley Golf authorizes the sale of
delinquent shares and that the by-laws constitute a valid law or contractual agreement between
the corporation and its stockholders or their respective successors. Caram, by becoming a member
of Valley Golf, bound himself to observe its by-laws which constitutes "the rules and regulations or
private laws enacted by the corporation to regulate, govern and control its own actions, affairs
and concerns and its stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it." 27 It also points out that the by-laws itself had duly
passed the SEC's scrutiny and approval.
Valley Golf further argues that it was error on the part of the Court of Appeals to rely,
as it did, upon Section 6 of the Corporation Code "to nullify the subject provisions of the By-
Laws." 28 Section 6 refers to "restrictions" on the shares of stock which should be stated in the
articles of incorporation, as differentiated from "liens" which under the by-laws would serve as
basis for the auction sale of the share. Since Section 6 refers to restrictions and not to liens,
Valley Golf submits that "liens" are excluded from the ambit of the provision. It further proffers
that assuming that liens and restrictions are synonymous, Section 6 itself utilizes the permissive
word "may", thus evincing the non-mandatory character of the requirement that restrictions or
liens be stated in the articles of incorporation. EcIDaA
Valley Golf also argues that the Court of Appeals erred in relying on the factual findings
of the hearing officer, which are allegedly replete with errors and contradictions. Finally, it
assails the award of moral and exemplary damages.
III.
As found by the SEC and the Court of Appeals, the Articles of Incorporation of Valley
Golf does not contain any provision authorizing the corporation to create any lien on a member's
Golf Share as a consequence of the member's unpaid assessments or dues to Valley Golf. Before
this Court, Valley Golf asserts that such a provision is contained in its by-laws. We required the
parties to submit a certified copy of the by-laws of Valley Golf in effect as of 11 June 1987. 29 In
compliance, Valley Golf submitted a copy of its by-laws, originally adopted on 6 June 1958 30 and
amended on 26 November 1986. 31 The amendments bear no relevance to the issue of delinquent
14
 membership dues. The relevant provisions, found in Article VIII entitled "Club Accounts", are
reproduced below:
Section 1. Lien. — The Club has the first lien on the share of the
stockholder who has, in his/her/its name, or in the name of an assignee,
outstanding accounts and liabilities in favor of the Club to secure the payment
thereof.
xxx xxx xxx
Section 3. The account of any member shall be presented to such
member every month. If any statement of accounts remains unpaid for a period
forty-five (45) days after cut-off date, said member maybe (sic) posted as
deliqnuent (sic). No delinquent member shall be entitled to enjoy the privileges
of such membership for the duration of the deliquency (sic). After the member
shall have been posted as delinquent, the Board may order his/her/its share sold
to satisfy the claims of the club; after which the member loses his/her/its rights
and privileges permanently. No member can be indebted to the Club at any time
any amount in excess of the credit limit set by the Board of Directors from time
to time. The unpaid account referred to here includes non-payment of dues,
charges and other assessments and non-payment for subscriptions. 32 ADCEcI
To bolster its cause, Valley Golf proffers the proposition that by virtue of the by-law
provisions a lien is created on the shares of its members to ensure payment of dues, charges and
other assessments on the members. Both the SEC and the Court of Appeals debunked the
tenability or applicability of the proposition through two common thrusts.
Firstly, they correctly noted that the procedure under Section 67 of the Corporation
Code for the stock corporation's recourse on unpaid subscriptions is inapt to a non-stock
corporation vis-à-vis a member's outstanding dues. The basic factual backdrops in the two
situations are disperate. * In the latter, the member has fully paid for his membership share,
while in the former, the stockholder has not yet fully paid for the share or shares of stock he
subscribed to, thereby authorizing the stock corporation to call on the unpaid subscription,
declare the shares delinquent and subject the delinquent shares to a sale at public auction. 33
Secondly, the two bodies below concluded that following Section 6 of the Corporation
Code, which provides:
The shares of stock of stock corporation may be divided into classes or
series of shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of
incorporation . . . 34
the lien on the Golf Share in favor of Valley Golf is not valid, as the power to constitute such a
lien should be provided in the articles of incorporation, and not merely in the by-laws.
However, there is a specific provision under the Title XI, on Non-Stock Corporations of
the Corporation Code dealing with termination of membership. Section 91 of the Corporation Code
provides:
SEC. 91. Termination of membership. — Membership shall be
terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws. Termination of membership shall have the effect
of extinguishing all rights of a member in the corporation or in its property,
unless otherwise provided in the articles of incorporation or the by-laws.
(Emphasis supplied) aCHDST
Clearly, the right of a non-stock corporation such as Valley Golf to expel a member
through the forfeiture of the Golf Share may be established in the by-laws alone, as is the
PILOTIN [ CORPO- Busmente Set 4]
situation in this case. Thus, both the SEC and the appellate court are wrong in holding that the
establishment of a lien and the loss of the Golf Share consequent to the enforcement of the lien
should have been provided for in the articles of incorporation.
