Then came this portion of the appellant's brief: "On August 12, 1960, admitted, voluntarily submitted itself
itself to the jurisdiction of the lower
Part I-GENERAL PROVISIONS
A. CORPORATION DEFINED.
1. G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased.
RENATO D. TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary
administrator, the County Trust Company of New York, United States
of America, of the estate of the deceased Idonah Slade Perkins, who
died in New York City on March 27, 1960, to surrender to the ancillary
administrator in the Philippines the stock certificates owned by her in
a Philippine corporation, Benguet Consolidated, Inc., to satisfy the
legitimate claims of local creditors, the lower court, then presided by
the Honorable Arsenio Santos, now retired, issued on May 18, 1964,
an order of this tenor: "After considering the motion of the ancillary
administrator, dated February 11, 1964, as well as the opposition filed
by the Benguet Consolidated, Inc., the Court hereby (1) considers as
lost for all purposes in connection with the administration and
liquidation of the Philippine estate of Idonah Slade Perkins the stock
certificates covering the 33,002 shares of stock standing in her name
in the books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation to issue new
certificates in lieu thereof, the same to be delivered by said corporation
to either the incumbent ancillary administrator or to the Probate
Division of this Court."1
From such an order, an appeal was taken to this Court not by the
domiciliary administrator, the County Trust Company of New York,
but by the Philippine corporation, the Benguet Consolidated, Inc. The
appeal cannot possibly prosper. The challenged order represents a
response and expresses a policy, to paraphrase Frankfurter, arising out
of a specific problem, addressed to the attainment of specific ends by
the use of specific remedies, with full and ample support from legal
doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant
Benguet Consolidated, Inc., Idonah Slade Perkins, who died on March
27, 1960 in New York City, left among others, two stock certificates
covering 33,002 shares of appellant, the certificates being in the
possession of the County Trust Company of New York, which as
noted, is the domiciliary administrator of the estate of the deceased.2
Prospero Sanidad instituted ancillary administration proceedings in
the Court of First Instance of Manila; Lazaro A. Marquez was
appointed ancillary administrator, and on January 22, 1963, he was
substituted by the appellee Renato D. Tayag. A dispute arose between
the domiciary administrator in New York and the ancillary
administrator in the Philippines as to which of them was entitled to the
possession of the stock certificates in question. On January 27, 1964,
the Court of First Instance of Manila ordered the domiciliary
administrator, County Trust Company, to "produce and deposit" them
with the ancillary administrator or with the Clerk of Court. The
domiciliary administrator did not comply with the order, and on
February 11, 1964, the ancillary administrator petitioned the court to
"issue an order declaring the certificate or certificates of stocks
covering the 33,002 shares issued in the name of Idonah Slade Perkins
by Benguet Consolidated, Inc., be declared [or] considered as lost." 3
It is to be noted further that appellant Benguet Consolidated, Inc.
admits that "it is immaterial" as far as it is concerned as to "who is
entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator because
the said stock certificates are in existence, they are today in the
possession of the domiciliary administrator, the County Trust
Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock
certificates cannot be declared or considered as lost. Moreover, it
would allege that there was a failure to observe certain requirements
of its by-laws before new stock certificates could be issued. Hence, its
appeal.
As was made clear at the outset of this opinion, the appeal lacks merit.
The challenged order constitutes an emphatic affirmation of judicial
authority sought to be emasculated by the wilful conduct of the
domiciliary administrator in refusing to accord obedience to a court
decree. How, then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response
was called for by the realities of the situation. What cannot be ignored
is that conduct bordering on wilful defiance, if it had not actually
reached it, cannot without undue loss of judicial prestige, be condoned
or tolerated. For the law is not so lacking in flexibility and
resourcefulness as to preclude such a solution, the more so as deeper
reflection would make clear its being buttressed by indisputable
principles and supported by the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated
the honor of the judiciary no less than that of the country. Through this
challenged order, there is thus dispelled the atmosphere of contingent
frustration brought about by the persistence of the domiciliary
administrator to hold on to the stock certificates after it had, as
court by entering its appearance through counsel on June 27, 1963,
and filing a petition for relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality
and effectiveness to what was decreed. For without it, what it had been
decided would be set at naught and nullified. Unless such a blatant
disregard by the domiciliary administrator, with residence abroad, of
what was previously ordained by a court order could be thus remedied,
it would have entailed, insofar as this matter was concerned, not a
partial but a well-nigh complete paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of
the appellee ancillary administrator to gain control and possession of
all assets of the decedent within the jurisdiction of the Philippines. Nor
could it. Such a power is inherent in his duty to settle her estate and
satisfy the claims of local creditors.5 As Justice Tuason speaking for
this Court made clear, it is a "general rule universally recognized" that
administration, whether principal or ancillary, certainly "extends to
the assets of a decedent found within the state or country where it was
granted," the corollary being "that an administrator appointed in one
state or country has no power over property in another state or
country."6
It is to be noted that the scope of the power of the ancillary
administrator was, in an earlier case, set forth by Justice Malcolm.
Thus: "It is often necessary to have more than one administration of
an estate. When a person dies intestate owning property in the country
of his domicile as well as in a foreign country, administration is had
in both countries. That which is granted in the jurisdiction of
decedent's last domicile is termed the principal administration, while
any other administration is termed the ancillary administration. The
reason for the latter is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign
state has no authority in the [Philippines]. The ancillary administration
is proper, whenever a person dies, leaving in a country other than that
of his last domicile, property to be administered in the nature of assets
of the deceased liable for his individual debts or to be distributed
among his heirs."7
It would follow then that the authority of the probate court to require
that ancillary administrator's right to "the stock certificates covering
the 33,002 shares ... standing in her name in the books of [appellant]
Benguet Consolidated, Inc...." be respected is equally beyond
question. For appellant is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal
Revenue8 finds application. "In the instant case, the actual situs of the
shares of stock is in the Philippines, the corporation being domiciled
[here]." To the force of the above undeniable proposition, not even
appellant is insensible. It does not dispute it. Nor could it successfully
do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather
conclusive fashion for the legality of the challenged order, how does
appellant, Benguet Consolidated, Inc. propose to carry the extremely
heavy burden of persuasion of precisely demonstrating the contrary?
It would assign as the basic error allegedly committed by the lower
court its "considering as lost the stock certificates covering 33,002
shares of Benguet belonging to the deceased Idonah Slade Perkins,
..."9 More specifically, appellant would stress that the "lower court
could not "consider as lost" the stock certificates in question when, as
a matter of fact, his Honor the trial Judge knew, and does know, and
it is admitted by the appellee, that the said stock certificates are in
existence and are today in the possession of the domiciliary
administrator in New York."10
There may be an element of fiction in the above view of the lower
court. That certainly does not suffice to call for the reversal of the
appealed order. Since there is a refusal, persistently adhered to by the
domiciliary administrator in New York, to deliver the shares of stocks
of appellant corporation owned by the decedent to the ancillary
administrator in the Philippines, there was nothing unreasonable or
arbitrary in considering them as lost and requiring the appellant to
issue new certificates in lieu thereof. Thereby, the task incumbent
under the law on the ancillary administrator could be discharged and
his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order
being made to depend on the uncontrolled discretion of the party or
entity, in this case domiciled abroad, which thus far has shown the
utmost persistence in refusing to yield obedience. Certainly, appellant
would not be heard to contend in all seriousness that a judicial decree
could be treated as a mere scrap of paper, the court issuing it being
powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the
lower court did not correspond exactly with the facts. To be more
blunt, the quality of truth may be lacking in such a conclusion arrived
at. It is to be remembered however, again to borrow from Frankfurter,
"that fictions which the law may rely upon in the pursuit of legitimate
ends have played an important part in its development."11
Speaking of the common law in its earlier period, Cardozo could state
fictions "were devices to advance the ends of justice, [even if] clumsy
and at times offensive."12 Some of them have persisted even to the
present, that eminent jurist, noting "the quasi contract, the adopted
child, the constructive trust, all of flourishing vitality, to attest the
empire of "as if" today."13 He likewise noted "a class of fictions of
another order, the fiction which is a working tool of thought, but which
at times hides itself from view till reflection and analysis have brought
it to the light."14
What cannot be disputed, therefore, is the at times indispensable role
that fictions as such played in the law. There should be then on the
part of the appellant a further refinement in the catholicity of its
condemnation of such judicial technique. If ever an occasion did call
for the employment of a legal fiction to put an end to the anomalous
situation of a valid judicial order being disregarded with apparent
impunity, this is it. What is thus most obvious is that this particular
alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the
above contention by its invoking one of the provisions of its by-laws
which would set forth the procedure to be followed in case of a lost,
stolen or destroyed stock certificate; it would stress that in the event
of a contest or the pendency of an action regarding ownership of such
certificate or certificates of stock allegedly lost, stolen or destroyed,
the issuance of a new certificate or certificates would await the "final
decision by [a] court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such occasion
to apply such by-law. It is admitted that the foreign domiciliary
administrator did not appeal from the order now in question.