IV.
Given that the cause for termination of membership in a non-stock corporation may be
established through the by-laws alone and need not be set forth in the articles of incorporation, is
there any cause to invalidate the lien and the subsequent sale of the Golf Share by Valley Golf?
Former SEC Chairperson, Rosario Lopez, in her commentaries on the Corporation Code,
explains the import of Section 91 in a manner relevant to this case:
The prevailing rule is that the provisions of the articles of
incorporation or by-laws of termination of membership must be strictly complied
with and applied to the letter. Thus, an association whose member fails to pay
his membership due and annual due as required in the by-laws, and which
provides for the termination or suspension of erring members as well as prohibits
the latter from intervening in any manner in the operational activities of the
association, must be observed because by-laws are self-imposed private laws
binding on all members, directors and officers of the corporation. 35
Examining closely the relevant by-law provisions of Valley Golf, 36 it appears that
termination of membership may occur when the following successive conditions are met: (1)
presentation of the account of the member; (2) failure of the member to settle the account
within forty-five days after the cut-off date; (3) posting of the member as delinquent; and (4)
issuance of an order by the board of directors that the share of the delinquent member be sold to
satisfy the claims of Valley Golf. These conditions found in by-laws duly approved by the SEC
warrant due respect and we are disinclined to rule against the validity of the by-law
provisions. aEHASI
At the same time, two points warrant special attention.
A.
Valley Golf has sought to accomplish the termination of Caram's membership through
the sale of the Golf Share, justifying the sale through the constitution of a lien on the Golf Share
under Section 1, Article VIII of its by-laws. Generally in theory, a non-stock corporation has the
power to effect the termination of a member without having to constitute a lien on the
membership share or to undertake the elaborate process of selling the same at public auction.
The articles of incorporation or the by-laws can very well simply provide that the failure of a
member to pay the dues on time is cause for the board of directors to terminate membership. Yet
Valley Golf was organized in such a way that membership is adjunct to ownership of a share in the
club; hence the necessity to dispose of the share to terminate membership.
Share ownership introduces another dimension to the case — the reality that
termination of membership may also lead to the infringement of property rights. Even though
Valley Golf is a non-stock corporation, as evinced by the fact that it is not authorized to distribute
to the holder of its shares dividends or allotments of the surplus profits on the basis of shares
held, 37 the Golf Share has an assigned value reflected on the certificate of membership
itself. 38 Termination of membership in Valley Golf does not merely lead to the withdrawal of the
rights and privileges of the member to club properties and facilities but also to the loss of the Golf
Share itself for which the member had fully paid.
The claim of Valley Golf is limited to the amount of unpaid dues plus incremental costs.
On the other hand, Caram's loss may encompass not only the amount he had paid for the share but
also the price it would have fetched in the market at the time his membership was terminated.
There is an easy way to remedy what is obviously an unfair situation. Taking the same
example, Valley Golf seizes the share, sells it to itself or a third person for P100,000.00, then
15
 refunds P99,000.00 back to the delinquent member. On its face, such a mechanism obviates the
inequity of the first example, and assures that the loss sustained by the delinquent member is
commensurate to the actual debt owed to Valley Golf. After all, applying civil law concepts, the
pecuniary injury sustained by Valley Golf attributable to the delinquent member is only to the
extent of the unpaid debt, and it would be difficult to foresee what right under law Valley Golf
would have to the remainder of the sale's proceeds. cACEaI
A refund mechanism may disquiet concerns of undue loss of property rights
corresponding to termination of membership. Yet noticeably, the by-laws of Valley Golf does not
require the Club to refund to the discharged member the remainder of the proceeds of the sale
after the outstanding obligation is extinguished. After petitioner had filed her complaint though,
Valley Golf did inform her that the heirs of Caram are entitled to such refund.
B.
Let us now turn to the other significant concern.
The by-laws does not provide for a mode of notice to the member before the board of
directors puts up the Golf Share for sale, yet the sale marks the termination of membership.
Whatever semblance of a notice that is afforded is bare at best, ambiguous at most. The member
is entitled to receive a statement of account every month; however, the mode by which the
member is to receive such notice is not elaborated upon. If the member fails to pay within 45 days
from the due date, Valley Golf is immediately entitled to have the member "posted as
delinquent". While the assignation of "delinquent status" is evident enough, it is not as clear what
the word "posted" entails. Connotatively, the word could imply the physical posting of the notice
of delinquency within the club premises, such as a bulletin board, which we recognize is often the
case. Still, the actual posting modality is uncertain from the language of the by-laws.
The moment the member is "posted as delinquent", Valley Golf is immediately enabled
to seize the share and sell the same, thereby terminating membership in the club. The by-laws
does not require any notice to the member from the time delinquency is posted to the day the
sale of the share is actually held. The setup is to the extreme detriment to the member, who
upon being notified that the lien on his share is due for execution would be duly motivated to
settle his accounts to foreclose such possibility.