Moreover, there is likewise the express admission of appellant that as
far as it is concerned, "it is immaterial ... who is entitled to the
possession of the stock certificates ..." Even if such were not the case,
it would be a legal absurdity to impart to such a provision
conclusiveness and finality. Assuming that a contrariety exists
between the above by-law and the command of a court decree, the
latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution
overrides a statute, to which, however, the judiciary must yield
deference, when appropriately invoked and deemed applicable. It
would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a court
must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be
saddled unless the appealed order be set aside for its inconsistency
with one of its by-laws does not impress us. Its obedience to a lawful
court order certainly constitutes a valid defense, assuming that such
apprehension of a possible court action against it could possibly
materialize. Thus far, nothing in the circumstances as they have
developed gives substance to such a fear. Gossamer possibilities of a
future prejudice to appellant do not suffice to nullify the lawful
exercise of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated,
Inc. is fraught with implications at war with the basic postulates of
corporate theory.
We start with the undeniable premise that, "a corporation is an
artificial being created by operation of law...."16 It owes its life to the
state, its birth being purely dependent on its will. As Berle so aptly
stated: "Classically, a corporation was conceived as an artificial
person, owing its existence through creation by a sovereign power." 17
As a matter of fact, the statutory language employed owes much to
Chief Justice Marshall, who in the Dartmouth College decision
defined a corporation precisely as "an artificial being, invisible,
intangible, and existing only in contemplation of law."18
The well-known authority Fletcher could summarize the matter thus:
"A corporation is not in fact and in reality a person, but the law treats
it as though it were a person by process of fiction, or by regarding it
as an artificial person distinct and separate from its individual
stockholders.... It owes its existence to law. It is an artificial person
created by law for certain specific purposes, the extent of whose
existence, powers and liberties is fixed by its charter."19 Dean Pound's
terse summary, a juristic person, resulting from an association of
human beings granted legal personality by the state, puts the matter
neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic
theme of which to quote from Friedmann, "is the reality of the group
as a social and legal entity, independent of state recognition and
concession."21 A corporation as known to Philippine jurisprudence is
a creature without any existence until it has received the imprimatur
of the state according to law. It is logically inconceivable therefore
that it will have rights and privileges of a higher priority than that of
its creator. More than that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not excluding the
judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following
American law still of persuasive authority in our jurisdiction, comes
more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action to
enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an
appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to
disregard is to confer upon it not autonomy which may be conceded
but license which cannot be tolerated. It is to argue that it may, when
so minded, overrule the state, the source of its very existence; it is to
contend that what any of its governmental organs may lawfully require
could be ignored at will. So extravagant a claim cannot possibly merit
approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it That is all then that this case presents. It is obvious why the appeal Manuel A. Torres, Jr. 100,120
was shown that in a guardianship proceedings then pending in a lower cannot succeed. It is always easy to conjure extreme and even 57.21 Dir./Pres./Chair
court, the United States Veterans Administration filed a motion for the oppressive possibilities. That is not decisive. It does not settle the
Milagros P. Torres 33,430
refund of a certain sum of money paid to the minor under issue. What carries weight and conviction is the result arrived at, the
19.10 Dir./Treasurer
guardianship, alleging that the lower court had previously granted its just solution obtained, grounded in the soundest of legal doctrines and
petition to consider the deceased father as not entitled to guerilla distinguished by its correspondence with what a sense of realism Josefina P. Torres 8,290
benefits according to a determination arrived at by its main office in requires. For through the appealed order, the imperative requirement 4.73 Dir./Ass. Cor-Sec.
the United States. The motion was denied. In seeking a of justice according to law is satisfied and national dignity and honor
reconsideration of such order, the Administrator relied on an maintained. Ma. Cristina T. Carlos 8,290
American federal statute making his decisions "final and conclusive 4.73 Dir./Cor-Sec.
WHEREFORE, the appealed order of the Honorable Arsenio Santos,
on all questions of law or fact" precluding any other American official Antonio P. Torres, Jr. 8,290
to examine the matter anew, "except a judge or judges of the United the Judge of the Court of First Instance, dated May 18, 1964, is
4.73 Director
States court."23 Reconsideration was denied, and the Administrator affirmed. With costs against oppositor-appelant Benguet
appealed. Consolidated, Inc. Ma. Jacinta P. Torres 8,290
4.73 Director
In an opinion by Justice J.B.L. Reyes, we sustained the lower court.
Thus: "We are of the opinion that the appeal should be rejected. The Ma. Luisa T. Morales 7,790
2. MANUEL A. TORRES, JR., (Deceased), GRACIANO J. 4.45 Director
provisions of the U.S. Code, invoked by the appellant, make the
TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S.
decisions of the U.S. Veterans' Administrator final and conclusive Dante D. Morales 500
JURISPRUDENCIA, AUGUSTUS CESAR AZURA and
when made on claims property submitted to him for resolution; but .28 Director i
EDGARDO D. PABALAN, petitioners, vs. COURT OF
they are not applicable to the present case, where the Administrator is
APPEALS, SECURITIES AND EXCHANGE COMMISSION, In 1984, Judge Torres, in order to make substantial savings in
not acting as a judge but as a litigant. There is a great difference
TORMIL REALTY & DEVELOPMENT CORPORATION, taxes, adopted an estate planning scheme under which he assigned to
between actions against the Administrator (which must be filed
ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. Tormil Realty & Development Corporation (Tormil for brevity)
strictly in accordance with the conditions that are imposed by the
LUISA T. MORALES, and DANTE D. MORALES, respondents. various real properties he owned and his shares of stock in other
Veterans' Act, including the exclusive review by United States courts),
and those actions where the Veterans' Administrator seeks a remedy DECISION corporations in exchange for 225,972 Tormil Realty shares. Hence, on
from our courts and submits to their jurisdiction by filing actions various dates in July and August of 1984, ten (10) deeds of assignment
therein. Our attention has not been called to any law or treaty that KAPUNAN, J.: were executed by the late Judge Torres:
would make the findings of the Veterans' Administrator, in actions In this petition for review on certiorari under Rule 45 of the ASSIGNMENT DATE PROPERTY ASSIGNED
where he is a party, conclusive on our courts. That, in effect, would Revised Rules of Court, petitioners seek to annul the decision of the LOCATION SHARES TO
deprive our tribunals of judicial discretion and render them mere Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May 1994 and
subordinate instrumentalities of the Veterans' Administrator." its subsequent resolution dated 10 May 1995 denying petitioners
motion for reconsideration. BE ISSUED
It is bad enough as the Viloria decision made patent for our judiciary
to accept as final and conclusive, determinations made by foreign The present case involves two separate but interrelated conflicts. 1. July 13, 1984 TCT 81834
governmental agencies. It is infinitely worse if through the absence of The facts leading to the first controversy are as follows: Quezon City 13,252
any coercive power by our courts over juridical persons within our
The late Manuel A. Torres, Jr. (Judge Torres for TCT 144240
jurisdiction, the force and effectivity of their orders could be made to
brevity) was the majority stockholder of Tormil Realty & Quezon City
depend on the whim or caprice of alien entities. It is difficult to
imagine of a situation more offensive to the dignity of the bench or the Development Corporation while private respondents who 2. July 13, 1984 TCT 77008
honor of the country. are the children of Judge Torres deceased brother Antonio Manila
A. Torres, constituted the minority stockholders. In
Yet that would be the effect, even if unintended, of the proposition to particular, their respective shareholdings and positions in TCT 65689
which appellant Benguet Consolidated seems to be firmly committed the corporation were as follows: Manila 78,493
as shown by its failure to accept the validity of the order complained
of; it seeks its reversal. Certainly we must at all pains see to it that it Name of Stockholder Number TCT 109200
does not succeed. The deplorable consequences attendant on appellant of Percentage Position(s) Manila
prevailing attest to the necessity of negative response from us. That is Shares 3. July 13, 1984 TCT 374079
what appellant will get. Makati 8,307
 4. July 24, 1984 TCT 41527 file a complaint with the Securities and Exchange Commission (SEC)
Pasay docketed as SEC Case No. 3153 to compel Judge Torres to deliver to
Tormil Corporation the two (2) deeds of assignment covering the
TCT 41528
aforementioned Makati and Pasay City properties which he had
Pasay
unilaterally revoked and to cause the registration of the corresponding
9,855
titles in the name of Tormil. Private respondents alleged that following
TCT 41529 the disappearance of the properties from the corporations inventory of
Pasay assets, they found that on October 24, 1986, Judge Torres, together
with Edgardo Pabalan and Graciano Tobias, then General Manager
5. Aug. 06, 1984 El Hogar Filipino Stocks and legal counsel, respectively, of Tormil, formed and organized a
2,000 corporation named Torres-Pabalan Realty and Development
6, Aug. 06, 1984 Manila Jockey Club Corporation and that as part of Judge Torres contribution to the new
Stocks 48,737 corporation, he executed in its favor a Deed of Assignment conveying