Does the Corporation Code permit the termination of membership without due notice to
the member? The Code itself is silent on that matter, and the argument can be made that if no
notice is provided for in the articles of incorporation or in the by-laws, then termination may be
effected without any notice at all. Support for such an argument can be drawn from our ruling
in Long v. Basa, 39 which pertains to a religious corporation that is also a non-stock
corporation. 40Therein, the Court upheld the expulsion of church members despite the absence of
any provision on prior notice in the by-laws, stating that the members had "waived such notice by
adhering to those by-laws[,] became members of the church voluntarily[,] entered into its
covenant and subscribed to its rules [and by] doing so, they are bound by their
consent." 41 cEAHSC
However, a distinction should be made between membership in a religious corporation,
which ordinarily does not involve the purchase of ownership shares, and membership in a non-
stock corporation such as Valley Golf, where the purchase of an ownership share is a
condition sine qua non. Membership in Valley Golf entails the acquisition of a property right. In
turn, the loss of such property right could also involve the application of aspects of civil law, in
addition to the provisions of the Corporation Code. To put it simply, when the loss of membership
in a non-stock corporation also entails the loss of property rights, the manner of deprivation of
such property right should also be in accordance with the provisions of the Civil Code.
It has been held that a by-law providing that if a member fails to pay dues for a year, he
shall be deemed to have relinquished his membership and may be excluded from the rooms of the
association and his certificate of membership shall be sold at auction, and any surplus of the
proceeds be paid over him, does notipso facto terminate the membership of one whose dues are a
PILOTIN [ CORPO- Busmente Set 4]
year in arrears; the remedy given for non-payment of dues is not exclusive because the
corporation, so long as he remains a member, may sue on his agreement and collect them. 42
V.
With these foregoing concerns in mind, were the actions of Valley Golf concerning the
Golf Share and membership of Caram warranted? We believe not.
It may be conceded that the actions of Valley Golf were, technically speaking, in accord
with the provisions of its by-laws on termination of membership, vaguely defined as these are. Yet
especially since the termination of membership in Valley Golf is inextricably linked to the
deprivation of property rights over the Golf Share, the emergence of such adverse consequences
make legal and equitable standards come to fore.
The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987 which
we can cite with approval. Lopez cites: TaHIDS
[I]n order that the action of a corporation in expelling a member for
cause may be valid, it is essential, in the absence of a waiver, that there shall
be a hearing or trial of the charge against him, with reasonable notice to him
and a fair opportunity to be heard in his defense. (Fletcher Cyc. Corp., supra) If
the method of trial is not regulated by the by-laws of the association, it
should at least permit substantial justice. The hearing must be conducted fairly
and openly and the body of persons before whom it is heard or who are to decide
the case must be unprejudiced. (SEC Opinion dated September 29, 1987,
Baclaran-Sucat Drivers Association)
It is unmistakably wise public policy to require that the termination of membership in a
non-stock corporation be done in accordance with substantial justice. No matter how one may
precisely define such term, it is evident in this case that the termination of Caram's membership
betrayed the dictates of substantial justice.
Valley Golf alleges in its present petition that it was notified of the death of Caram only
in March of 1990, 43 a claim which is reiterated in its Reply to respondent's Comment. 44 Yet this
claim is belied by the very demand letters sent by Valley Golf to Caram's mailing address. The
letters dated 25 January 1987 and 7 March 1987, both of which were sent within a few months
after Caram's death are both addressed to "Est. of Fermin Z. Caram, Jr.;" and the abbreviation
"[e]st." can only be taken to refer to "estate". This is to be distinguished from the two earlier
letters, both sent prior to Caram's death on 6 October 1986, which were addressed to Caram
himself. Inexplicably, the final letter dated 3 May 1987 was again addressed to Caram himself,
although the fact that the two previous letters were directed at the estate of Caram stands as
incontrovertible proof that Valley Golf had known of Caram's death even prior to the auction sale.
Interestingly, Valley Golf did not claim before the Court of Appeals that they had
learned of Caram's death only after the auction sale. It also appears that Valley Golf had conceded
before the SEC that some of the notices it had sent were addressed to the estate of Caram, and
not the decedent himself. 45 aDSTIC
What do these facts reveal? Valley Golf acted in clear bad faith when it sent the final
notice to Caram under the pretense they believed him to be still alive, when in fact they had very
well known that he had already died. That it was in the final notice that Valley Golf had
perpetrated the duplicity is especially blameworthy, since it was that notice that carried the final
threat that his Golf Share would be sold at public auction should he fail to settle his account on or
before 31 May 1987.
Valley Golf could have very well addressed that notice to the estate of Caram, as it had
done with the third and fourth notices. That it did not do so signifies that Valley Golf was bent on
selling the Golf Share, impervious to potential complications that would impede its intentions,
such as the need to pursue the claim before the estate proceedings of Caram. By pretending to
16
 assume that Caram was then still alive, Valley Golf would have been able to capitalize on his
previous unresponsiveness to their notices and proceed in feigned good faith with the sale.