the same Makati and Pasay City properties he had earlier transferred
7. Aug. 07, 1984 San Miguel Corp. Stocks to Tormil.
50,283
The second controversy--involving the same parties--concerned
8. Aug. 07, 1984 China Banking Corp.
the election of the 1987 corporate board of directors.
Stocks 6,300
The 1987 annual stockholders meeting and election of directors
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468 of Tormil corporation was scheduled on 25 March 1987 in compliance
10. Aug. 29, 1984 Ayala Fund with the provisions of its by-laws.
Stocks 1,322 Pursuant thereto, Judge Torres assigned from his own shares,
one (1) share each to petitioners Tobias, Jocson, Jurisprudencia, Azura
225,972 ii and Pabalan. These assigned shares were in the nature of qualifying
shares, for the sole purpose of meeting the legal requirement to be able
Consequently, the aforelisted properties were duly recorded in to elect them (Tobias and company) to the Board of Directors as
the inventory of assets of Tormil Realty and the revenues generated Torres nominees.
by the said properties were correspondingly entered in the
corporations books of account and financial records. The assigned shares were covered by corresponding Tormil
Stock Certificates Nos. 030, 029, 028, 027, 026 and at the back of each
Likewise, all the assigned parcels of land were duly registered certificate the following inscription is found:
with the respective Register of Deeds in the name of Tormil Realty,
except for the ones located in Makati and Pasay City. The present certificate and/or the one share it
represents, conformably to the purpose and intention of the
At the time of the assignments and exchange, however, only
Deed of Assignment dated March 6, 1987, is not held by
225,000 Tormil Realty shares remained unsubscribed, all of which
me under any claim of ownership and I acknowledge that
were duly issued to and received by Judge Torres (as evidenced by
I hold the same merely as trustee of Judge Manuel A.
stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).iii
Torres, Jr. and for the sole purpose of qualifying me as
Due to the insufficient number of shares of stock issued to Judge Director;
Torres and the alleged refusal of private respondents to approve the (Signature of Assignee) v
needed increase in the corporations authorized capital stock (to cover
the shortage of 972 shares due to Judge Torres under the estate The reason behind the aforestated action was to remedy the
planning scheme), on 11 September 1986, Judge Torres revoked the inequitable lopsided set-up obtaining in the corporation, where,
two (2) deeds of assignment covering the properties in Makati and notwithstanding his controlling interest in the corporation, the late
Pasay City.iv Judge held only a single seat in the nine-member Board of Directors
and was, therefore, at the mercy of the minority, a combination of any
Noting the disappearance of the Makati and Pasay City
two (2) of whom would suffice to overrule the majority stockholder in
properties from the corporations inventory of assets and financial
the Boards decision making functions. vi
records private respondents, on 31 March 1987, were constrained to
On 25 March 1987, the annual stockholders meeting was held as
scheduled. What transpired therein was ably narrated by Attys. Benito
Cataran and Bayani De los Reyes, the official representatives
dispatched by the SEC to observe the proceedings (upon request of the
late Judge Torres) in their report dated 27 March 1987:
xxx.
The undersigned arrived at 1:55 p.m. in the place of
the meeting, a residential bungalow in Urdaneta Village,
Makati, Metro Manila. Upon arrival, Josefina Torres
introduced us to the stockholders namely: Milagros Torres,
Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina
Carlos and Ma. Jacinta Torres. Antonio Torres, Jr.
questioned our authority and personality to appear in the
meeting claiming subject corporation is a family and
private firm. We explained that our appearance there was
merely in response to the request of Manuel Torres, Jr. and
that SEC has jurisdiction over all registered corporations.
Manuel Torres, Jr., a septuagenarian, argued that as holder
of the major and controlling shares, he approved of our
attendance in the meeting.
At about 2:30 p.m., a group composed of Edgardo
Pabalan, Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr.,
Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar
Azura arrived. Atty. Azura told the body that they came as
counsels of Manuel Torres, Jr. and as stockholders having
assigned qualifying shares by Manuel Torres, Jr.
The stockholders meeting started at 2:45 p.m. with
Mr. Pabalan presiding after verbally authorized by Manuel
Torres, Jr., the President and Chairman of the Board. The
secretary when asked about the quorum, said that there was
more than a quorum. Mr. Pabalan distributed copies of the
presidents report and the financial statements. Antonio
Torres, Jr. requested time to study the said reports and
brought out the question of auditing the finances of the
corporation which he claimed was approved previously by
the board. Heated arguments ensued which also touched
on family matters. Antonio Torres, Jr. moved for the
suspension of the meeting but Manuel Torres, Jr. voted for
the continuation of the proceedings.
Mr. Pabalan suggested that the opinion of the SEC
representatives be asked on the propriety of suspending the
meeting but Antonio Torres, Jr. objected reasoning out that
we were just observers.
When the Chairman called for the election of
directors, the Secretary refused to write down the names of
nominees prompting Atty. Azura to initiate the
appointment of Atty. Jocson, Jr. as Acting Secretary.
 Antonio Torres, Jr. nominated the present members
of the Board. At this juncture, Milagros Torres cried out
and told the group of Manuel Torres, Jr. to leave the house.
Manuel Torres, Jr., together with his lawyers-
stockholders went to the residence of Ma. Jacinta Torres in
San Miguel Village, Makati, Metro Manila. The
undersigned joined them since the group with Manuel
Torres, Jr. the one who requested for S.E.C. observers,
represented the majority of the outstanding capital stock
and still constituted a quorum.
At the resumption of the meeting, the following were
nominated and elected as directors for the year 1987-1988:
1.Manuel Torres, Jr.
2.Ma. Jacinta Torres
3.Edgardo Pabalan
4.Graciano Tobias
5.Rodolfo Jocson, Jr.
6.Melvin Jurisprudencia
7.Augustus Cesar Azura
8.Josefina Torres
9.Dante Morales
After the election, it was resolved that
after the meeting, the new board of directors
shall convene for the election of officers.
xxx . vii
Consequently, on 10 April 1987, private respondents instituted
a complaint with the SEC (SEC Case No. 3161) praying in the main,
that the election of petitioners to the Board of Directors be annulled.
Private respondents alleged that the petitioners-nominees were
not legitimate stockholders of Tormil because the assignment of
shares to them violated the minority stockholders right of pre-emption
as provided in the corporations articles and by-laws.
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161
were consolidated for joint hearing and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC
rendered a decision in favor of private respondents. The dispositive
portion thereof states, thus:
WHEREFORE, premises considered, judgment is
hereby rendered as follows:
1. Ordering and directing the respondents,
particularly respondent Manuel A. Torres, Jr., to turn over and
deliver to TORMIL through its Corporate Secretary, Ma.
Cristina T. Carlos: (a) the originals of the Deeds of Assignment
dated July 13 and 24, 1984 together with the owners duplicates
of Transfer Certificates of Title Nos. 374079 of the Registry of
Deeds for Makati, and 41527, 41528 and 41529 of the Registry
of Deeds for Pasay City and/or to cause the formal registration
and transfer of title in and over such real properties in favor of
TORMIL with the proper government agency; (b) all corporate
books of account, records and papers as may be necessary for the
conduct of a comprehensive audit examination, and to allow the
examination and inspection of such accounting books, papers
and records by any or all of the corporate directors, officers and
stockholders and/or their duly authorized representatives or
auditors;
2. Declaring as permanent and final the writ of
preliminary injunction issued by the Hearing Panel on February
13, 1989;
3. Declaring as null and void the election and
appointment of respondents to the Board of Directors and
executive positions of TORMIL held on March 25, 1987, and all
their acts and resolutions made for and in behalf of TORMIL by
authority of and pursuant to such invalid appointment & election
held on March 25, 1987;
4. Ordering the respondents jointly and severally,
to pay the complainants the sum of ONE HUNDRED
THOUSAND PESOS (P100,000.00) and by way of attorneys
fees. viii
Petitioners promptly appealed to the SEC en banc (docketed as
SEC-AC No. 339). Thereafter, on 3 April 1991, during the pendency
of said appeal, petitioner Manuel A. Torres, Jr. died. However, notice
thereof was brought to the attention of the SEC not by petitioners
counsel but by private respondents in a Manifestation dated 24 April
1991.ix
On 8 June 1993, petitioners filed a Motion to Suspend
Proceedings on grounds that no administrator or legal representative
of the late Judge Torres estate has yet been appointed by the Regional
Trial Court of Makati where Sp. Proc. No. M-1768 (In Matter of the
Issuance of the Last Will and Testament of Manuel A. Torres, Jr.) was
pending. Two similar motions for suspension were filed by petitioners
on 28 June 1993 and 9 July 1993.
On 19 July 1993, the SEC en banc issued an Order denying
petitioners aforecited motions on the following ground:
Before the filing of these motions, the Commission
en banc had already completed all proceedings and had
likewise ruled on the merits of the appealed cases. Viewed
in this light, we thus feel that there is nothing left to be
done except to deny these motions to suspend proceedings.
x
On the same date, the SEC en banc rendered a decision, the
dispositive portion of which reads, thus:
WHEREFORE, premises considered, the appealed
decision of the hearing panel is hereby affirmed and all
motions pending before us incident to this appealed case
are necessarily DISMISSED.
SO ORDERED. xi
Undaunted, on 10 August 1993, petitioners proceeded to plead
its cause to the Court of Appeals by way of a petition for review
(docketed as CA-G.R. SP No. 31748).
On 23 May 1994, the Court of Appeals rendered a decision, the
dispositive portion of which states:
WHEREFORE, the petition for review is
DISMISSED and the appealed decision is accordingly
affirmed.
SO ORDERED. xii
From the said decision, petitioners filed a motion for
reconsideration which was denied in a resolution issued by the Court
of Appeals dated 10 May 1995. xiii
Insisting on their cause, petitioners filed the present petition for
review alleging that the Court of Appeals committed the following
errors in its decision:
(1)
WHEN IT RENDERED THE MAY 23, 1994
DECISION, WHICH IS A FULL LENGTH DECISION,
WITHOUT THE EVIDENCE AND THE ORIGINAL
RECORD OF S.E.C. - AC NO. 339 BEING PROPERLY
BROUGHT BEFORE IT FOR REVIEW AND RE-
EXAMINATION, AN OMISSION RESULTING IN A
CLEAR TRANSGRESSION OR CURTAILMENT OF
THE RIGHTS OF THE HEREIN PETITIONERS TO
PROCEDURAL DUE PROCESS;
(2)
WHEN IT SANCTIONED THE JULY 19, 1993
DECISION OF THE RESPONDENT S.E.C., WHICH IS
VOID FOR HAVING BEEN RENDERED WITHOUT
 THE PROPER SUBSTITUTION OF THE DECEASED
PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO.
339 AND CONSEQUENTLY, FOR WANT OF
JURISDICTION OVER THE SAID DECEASEDS
TESTATE ESTATE, AND MOREOVER, WHEN IT
SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY
ITS APPLICATION OF THE CIVIL LAW CONCEPT
OF NEGOTIORUM GESTIO;
(3)
WHEN IT FAILED TO SEE, AS A
CONSEQUENCE OF THE EVIDENCE AND THE
ORIGINAL RECORD OF S.E.C. -AC NO. 339 NOT
HAVING ACTUALLY BEEN RE-EXAMINED, THAT
S.E.C. CASE NO. 3153 INVOLVED A SITUATION
WHERE PERFORMANCE WAS IMPOSSIBLE (AS
CONTEMPLATED UNDER ARTICLE 1191 OF THE
CIVIL CODE) AND WAS NOT A MERE CASE OF
LESION OR INADEQUACY OF CAUSE (UNDER
ARTICLE 1355 OF THE CIVIL CODE) AS SO
ERRONEOUSLY CHARACTERIZED BY THE
RESPONDENT S.E.C.; and,
(4)
WHEN IT FAILED TO SEE, AS A
CONSEQUENCE OF THE EVIDENCE AND THE
ORIGINAL RECORD OF S.E.C.-AC NO. 339 NOT
HAVING ACTUALLY BEEN EXAMINED, THAT THE
RECORDING BY THE LATE JUDGE MANUEL A.
TORRES, JR. OF THE QUESTIONED ASSIGNMENT
OF QUALIFYING SHARES TO HIS NOMINEES, WAS
AFFIRMED IN THE STOCK AND TRANSFER BOOK
BY AN ACTING CORPORATE SECRETARY AND
MOREOVER, THAT ACTUAL NOTICE OF SAID
ASSIGNMENT WAS TIMELY MADE TO THE OTHER
STOCKHOLDERS. xiv
We shall resolve the issues in seriatim.
I respondents) and furthermore declared in the same
Petitioners insist that the failure to transmit the original records
to the Court of Appeals deprived them of procedural due process.
Without the evidence and the original records of the proceedings
before the SEC, the Court of Appeals, petitioners adamantly state,
could not have possibly made a proper appreciation and correct
determination of the issues, particularly the factual issues they had
raised on appeal. Petitioners also assert that since the Court of Appeals
allegedly gave due course to their petition, the original records should
have been forwarded to said court.
Petitioners anchor their argument on Secs. 8 and 11 of SC
Circular 1-91 (dated 27 February 1991) which provides that:
8. WHEN PETITION GIVEN DUE COURSE.-
The Court of Appeals shall give due course to the petition
only when it shows prima facie that the court, commission,
board, office or agency concerned has committed errors of
fact or law that would warrant reversal or modification of
the order, ruling or decision sought to be reviewed. The
findings of fact of the court commission, board, office or
agency concerned when supported by substantial evidence
shall be final.
xxx.
11. TRANSMITTAL OF RECORD.-Within
fifteen (15) days from notice that the petition has been
given due course, the court, commission, board, office or
agency concerned shall transmit to the Court of Appeals
the original or a certified copy of the entire record of the
proceeding under review. The record to be transmitted may
be abridged by agreement of all parties to the proceeding.
The Court of Appeals may require or permit subsequent
correction or addition to the record.