Whatever the reason Caram was unable to respond to the earlier notices, the fact remains that at
the time of the final notice, Valley Golf knew that Caram, having died and gone, would not be
able to settle the obligation himself, yet they persisted in sending him notice to provide a
color of regularity to the resulting sale.
That reason alone, evocative as it is of the absence of substantial justice in the sale of
the Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the Court of
Appeals.
Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into operation
Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code. 46 These
provisions enunciate a general obligation under law for every person to act fairly and in good faith
towards one another. Non-stock corporations and its officers are not exempt from that obligation.
VI.
Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to
provide any formal notice and hearing procedure before a member's share may be seized and sold.
The Court would have been satisfied had the by-laws or the articles of incorporation established a
procedure which assures that the member would in reality be actually notified of the pending
accounts and provide the opportunity for such member to settle such accounts before the
membership share could be seized then sold to answer for the debt. As we have emphasized,
membership in Valley Golf and many other like-situated non-stock corporations actually involves
the purchase of a membership share, which is a substantially expensive property. As a result,
termination of membership does not only lead to loss of bragging rights, but the actual
deprivation of property. CSIDEc
The Court has no intention to interfere with how non-stock corporations should run their
daily affairs. The Court also respects the fact that membership is * non-stock corporations is a
voluntary arrangement, and that the member who signs up is bound to adhere to what the articles
of incorporation or the by-laws provide, even if provisions are detrimental to the interest of the
member. At the same time, in the absence of a satisfactory procedure under the articles of
incorporation or the by-laws that affords a member the opportunity to defend against the
deprivation of significant property rights in accordance with substantial justice, the terms of the
by-laws or articles of incorporation will not suffice. There will be need in such case to refer to
substantive law. Such a flaw attends the articles of incorporation and by-laws of Valley Golf. The
Court deems it judicious to refer to the protections afforded by the Civil Code, with respect to
the preservation, maintenance, and defense from loss of property rights.
The arrangement provided for in the afore-quoted by-laws of Valley Golf whereby a lien
is constituted on the membership share to answer for subsequent obligations to the corporation
finds applicable parallels under the Civil Code. Membership shares are considered as movable or
personal property, 47 and they can be constituted as security to secure a principal obligation,
such as the dues and fees. There are at least two contractual modes under the Civil Code by
which personal property can be used to secure a principal obligation. The first is through a
contract of pledge, 48 while the second is through a chattel mortgage. 49 A pledge would require
the pledgor to surrender possession of the thing pledged, i.e., the membership share, to the
pledge in order that the contract of pledge may be constituted.50
Is * delivery of the share cannot be effected, the suitable security transaction is the chattel
mortgage. Under Article 2124 of the Civil Code, movables may be the object of a chattel
mortgage. The Chattel mortgage is governed by Act No. 1508, otherwise known The Chattel
Mortgage Law, 51 and the Civil Code. HDTcEI
PILOTIN [ CORPO- Busmente Set 4]
In this case, Caram had not signed any document that manifests his agreement to
constitute his Golf Share as security in favor of Valley Golf to answer for his obligations to the
club. There is no document we can assess that it is substantially compliant with the form of
chattel mortgages under Section 5 of Act No. 1508. The by-laws could not suffice for that purpose
since it is not designed as a bilateral contract between Caram and Valley Golf, or a vehicle by
which Caram expressed his consent to constitute his Golf Share as security for his account with
Valley Golf.
VII.
We finally turn to the matter of damages. The award of damages sustained by the Court
of Appeals was for moral damages in the sum of P50,000.00 and exemplary damages in the sum of
P10,000.00. Both awards should be sustained. In pretending to give actual notice to Caram despite
full knowledge that he was in fact dead, Valley Golf exhibited utter bad faith.
The award of moral damages was based on a finding by the hearing officer that Valley
Golf had "considerably besmirched the reputation and good credit standing of the plaintiff and her
family", such justification having foundation under Article 2217 of the Civil Code. No cause has
been submitted to detract from such award. In addition, exemplary damages were awarded "to
[Valley Golf] defendant from repeating similar acts in the future and to protect the interest of its
stockholders. . . and by way of example or correction for the public good." Such conclusion is in
accordance with Article 2229 of the Civil Code, which establishes liability for exemplary
damages. AEDISC
WHEREFORE, the petition is DENIED. Costs against petitioners.
SO ORDERED.
||| (Valley Golf & Country Club, Inc. v. Vda. de Caram, G.R. No. 158805, [April 16, 2009], 603 PHIL
219-243)
[G.R. No. 165443. April 16, 2009.] CALATAGAN GOLF CLUB, INC., petitioner, vs. SIXTO CLEMENTE,
JR., respondent.
TINGA, J p:
Seeking the reversal of the Decision 1 dated 1 June 2004 of the Court of Appeals in CA-
G.R. SP No. 62331 and the reinstatement of the Decision dated 15 November 2000 of the
Securities and Exchange Commission (SEC) in SEC Case No. 04-98-5954, petitioner Calatagan Golf
Club, Inc. (Calatagan) filed this Rule 45 petition against respondent Sixto Clemente, Jr.