Petitioners contend that the Court of Appeals had given due
course to their petition as allegedly indicated by the following acts:
a) it granted the restraining order applied for by
the herein petitioners, and after hearing, also the writ of
preliminary injunction sought by them; under the original
SC Circular No. 1-91, a petition for review may be given
due course at the onset (paragraph 8) upon a mere prima
facie finding of errors of fact or law having been
committed, and such prima facie finding is but consistent
with the grant of the extra-ordinary writ of preliminary
injunction;
b) it required the parties to submit simultaneous
memoranda in its resolution dated October 15, 1993 (this
is in addition to the comment required to be filed by the
resolution that the petition will be decided on the merits,
instead of outrightly dismissing the same;
c) it rendered a full length decision, wherein:
(aa) it expressly declared the respondent S.E.C. as having
erred in denying the pertinent motions to suspend
proceedings; (bb) it declared the supposed error as having
become a non-issue when the respondent C.A. proceeded
to hear (the) appeal; (cc) it formulated and applied its own
theory of negotiorum gestio in justifying the non-
substitution of the deceased principal party in S.E C. -AC
No. 339 and moreover, its theory of di minimis non curat
lex (this, without first determining the true extent of and
the correct legal characterization of the so-called shortage
of Tormil shares; and, (dd) it expressly affirmed the
assailed decision of respondent S.E.C .xv
Petitioners contention is unmeritorious.
There is nothing on record to show that the Court of Appeals
gave due course to the petition. The fact alone that the Court of
Appeals issued a restraining order and a writ of preliminary injunction
and required the parties to submit their respective memoranda does
not indicate that the petition was given due course. The office of an
injunction is merely to preserve the status quo pending the disposition
of the case. The court can require the submission of memoranda in
support of the respective claims and positions of the parties without
necessarily giving due course to the petition. The matter of whether or
not to give due course to a petition lies in the discretion of the court.
It is worthy to mention that SC Circular No. 1-91 has been
replaced by Revised Administrative Circular No. 1-95 (which took
effect on 1 June 1995) wherein the procedure for appeals from quasi-
judicial agencies to the Court of Appeals was clarified thus:
10. Due course.-- If upon the filing of the comment
or such other pleadings or documents as may be required
or allowed by the Court of Appeals or upon the expiration
of the period for the filing thereof, and on the bases of the
petition or the record the Court of Appeals finds prima
facie that the court or agency concerned has committed
errors of fact or law that would warrant reversal or
modification of the award, judgment, final order or
resolution sought to be reviewed, it may give due course
to the petition; otherwise, it shall dismiss the same. The
findings of fact of the court or agency concerned, when
supported by substantial evidence, shall be binding on the
Court of Appeals.
11. Transmittal of record.-- Within fifteen (15) days
from notice that the petition has been given due course, the
Court of Appeals may require the court or agency
concerned to transmit the original or a legible certified true
copy of the entire record of the proceeding under review.
The record to be transmitted may be abridged by
agreement of all parties to the proceeding. The Court of
Appeals may require or permit subsequent correction of or
addition to the record. (Underscoring ours.)
The aforecited circular now formalizes the correct practice and
clearly states that in resolving appeals from quasi judicial agencies, it
is within the discretion of the Court of Appeals to have the original
records of the proceedings under review be transmitted to it. In this
connection, petitioners claim that the Court of Appeals could not have
decided the case on the merits without the records being brought
before it is patently lame. Indubitably, the Court of Appeals decided
the case on the basis of the uncontroverted facts and admissions
contained in the pleadings, that is, the petition, comment, reply,
rejoinder, memoranda, etc. filed by the parties.
II
Petitioners contend that the decisions of the SEC and the Court
of Appeals are null and void for being rendered without the necessary
substitution of parties (for the deceased petitioner Manuel A. Torres,
Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court,
which provides as follows:
SEC. 17. Death of party.--After a party dies and the
claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the deceased
to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be
granted. If the legal representative fails to appear within
said time, the court may order the opposing party to
procure the appointment of a legal representative of the
deceased within a time to be specified by the court, and the
representative shall immediately appear for and on behalf
of the interest of the deceased. The court charges involved
in procuring such appointment, if defrayed by the
opposing party, may be recovered as costs. The heirs of the
deceased may be allowed to be substituted for the
deceased, without requiring the appointment of an
executor or administrator and the court may appoint
guardian ad litem for the minor heirs.
Petitioners insist that the SEC en banc should have granted the
motions to suspend they filed based as they were on the ground that
the Regional Trial Court of Makati, where the probate of the late Judge
Torres will was pending, had yet to appoint an administrator or legal
representative of his estate.
We are not unaware of the principle underlying the aforequoted
provision:
It has been held that when a party dies in an action
that survives, and no order is issued by the Court for the
appearance of the legal representative or of the heirs of the
deceased to be substituted for the deceased, and as a matter
of fact no such substitution has ever been effected, the trial
held by the court without such legal representative or heirs,
and the judgment rendered after such trial, are null and
void because the court acquired no jurisdiction over the
persons of the legal representative or of the heirs upon effect upon any party, in representation of the deceased,
whom the trial and the judgment are not binding. xvi without trenching upon the fundamental right to a day in
court which is the very essence of the constitutionally
As early as 8 April 1988, Judge Torres instituted Special
enshrined guarantee of due process.
Proceedings No. M-1768 before the Regional Trial Court of Makati
for the ante-mortem probate of his holographic will which he had We are not unaware of several cases where we have
executed on 31 October 1986. Testifying in the said proceedings, ruled that a party having died in an action that survives, the
Judge Torres confirmed his appointment of petitioner Edgardo D. trial held by the court without appearance of the deceaseds
Pabalan as the sole executor of his will and administrator of his estate. legal representative or substitution of heirs and the
The proceedings, however, were opposed by the same parties, herein judgment rendered after such trial, are null and void
private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and because the court acquired no jurisdiction over the persons
Ma. Cristina T. Carlos, xvii who are nephew and nieces of Judge Torres, of the legal representatives or of the heirs upon whom the
being the children of his late brother Antonio A. Torres. trial and the judgment would be binding. This general rule
notwithstanding, in denying petitioners motion for
It can readily be observed therefore that the parties involved in
reconsideration, the Court of Appeals correctly ruled that
the present controversy are virtually the same parties fighting over the
formal substitution of heirs is not necessary when the heirs
representation of the late Judge Torres estate. It should be recalled that
themselves voluntarily appeared, participated in the case
the purpose behind the rule on substitution of parties is the protection
and presented evidence in defense of deceased defendant.
of the right of every party to due process. It is to ensure that the
Attending the case at bench, after all, are these particular
deceased party would continue to be properly represented in the suit
circumstances which negate petitioners belated and
through the duly appointed legal representative of his estate. In the
seemingly ostensible claim of violation of her rights to due
present case, this purpose has been substantially fulfilled (despite the
process. We should not lose sight of the principle
lack of formal substitution) in view of the peculiar fact that both
underlying the general rule that formal substitution of heirs
proceedings involve practically the same parties. Both parties have
must be effectuated for them to be bound by a subsequent
been fiercely fighting in the probate proceedings of Judge Torres
judgment. Such had been the general rule established not
holographic will for appointment as legal representative of his estate.
because the rule on substitution of heirs and that on
Since both parties claim interests over the estate, the rights of the
appointment of a legal representative are jurisdictional
estate were expected to be fully protected in the proceedings before
requirements per se but because non-compliance therewith
the SEC en banc and the Court of Appeals. In either case, whoever
results in the undeniable violation of the right to due
shall be appointed legal representative of Judge Torres estate
process of those who, though not duly notified of the
(petitioner Pabalan or private respondents) would no longer be a
proceedings, are substantially affected by the decision
stranger to the present case, the said parties having voluntarily
rendered therein. xxx.
submitted to the jurisdiction of the SEC and the Court of Appeals and
having thoroughly participated in the proceedings. It is appropriate to mention here that when Judge Torres died on
April 3, 1991, the SEC en banc had already fully heard the parties and
The foregoing rationale finds support in the recent case of Vda.
what remained was the evaluation of the evidence and rendition of the
de Salazar v. CA, xviii wherein the Court expounded thus:
judgment.
The need for substitution of heirs is based on the
Further, petitioners filed their motions to suspend proceedings
right to due process accruing to every party in any
only after more than two (2) years from the death of Judge Torres.
proceeding. The rationale underlying this requirement in
Petitioners counsel was even remiss in his duty under Sec. 16, Rule 3
case a party dies during the pendency of proceedings of a
of the Revised Rules of Court.xix Instead, it was private respondents
nature not extinguished by such death, is that xxx the
who informed the SEC of Judge Torres death through a manifestation
exercise of judicial power to hear and determine a cause
dated 24 April 1991.
implicitly presupposes in the trial court, amongst other
essentials, jurisdiction over the persons of the parties. That For the SEC en banc to have suspended the proceedings to await
jurisdiction was inevitably impaired upon the death of the the appointment of the legal representatives by the estate was
protestee pending the proceedings below such that unless impractical and would have caused undue delay in the proceedings
and until a legal representative is for him duly named and and a denial of justice. There is no telling when the probate court will
within the jurisdiction of the trial court, no adjudication in decide the issue, which may still be appealed to the higher courts.
the cause could have been accorded any validity or binding
 In any case, there has been no final disposition of the properties A comparison of the number of shares that respondent Torres TCT 102200
of the late Judge Torres before the SEC. On the contrary, the decision received from TORMIL by virtue of the deeds of assignment Manila)
of the SEC en banc as affirmed by the Court of Appeals served to and the stock certificates issued by the latter to the former
3. July 13, 1984 TCT 374079
protect and preserve his estate. Consequently, the rule that when a readily shows that TORMIL had substantially performed what
Makati 8,307 1st
party dies, he should be substituted by his legal representative to was expected of it. In fact, the first two issuances were in
protect the interest of his estate in observance of due process was not satisfaction to the properties being revoked by respondent 4. July 24, 1984 TCT 41527
violated in this case in view of its peculiar situation where the estate Torres. Hence, the shortage of 972 shares would never be a Pasay)
was fully protected by the presence of the parties who claim interest valid ground for the revocation of the deeds covering Pasay
thereto either as directors, stockholders or heirs. and Quezon City properties. TCT 41528
Pasay) 9,855 4th
Finally, we agree with petitioners contention that the principle In Universal Food Corp. vs. CA, the Supreme Court held:
of negotiorum gestio xx does not apply in the present case. Said TCT 41529
The general rule is that rescission of a contract will not be Pasay)
principle explicitly covers abandoned or neglected property or
permitted for a slight or carnal breach, but only for such
business. 5. August 6, 1984 El Hogar Filipino Stocks
substantial and fundamental breach as would defeat the very
III object of the parties in making the agreement. 2,000 7th

Petitioners find legal basis for Judge Torres act of revoking the The shortage of 972 shares definitely is not substantial and 6. August 6, 1984 Manila Jockey Club
assignment of his properties in Makati and Pasay City to Tormil fundamental breach as would defeat the very object of the Stocks 48,737 5th
corporation by relying on Art. 1191 of the Civil Code which provides parties in entering into contract. Art. 1355 of the Civil Code 7. August 7, 1984 San Miguel Corp. Stocks
that: also provides: Except in cases specified by law, lesion or 50,238 8th
inadequacy of cause shall not invalidate a contract, unless
ART. 1191. The power to rescind obligations is 8. August 7, 1984 China Banking Corp.
there has been fraud, mistake or undue influences. There
implied in reciprocal ones, in case one of the obligors Stocks 6,300 6th
being no fraud, mistake or undue influence exerted on
should not comply with what is incumbent upon him.
respondent Torres by TORMIL and the latter having 9. August 20, 1984 Ayala Corp. Stocks
The injured party may choose between the already issued to the former of its 225,000 unissued shares, 7,468.2) 9th
fulfillment and the rescission of the obligation, with the the most logical course of action is to declare as null and
payment of damages in either case. He may also seek void the deed of revocation executed by respondent Torres. 10. August 29, 1984 Ayala Fund Stocks
rescission, even after he has chosen fulfillment, if the latter (Rollo, pp. 45-46.) xxi 1,322.1)
should become impossible. TOTAL
The aforequoted Civil Code provision does not apply in this
The court shall decree the rescission claimed, unless particular situation for the obvious reason that a specific number of 225,972.3
there be just cause authorizing the fixing of a period. shares of stock (as evidenced by stock certificates) had already been * Order of stock certificate issuances by TORMIL to
issued to the late Judge Torres in exchange for his Makati and Pasay respondent Torres relative to the Deeds of Assignment he
This is understood to be without prejudice to the City properties. The records thus disclose:
rights of third persons who have acquired the thing, in executed sometime in July and August, 1984. xxii
accordance with articles 1385 and 1388 and the Mortgage DATE OF PROPERTY LOCATION (Emphasis ours.)
Law. NO. OF SHARES ORDER OF Moreover, we agree with the contention of the Solicitor General
Petitioners contentions cannot be sustained. We see no ASSIGNMENT ASSIGNED TO BE ISSUED that the shortage of shares should not have affected the assignment of
justifiable reason to disturb the findings of SEC, as affirmed by the COMPLIANCE the Makati and Pasay City properties which were executed in 13 and
Court of Appeals: 24 July 1984 and the consideration for which have been duly paid or
1. July 13, 1984 TCT 81834 Quezon City) fulfilled but should have been applied logically to the last assignment
We sustain the ruling of respondent SEC in the decision 13,252 3rd of property -- Judge Torres Ayala Fund shares--which was executed
appealed from (Rollo, pp. 45-46) that - on 29 August 1984.xxiii
TCT 144240
x x x the shortage of 972 shares would not be valid ground for Quezon City) IV
respondent Torres to unilaterally revoke the deeds of
2. July 13, 1984 TCT 77008 Manila) Petitioners insist that the assignment of qualifying shares to the
assignment he had executed on July 13, 1984 and July 24,
1984 wherein he voluntarily assigned to TORMIL real TCT 65689 nominees of the late Judge Torres (herein petitioners) does not partake
properties covered by TCT No. 374079 (Makati) and TCT No. Manila) 78,493 2nd of the real nature of a transfer or conveyance of shares of stock as
41527, 41528 and 41529 (Pasay) respectively. would call for the imposition of stringent requirements (with respect
to the) recording of the transfer of said shares. Anyway, petitioners
add, there was substantial compliance with the above-stated
requirement since said assignments were entered by the late Judge
Torres himself in the corporations stock and transfer book on 6 March
1987, prior to the 25 March 1987 annual stockholders meeting and
which entries were confirmed on 8 March 1987 by petitioner Azura
who was appointed Assistant Corporate Secretary by Judge Torres.
Petitioners further argue that:
10.10. Certainly, there is no legal or just basis for the
respondent S.E.C. to penalize the late Judge Torres by
invalidating the questioned entries in the stock and transfer
book, simply because he initially made those entries (they
were later affirmed by an acting corporate secretary) and
because the stock and transfer book was in his possession
instead of the elected corporate secretary, if the
background facts herein-before narrated and the serious
animosities that then reigned between the deceased Judge
and his relatives are to be taken into account;
xxx.
10.12. Indeed it was a practice in the corporate
respondent, a family corporation with only a measly
number of stockholders, for the late judge to have personal
custody of corporate records; as president, chairman and
majority stockholder, he had the prerogative of designating
an acting corporate secretary or to himself make the
needed entries, in instances where the regular secretary,
who is a mere subordinate, is unavailable or intentionally
defaults, which was the situation that obtained
immediately prior to the 1987 annual stockholders meeting
of Tormil, as the late Judge Torres had so indicated in the
stock and transfer book in the form of the entries now in
question;
10.13. Surely, it would have been futile nay foolish
for him to have insisted under those circumstances, for the
regular secretary, who was then part of a group ranged provision, the stock and transfer book was not kept at the
against him, to make the entries of the assignments in favor principal office of the corporation either but at the place of
of his nominees; xxiv respondent Torres.