(Clemente).
The key facts are undisputed.
Clemente applied to purchase one share of stock of Calatagan, indicating in his
application for membership his mailing address at "Phimco Industries, Inc. — P.O. Box 240, MCC",
complete residential address, office and residence telephone numbers, as well as the company
(Phimco) with which he was connected, Calatagan issued to him Certificate of Stock No. A-01295
on 2 May 1990 after paying P120,000.00 for the share. 2
Calatagan charges monthly dues on its members to meet expenses for general
operations, as well as costs for upkeep and improvement of the grounds and facilities. The
provision on monthly dues is incorporated in Calatagan's Articles of Incorporation and By-Laws. It
is also reproduced at the back of each certificate of stock. 3 As reproduced in the dorsal side of
Certificate of Stock No. A-01295, the provision reads: IaHAcT
5. The owners of shares of stock shall be subject to the payment of
monthly dues in an amount as may be prescribed in the by-laws or by the Board
of Directors which shall in no case be less that [sic] P50.00 to meet the expenses
17
 for the general operations of the club, and the maintenance and improvement of
its premises and facilities, in addition to such fees as may be charged for the
actual use of the facilities . . .
When Clemente became a member the monthly charge stood at P400.00. He paid
P3,000.00 for his monthly dues on 21 March 1991 and another P5,400.00 on 9 December 1991.
Then he ceased paying the dues. At that point, his balance amounted to P400.00. 4
Ten (10) months later, Calatagan made the initial step to collect Clemente's back
accounts by sending a demand letter dated 21 September 1992. It was followed by a second letter
dated 22 October 1992. Both letters were sent to Clemente's mailing address as indicated in his
membership application but were sent back to sender with the postal note that the address had
been closed. 5 IDSaAH
Calatagan declared Clemente delinquent for having failed to pay his monthly dues for
more than sixty (60) days, specifically P5,600.00 as of 31 October 1992. Calatagan also included
Clemente's name in the list of delinquent members posted on the club's bulletin board. On 1
December 1992, Calatagan's board of directors adopted a resolution authorizing the foreclosure of
shares of delinquent members, including Clemente's; and the public auction of these shares.
On 7 December 1992, Calatagan sent a third and final letter to Clemente, this time
signed by its Corporate Secretary, Atty. Benjamin Tanedo, Jr. The letter contains a warning that
unless Clemente settles his outstanding dues, his share would be included among the delinquent
shares to be sold at public auction on 15 January 1993. Again, this letter was sent to Clemente's
mailing address that had already been closed. 6 TEcADS
On 5 January 1993, a notice of auction sale was posted on the Club's bulletin board, as
well as on the club's premises. The auction sale took place as scheduled on 15 January 1993, and
Clemente's share sold for P64,000. 7 According to the Certificate of Sale issued by Calatagan after
the sale, Clemente's share was purchased by a Nestor A. Virata. 8 At the time of the sale,
Clemente's accrued monthly dues amounted to P5,200.00. 9 A notice of foreclosure of Clemente's
share was published in the 26 May 1993 issue of the Business World. 10
Clemente learned of the sale of his share only in November of 1997. 11 He filed a claim
with the Securities and Exchange Commission (SEC) seeking the restoration of his shareholding in
Calatagan with damages.
On 15 November 2000, the SEC rendered a decision dismissing Clemente's complaint.
Citing Section 69 of the Corporation Code which provides that the sale of shares at an auction sale
can only be questioned within six (6) months from the date of sale, the SEC concluded that
Clemente's claim, filed four (4) years after the sale, had already prescribed. The SEC further held
that Calatagan had complied with all the requirements for a valid sale of the subject share,
Clemente having failed to inform Calatagan that the address he had earlier supplied was no longer
his address. Clemente, the SEC ruled, had acted in bad faith in assuming as he claimed that his
non-payment of monthly dues would merely render his share "inactive". CIAHDT
Clemente filed a petition for review with the Court of Appeals. On 1 June 2004, the
Court of Appeals promulgated a decision reversing the SEC. The appellate court restored
Clemente's one share with a directive to Calatagan to issue in his a new share, * and awarded to
Clemente a total of P400,000.00 in damages, less the unpaid monthly dues of P5,200.00.
In rejecting the SEC's finding that the action had prescribed, the Court of Appeals cited
the SEC's own ruling in SEC Case No. 4160, Caram v. Valley Golf Country Club, Inc., that Section
69 of the Corporation Code specifically refers to unpaid subscriptions to capital stock, and not to
any other debt of stockholders. With the insinuation that Section 69 does not apply to unpaid
membership dues in non-stock corporations, the appellate court employed Article 1140 of the Civil
Code as the proper rule of prescription. The provision sets the prescription period of actions to
recover movables at eight (8) years.