Petitioners contentions lack merit. These being the obtaining circumstances, any entries made in
the stock and transfer book on March 8, 1987 by respondent
It is precisely the brewing family discord between Judge Torres
Torres of an alleged transfer of nominal shares to Pabalan and
and private respondents--his nephew and nieces that should have
Co. cannot therefore be given any valid effect. Where the
placed Judge Torres on his guard. He should have been more careful
entries made are not valid, Pabalan and Co. cannot therefore
in ensuring that his actions (particularly the assignment of qualifying
be considered stockholders of record of TORMIL. Because
shares to his nominees) comply with the requirements of the law.
they are not stockholders, they cannot therefore be elected as
Petitioners cannot use the flimsy excuse that it would have been a vain
directors of TORMIL. To rule otherwise would not only
attempt to force the incumbent corporate secretary to register the
encourage violation of clear mandate of Sec. 74 of the
aforestated assignments in the stock and transfer book because the
Corporation Code that stock and transfer book shall be kept in
latter belonged to the opposite faction. It is the corporate secretarys
the principal office of the corporation but would likewise open
duty and obligation to register valid transfers of stocks and if said
the flood gates of confusion in the corporation as to who has
corporate officer refuses to comply, the transferor-stockholder may
the proper custody of the stock and transfer book and who are
rightfully bring suit to compel performance.xxv In other words, there
the real stockholders of records of a certain corporation as any
are remedies within the law that petitioners could have availed of,
holder of the stock and transfer book, though not the corporate
instead of taking the law in their own hands, as the cliche goes.
secretary, at pleasure would make entries therein.
Thus, we agree with the ruling of the SEC en banc as affirmed
The fact that respondent Torres holds 81.28% of the
by the Court of Appeals:
outstanding capital stock of TORMIL is of no moment and is
We likewise sustain respondent SEC when it ruled, not a license for him to arrogate unto himself a duty lodged to
interpreting Section 74 of the Corporation Code, as (sic) the corporate secretary.
follows (Rollo, p. 45):
All corporations, big or small, must abide by the provisions of
In the absence of (any) provision to the contrary, the corporate the Corporation Code. Being a simple family corporation is not an
secretary is the custodian of corporate records. Corollarily, he exemption. Such corporations cannot have rules and practices other
keeps the stock and transfer book and makes proper and than those established by law.
necessary entries therein.
WHEREFORE, premises considered, the petition for review on
Contrary to the generally accepted corporate practice, the certiorari is hereby DENIED.
stock and transfer book of TORMIL was not kept by Ms.
SO ORDERED.
Maria Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of the Board
of Directors of TORMIL. In contravention to the above cited

3. PHILIPPINE STOCK EXCHANGE, INC.,
petitioner, vs. THE HONORABLE COURT
OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO
AZUL LAND, INC., respondents.
DECISION
TORRES, JR., J.:
The Securities and Exchange Commission is the
government agency, under the direct general
supervision of the Office of the President,i with the
immense task of enforcing the Revised Securities Act,
and all other duties assigned to it by pertinent laws.
Among its inumerable functions, and one of the most
important, is the supervision of all corporations,
partnerships or associations, who are grantees or
primary franchise and/or a license or permit issued by
the government to operate in the Philippines.i Just how
far this regulatory authority extends, particularly, with
regard to the Petitioner Philippine Stock Exchange, Inc.
is the issue in the case at bar.
In this Petition for Review of Certiorari, petitioner
assails the resolution of the respondent Court of
Appeals, dated June 27, 1996, which affirmed the
decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc.
to be listed in its stock market, thus paving the way for
the public offering of PALIs shares.
The facts of the case are undisputed, and are hereby
restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real
estate corporation, had sought to offer its shares to the
public in order to raise funds allegedly to develop its
properties and pay its loans with several banking
institutions. In January, 1995, PALI was issued a
Permit to Sell its shares to the public by the Securities
and Exchange Commission (SEC). To facilitate the
trading of its shares among investors, PALI sought to
course the trading of its shares through the Philippine
Stock Exchange, Inc. (PSE), for which purpose it filed
with the said stock exchange an application to list its
shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the
PSE, upon a perusal of PALIs application,
recommended to the PSEs Board of Governors the
approval of PALIs listing application.
On February 14, 1996, before it could act upon
PALIs application, the Board of Governors of PSE
received a letter from the heirs of Ferdinand E. Marcos,
claiming that the late President Marcos was the legal
and beneficial owner of certain properties forming part
of the Puerto Azul Beach Hotel and Resort Complex
which PALI claims to be among its assets and that the
Ternate Development Corporation, which is among the
stockholders of PALI, likewise appears to have been
held and continue to be held in trust by one Rebecco
Panlilio for then President Marcos and now, effectively
for his estate, and requested PALIs application to be
deferred. PALI was requested to comment upon the
said letter.
PALIs answer stated that the properties forming
part of Puerto Azul Beach Hotel and Resort Complex
were not claimed by PALI as its assets. On the contrary,
the resort is actually owned by Fantasia Filipina Resort,
Inc. and the Puerto Azul Country Club, entities distinct
from PALI. Furthermore, the Ternate Development
Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also
asserting legal and beneficial ownership of other
properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman
Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting
for comments on the letter of the PALI and the
Marcoses. On March 4, 1996, the PSE was informed
that the Marcoses received a Temporary Restraining
Order on the same date, enjoining the Marcoses from,
among others, further impeding, obstructing, delaying
or interfering in any manner by or any means with the
consideration, processing and approval by the PSE of
the initial public offering of PALI. The TRO was issued
by Judge Martin S. Villarama, Executive Judge of the
RTC of Pasig City in Civil Case No. 65561, pending in
Branch 69 thereof.
In its regular meeting held on March 27, 1996, the
Board of Governors of the PSE reached its decision to
reject PALIs application, citing the existence of serious
claims, issues and circumstances surrounding PALIs
ownership over its assets that adversely affect the
suitability of listing PALIs shares in the stock
exchange.
On April 11, 1996, PALI wrote a letter to the SEC
addressed to the then Acting Chairman, Perfecto R.
Yasay, Jr., bringing to the SECs attention the action
taken by the PSE in the application of PALI for the
listing of its shares with the PSE, and requesting that
the SEC, in the exercise of its supervisory and
regulatory powers over stock exchanges under Section
6(j) of P.D. No. 902-A, review the PSEs action on
PALIs listing application and institute such measures as

are just and proper and under the circumstances.
On the same date, or on April 11, 1996, the SEC
wrote to the PSE, attaching thereto the letter of PALI
and directing the PSE to file its comments thereto
within five days from its receipt and for its authorized
representative to appear for an inquiry on the matter.
On April 22, 1996, the PSE submitted a letter to the
SEC containing its comments to the April 11, 1996
letter of PALI.
On April 24, 1996, the SEC rendered its Order,
reversing the PSEs decision. The dispositive portion of
the said order reads:
WHEREFORE, premises considered, and
invoking the Commissioners authority and
jurisdiction under Section 3 of the Revised
Securities Act, in conjunction with Section 3,
6(j) and 6(m) of the Presidential Decree No.
902-A, the decision of the Board of Governors
of the Philippine Stock Exchange denying the
listing of shares of Puerto Azul Land, Inc., is
hereby set aside, and the PSE is hereby
ordered to immediately cause the listing of the
PALI shares in the Exchange, without
prejudice to its authority to require PALI to
disclose such other material information it
deems necessary for the protection of the
investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said
order on April 29, 1996, which was, however denied by
the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the
Commission finds no compelling reason to
consider its order dated April 24, 1996, and in
the light of recent developments on the
adverse claim against the PALI properties,
PSE should require PALI to submit full
disclosure of material facts and information to
protect the investing public. In this regard,
PALI is hereby ordered to amend its
registration statements filed with the
Commission to incorporate the full disclosure
of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the
Court of Appeals on May 17, 1996 a Petition for
Review (with application for Writ of Preliminary
Injunction and Temporary Restraining Order), assailing
the above mentioned orders of the SEC, submitting the
following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR
AND GRAVE ABUSE OF DISCRETION IN
ISSUING THE ASSAILED ORDERS
WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO
ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE
SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON
LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR
AND GRAVE ABUSE OF DISCRETION IN
FINDING THAT PSE ACTED IN AN
ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALIS LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE
ILLEGAL AND VOID FOR ALLOWING
FURTHER DISPOSITION OF PROPERTIES
IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC
WAS NOT PROPERLY PROMULGATED
AND ITS IMPLEMENTATION AND
APPLICATION IN THIS CASE VIOLATES
THE DUE PROCESS CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the
Petition for Review and subsequently, a Comment and
Motion to Dismiss. On June 10, 1996, PSE filed its
Reply to Comment and Opposition to Motion to
Dismiss.