PILOTIN [ CORPO- Busmente Set 4]
The Court of Appeals also pointed out that since that Calatagan's first two demand
letters had been returned to it as sender with the notation about the closure of the mailing
address, it very well knew that its third and final demand letter also sent to the same mailing
address would not be received by Clemente. It noted the by-law requirement that within ten (10)
days after the Board has ordered the sale at auction of a member's share of stock for
indebtedness, the Corporate Secretary shall notify the owner thereof and advise the Membership
Committee of such fact. Finally, the Court of Appeals ratiocinated that "a person who is in danger
of the imminent loss of his property has the right to be notified and be given the chance to
prevent the loss". 12
Hence, the present appeal.
Calatagan maintains that the action of Clemente had prescribed pursuant to Section 69
of the Corporation Code, and that the requisite notices under both the law and the by-laws had
been rendered to Clemente. EHcaAI
Section 69 of the Code provides that an action to recover delinquent stock sold must be
commenced by the filing of a complaint within six (6) months from the date of sale. As correctly
pointed out by the Court of Appeals, Section 69 is part of Title VIII of the Code entitled "Stocks
and Stockholders" and refers specifically to unpaid subscriptions to capital stock, the sale of which
is governed by the immediately preceding Section 68.
The Court of Appeals debunked both Calatagan's and the SEC's reliance on Section 69 by
citing another SEC ruling in the case of Caram v. Valley Golf. In connection with Section 69,
Calatagan raises a peripheral point made in the SEC's Caram ruling. In Caram, the SEC, using as
take-off Section 6 of the Corporation Code which refers to "such rights, privileges or restrictions as
may be stated in the articles of incorporation", pointed out that the Articles of Incorporation of
Valley Golf does not "impose any lien, liability or restriction on the Golf Share [of Caram]", but
only its (Valley Golf's) By-Laws does. Here, Calatagan stresses that its own Articles of
Incorporation does provide that the monthly dues assessed on owners of shares of the corporation,
along with all other obligations of the shareholders to the club, "shall constitute a first lien on the
shares . . . and in the event of delinquency such shares may be ordered sold by the Board of
Directors in the manner provided in the By-Laws to satisfy said dues or other obligations of the
shareholders". 13 With its illative but incomprehensible logic, Calatagan concludes that the
prescriptive period under Section 69 should also apply to the sale of Clemente's share as the lien
that Calatagan perceives to be a restriction is stated in the articles of incorporation and not only
in the by-laws.
We remain unconvinced.
There are fundamental differences that defy equivalence or even analogy between the
sale of delinquent stock under Section 68 and the sale that occurred in this case. At the root of
the sale of delinquent stock is the non-payment of the subscription price for the share of stock
itself. The stockholder or subscriber has yet to fully pay for the value of the share or shares
subscribed. In this case, Clemente had already fully paid for the share in Calatagan and no longer
had any outstanding obligation to deprive him of full title to his share. Perhaps the analogy could
have been made if Clemente had not yet fully paid for his share and the non-stock corporation,
pursuant to an article or by-law provision designed to address that situation, decided to sell such
share as a consequence. But that is not the case here, and there is no purpose for us to apply
Section 69 to the case at bar. CaAIES
Calatagan argues in the alternative that Clemente's suit is barred by Article 1146 of the
Civil Code which establishes four (4) years as the prescriptive period for actions based upon injury
to the rights of the plaintiff on the hypothesis that the suit is purely for damages. As a second
alternative still, Calatagan posits that Clemente's action is governed by Article 1149 of the Civil
Code which sets five (5) years as the period of prescription for all other actions whose prescriptive
periods are not fixed in the Civil Code or in any other law. Neither article is applicable but Article
18
 1140 of the Civil Code which provides that an action to recover movables shall prescribe in eight
(8) years. Calatagan's action is for the recovery of a share of stock, plus damages.
Calatagan's advertence to the fact that the constitution of a lien on the member's share
by virtue of the explicit provisions in its Articles of Incorporation and By-Laws is relevant but
ultimately of no help to its cause. Calatagan's Articles of Incorporation states that the "dues,
together with all other obligations of members to the club, shall constitute a first lien on the
shares, second only to any lien in favor of the national or local government, and in the event of
delinquency such shares may be ordered sold by the Board of Directors in the manner provided in
the By-Laws to satisfy said dues or other obligations of the stockholders". 14 In turn, there are
several provisions in the By-laws that govern the payment of dues, the lapse into delinquency of
the member, and the constitution and execution on the lien. We quote these provisions:
ARTICLE XII — MEMBER'S ACCOUNT
SEC. 31. (a) Billing Members, Posting of Delinquent Members. — The
Treasurer shall bill all members monthly. As soon as possible after the end of
every month, a statement showing the account of bill of a member for said
month will be prepared and sent to him. If the bill of any member remains
unpaid by the 20th of the month following that in which the bill was incurred,
the Treasurer shall notify him that if his bill is not paid in full by the end of the
succeeding month his name will be posted as delinquent the following day at the
Clubhouse bulletin board. While posted, a member, the immediate members of
his family, and his guests, may not avail of the facilities of the Club.
(b) Members on the delinquent list for more than 60 days shall be
reported to the Board and their shares or the shares of the juridical entities they
represent shall thereafter be ordered sold by the Board at auction to satisfy the
claims of the Club as provided for in Section 32 hereon. A member may pay his
overdue account at any time before the auction sale. DTAHSI
Sec. 32. Lien on Shares; Sale of Share at Auction. — The club shall
have a first lien on every share of stock to secure debts of the members to the
Club. This lien shall be annotated on the certificates of stock and may be
enforced by the Club in the following manner:
(a) Within ten (10) days after the Board has ordered the sale at auction
of a member's share of stock for indebtedness under Section 31(b) hereof, the
Secretary shall notify the owner thereof, and shall advise the Membership
Committee of such fact.
(b) The Membership Committee shall then notify all applicants on the
Waiting List and all registered stockholders of the availability of a share of stock
for sale at auction at a specified date, time and place, and shall post a notice to
that effect in the Club bulletin board for at least ten (10) days prior to the
auction sale. EAIcCS
(c) On the date and hour fixed, the Membership Committee shall
proceed with the auction by viva voce bidding and award the sale of the share of
stock to the highest bidder.
(d) The purchase price shall be paid by the winning bidder to the Club
within twenty-four (24) hours after the bidding. The winning bidder or the
representative in the case of a juridical entity shall become a Regular Member
upon payment of the purchase price and issuance of a new stock certificate in
his name or in the name of the juridical entity he represents. The proceeds of
the sale shall be paid by the Club to the selling stockholder after deducting his
obligations to the Club.
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(e) If no bids be received or if the winning bidder fails to pay the
amount of this bid within twenty-four (24) hours after the bidding, the auction
procedures may be repeated from time to time at the discretion of the
Membership Committee until the share of stock be sold. TCacIE
(f) If the proceeds from the sale of the share of stock are not sufficient
to pay in full the indebtedness of the member, the member shall continue to be
obligated to the Club for the unpaid balance. If the member whose share of
stock is sold fails or refuse to surrender the stock certificate for cancellation,
cancellation shall be effected in the books of the Club based on a record of the
proceedings. Such cancellation shall render the unsurrendered stock certificate
null and void and notice to this effect shall be duly published.
It is plain that Calatagan had endeavored to install a clear and comprehensive procedure
to govern the payment of monthly dues, the declaration of a member as delinquent, and the
constitution of a lien on the shares and its eventual public sale to answer for the member's debts.
Under Section 91 of the Corporation Code, membership in a non-stock corporation "shall be
terminated in the manner and for the causes provided in the articles of incorporation or the by-
laws". The By-law provisions are elaborate in explaining the manner and the causes for the
termination of membership in Calatagan, through the execution on the lien of the share. The
Court is satisfied that the By-Laws, as written, affords due protection to the member by assuring
that the member should be notified by the Secretary of the looming execution sale that would
terminate membership in the club. In addition, the By-Laws guarantees that after the execution
sale, the proceeds of the sale would be returned to the former member after deducting the
outstanding obligations. If followed to the letter, the termination of membership under this
procedure outlined in the By-Laws would accord with substantial justice. ICDSca
Yet, did Calatagan actually comply with the by-law provisions when it sold Clemente's
share? The appellate court's finding on this point warrants our approving citation, thus:
In accordance with this provision, Calatagan sent the third and final
demand letter to Clemente on December 7, 1992. The letter states that if the
amount of delinquency is not paid, the share will be included among the
delinquent shares to be sold at public auction. This letter was signed by Atty.
Benjamin Tanedo, Jr., Calatagan Golf's Corporate Secretary. It was again sent to
Clemente's mailing address — Phimco Industries Inc., P.O. Box 240, MCC
Makati. As expected, it was returned because the post office box had been
closed.
Under the By-Laws, the Corporate Secretary is tasked to "give or cause
to be given, all notices required by law or by these By-Laws. . . . and . . . keep a
record of the addresses of all stockholders. As quoted above, Sec. 32 (a) of the
By-Laws further provides that "within ten (10) days after the Board has ordered
the sale at auction of a member's share of stock for indebtedness under Section
31 (b) hereof, the Secretary shall notify the owner thereof and shall advise the
Membership Committee of such fact". The records do not disclose what report
the Corporate Secretary transmitted to the Membership Committee to comply
with Section 32(a). Obviously, the reason for this mandatory requirement is to
give the Membership Committee the opportunity to find out, before the share is
sold, if proper notice has been made to the shareholder member.
We presume that the Corporate Secretary, as a lawyer is
knowledgeable on the law and on the standards of good faith and fairness that
the law requires. As custodian of corporate records, he should also have known
that the first two letters sent to Clemente were returned because the P.O. Box
had been closed. Thus, we are surprised — given his knowledge of the law and of
corporate records — that he would send the third and final letter — Clemente's
19
 last chance before his share is sold and his membership lost — to the same P.O.
Box that had been closed.
Calatagan argues that it "exercised due diligence before the
foreclosure sale" and "sent several notices to Clemente's specified mailing
address". We do not agree; we cannot label as due diligence Calatagan's act of
sending the December 7, 1992 letter to Clemente's mailing address knowing fully
well that the P.O. Box had been closed. Due diligence or good faith imposes
upon the Corporate Secretary — the chief repository of all corporate records —
the obligation to check Clemente's other address which, under the By-Laws, have
to be kept on file and are in fact on file. One obvious purpose of giving the
Corporate Secretary the duty to keep the addresses of members on file is
specifically for matters of this kind, when the member cannot be reached
through his or her mailing address. Significantly, the Corporate Secretary does
not have to do the actual verification of other addressees on record; a mere
clerk can do the very simple task of checking the files as in fact clerks actually
undertake these tasks. In fact, one telephone call to Clemente's phone numbers
on file would have alerted him of his impending loss.
Ultimately, the petition must fail because Calatagan had failed to duly observe both the
spirit and letter of its own by-laws. The by-law provisions was clearly conceived to afford due
notice to the delinquent member of the impending sale, and not just to provide an intricate
facade that would facilitate Calatagan's sale of the share. But then, the bad faith on Calatagan's
part is palpable. As found by the Court of Appeals, Calatagan very well knew that Clemente's
postal box to which it sent its previous letters had already been closed, yet it persisted in sending
that final letter to the same postal box. What for? Just for the exercise, it appears, as it had
known very well that the letter would never actually reach Clemente.
It is noteworthy that Clemente in his membership application had provided his
residential address along with his residence and office telephone numbers. Nothing in Section 32
of Calatagan's By-Laws requires that the final notice prior to the sale be made solely through the
member's mailing address. Clemente cites our aphorism-like pronouncement inRizal Commercial
Banking Corporation v. Court of Appeals 15 that "[a] simple telephone call and an ounce of good
faith . . . could have prevented this present controversy". That memorable observation is quite
apt in this case.
We turn to the matter of damages. The award of actual damages is of course warranted
since Clemente has sustained pecuniary injury by reason of Calatagan's wrongful violation of its
own By-Laws. It would not be feasible to deliver Clemente's original Certificate of Stock because it
had already been cancelled and a new one issued in its place in the name of the purchases at the
auction who was not impleaded in this case. However, the Court of Appeals instead directed that
Calatagan to issue to Clemente * a new certificate of stock. That sufficiently redresses the actual
damages sustained by Clemente. After all, the certificate of stock is simply the evidence of the
share.
The Court of Appeals also awarded Clemente P200,000.00 as moral damages,
P100,000.00 as exemplary damages, and P100,000.00 as attorney's fees. We agree that the award
of such damages is warranted.
The Court of Appeals cited Calatagan for violation of Article 32 of the Civil Code, which
allows recovery of damages from any private individual "who directly or indirectly obstructs,
defeats, violates or in any manner impedes or impairs" the right "against deprivation of property
without due process of law". The plain letter of the provision squarely entitles Clemente to
damages from Calatagan. Even without Article 32 itself, Calatagan will still be bound to pay moral
and exemplary damages to Clemente. The latter was able to duly prove that he had sustained
mental anguish, serious anxiety and wounded feelings by reason of Calatagan's acts, thereby
entitling him to moral damages under Article 2217 of the Civil Code. Moreover, it is evident that
Calatagan's bad faith as exhibited in the course of its corporate actions warrants correction for
the public good, thereby justifying exemplary damages under Article 2229 of the Civil
Code. SIcCEA
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals is AFFIRMED.
Costs against petitioner.
SO ORDERED.
||| (Calatagan Golf Club, Inc. v. Clemente, Jr., G.R. No. 165443, [April 16, 2009], 603 PHIL 295-309)

Calatagan's bad faith and failure to observe its own By-Laws had resulted not merely in
the loss of Clemente's privilege to play golf at its golf course and avail of its amenities, but also in
significant pecuniary damage to him. For that loss, the only blame that could be thrown
Clemente's way was his failure to notify Calatagan of the closure of the P.O. Box. That lapse, if
we uphold Calatagan would cost Clemente a lot. But, in the first place, does he deserve
answerability for failing to notify the club of the closure of the postal box? Indeed, knowing as he
did that Calatagan was in possession of his home address as well as residence and office telephone
numbers, he had every reason to assume that the club would not be at a loss should it need to
contact him. In addition, according to Clemente, he was not even aware of the closure of the
postal box, the maintenance of which was not his responsibility but his employer Phimco's.
The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21
of the Civil Code, 16 under the Chapter on Human Relations. These provisions, which the Court of
Appeals did apply, enunciate a general obligation under law for every person to act fairly and in
good faith towards one another. A non-stock corporation like Calatagan is not exempt from that
obligation in its treatment of its members. The obligation of a corporation to treat every person
honestly and in good faith extends even to its shareholders or members, even if the latter find
themselves contractually bound to perform certain obligations to the corporation. A certificate of
stock cannot be a charter of dehumanization.

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