On June 27, 1996, the Court of Appeals
promulgated its Resolution dismissing the PSEs
Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the decision of
the petitioner PSE, pursuant to Section 3i of the Revised
Securities Act in relation to Section 6(j) and 6(m)i of
P.D. No. 902-A, and Section 38(b)i of the Revised
Securities Act, and for the purpose of ensuring fair
administration of the exchange. Both as a corporation
and as a stock exchange, the petitioner is subject to
public respondents jurisdiction, regulation and control.
Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would
amount to serious consequences, considering that the
petitioner is a stock exchange whose business is
impressed with public interest. Abuse is not remote if
the public respondent is left without any system of
control. If the securities act vested the public
respondent with jurisdiction and control over all
corporations; the power to authorize the establishment
of stock exchanges; the right to supervise and regulate
the same; and the power to alter and supplement rules
of the exchange in the listing or delisting of securities,
then the law certainly granted to the public respondent

the plenary authority over the petitioner; and the power
of review necessarily comes within its authority.
All in all, the court held that PALI complied with
all the requirements for public listing, affirming the
SECs ruling to the effect that:
x x x the Philippine Stock Exchange has acted in
an arbitrary and abusive manner in disapproving
the application of PALI for listing of its shares in
the face of the following considerations:
1. PALI has clearly and admittedly complied
with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable standards
on the suitability for listing of shares, PSE has
failed to justify why it acted differently on the
application of PALI, as compared to the IPOs of
other companies similarly that were allowed
listing in the Exchange;
3. It appears that the claims and issues on the
title to PALIs properties were even less serious
than the claims against the assets of the other
companies in that, the assertions of the Marcoses
that they are owners of the disputed properties
were not substantiated enough to overcome the
strength of a title to properties issued under the
Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of
competent jurisdiction seeking to nullify PALIs
ownership over the disputed properties, neither
has the government instituted recovery
proceedings against these properties. Yet the
import of PSEs decision in denying PALIs
application is that it would be PALI, not the
Marcoses, that must go to court to prove the
legality of its ownership on these properties
before its shares can be listed.
In addition, the argument that the PALI properties
belong to the Military/Naval Reservation does not
inspire belief. The point is, the PALI properties are now
titled. A property losses its public character the moment
it is covered by a title. As a matter of fact, the titles have
long been settled by a final judgment; and the final
decree having been registered, they can no longer be re-
opened considering that the one year period has already
passed. Lastly, the determination of what standard to
apply in allowing PALIs application for listing,
whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed
to the Securities Commission, it being the government
agency that exercises both supervisory and regulatory
authority over all corporations.
On August 15, 1996, the PSE, after it was granted
an extension, filed an instant Petition for Review on
Certiorari, taking exception to the rulings of the SEC
and the Court of Appeals. Respondent PALI filed its
Comment to the petition on October 17, 1996. On the
same date, the PCGG filed a Motion for Leave to file a
Petition for Intervention. This was followed up by the
PCGGs Petition for Intervention on October 21, 1996.
A supplemental Comment was filed by PALI on
October 25, 1997. The Office of the Solicitor General,
representing the SEC and the Court of Appeals,
likewise filed its Comment on December 26, 1996. In
answer to the PCGGs motion for leave to file petition
for intervention, PALI filed its Comment thereto on
January 17, 1997, whereas the PSE filed its own
Comment on January 20, 1997.
On February 25, 1996, the PSE filed its
Consolidated Reply to the comments of respondent
PALI (October 17, 1996) and the Solicitor General
(December 26, 1996). On may 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in
ruling that the SEC had authority to order the PSE to
list the shares of PALI in the stock exchange. Under
presidential decree No. 902-A, the powers of the SEC
over stock exchanges are more limited as compared to
its authority over ordinary corporations. In connection
with this, the powers of the SEC over stock exchanges
under the Revised Securities Act are specifically
enumerated, and these do not include the power to
reverse the decisions of the stock exchange. Authorities
are in abundance even in the United States, from which
the countrys security policies are patterned, to the effect
of giving the Securities Commission less control over
stock exchanges, which in turn are given more lee-way
in making the decision whether or not to allow
corporations to offer their stock to the public through
the stock exchange. This is in accord with the business
judgment rule whereby the SEC and the courts are
barred from intruding into business judgments of
corporations, when the same are made in good faith.
The said rule precludes the reversal of the decision of
the PSE to deny PALIs listing application, absent a
showing a bad faith on the part of the PSE. Under the
listing rule of the PSE, to which PALI had previously
agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an
issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or
reject the issuers listing application if the PSE
determines that the listing shall not serve the interests
of the investing public.
Moreover, PSE argues that the SEC has no
jurisdiction over sequestered corporations, nor with
corporations whose properties are under sequestration.
A reading of Republic of the Philippines vs.
Sandiganbayan, G.R. No. 105205, 240 SCRA 376,

would reveal that the properties of PALI, which were
derived from the Ternate Development Corporation
(TDC) and the Monte del Sol Development
Corporation (MSDC), are under sequestration by the
PCGG, and the subject of forfeiture proceedings in the
Sandiganbayan. This ruling of the Court is the law of
the case between the Republic and the TDC and MSDC.
It categorically declares that the assets of these
corporations were sequestered by the PCGG on March
10, 1986 and April 4, 1988.
It is, likewise, intimidated that the Court of
Appeals sanction that PALIs ownership over its
properties can no longer be questioned, since
certificates of title have been issued to PALI and more
than one year has since lapsed, is erroneous and ignores
well settled jurisprudence on land titles. That a
certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute
rule and admits certain exceptions. It is fundamental
that forest lands or military reservations are non-
alienable. Thus, when a title covers a forest reserve or
a government reservation, such title is void.
PSE, likewise, assails the SECs and the Court of
Appeals reliance on the alleged policy of full disclosure
to uphold the listing of the PALIs shares with the PSE,
in the absence of a clear mandate for the effectivity of
such policy. As it is, the case records reveal the truth
that PALI did not comply with the listing rules and
disclosure requirements. In fact, PALIs documents
supporting its application contained misrepresentations
and misleading statements, and concealed material
information. The matter of sequestration of PALIs
properties and the fact that the same form part of
military/naval/forest reservations were not reflected in
PALIs application.
It is undeniable that the petitioner PSE is not an
ordinary corporation, in that although it is clothed with
the marking of a corporate entity, its functions as the
primary channel through which the vessels of capital
trade ply. The PSEs relevance to the continued
operation and filtration of the securities transactions in
the country gives it a distinct color of importance such
that government intervention in its affairs becomes
justified, if not necessary. Indeed, as the only
operational stock exchange in the country today, the
PSE enjoys a monopoly of securities transactions, and
as such, it yields an immense influence upon the
countrys economy.
Due to this special nature of stock exchanges, the
countrys lawmakers has seen it wise to give special
treatment to the administration and regulation of stock
exchanges.i
These provisions, read together with the general
grant of jurisdiction, and right of supervision and
control over all corporations under Sec. 3 of P.D. 902-
A, give the SEC the special mandate to be vigilant in
the supervision of the affairs of stock exchanges so that
the interests of the investing public may be fully
safeguarded.
Section 3 of Presidential Decree 902-A, standing
alone, is enough authority to uphold the SECs
challenged control authority over the petitioner PSE
even as it provides that the Commission shall have
absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the
grantees of primary franchises and/or a license or
permit issued by the government to operate in the
Philippines The SECs regulatory authority over private
corporations encompasses a wide margin of areas,
touching nearly all of a corporations concerns. This
authority springs from the fact that a corporation owes
its existence to the concession of its corporate franchise
from the state.
The SECs power to look into the subject ruling of
the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out
of the SECs express power to insure fair dealing in
securities traded upon a stock exchange or to ensure the
fair administration of such exchange.i It is, likewise,
observed that the principal function of the SEC is the
supervision and control over corporations, partnerships
and associations with the end in view that investment in
these entities may be encouraged and protected, and
their activities pursued for the promotion of economic
development.i
Thus, it was in the alleged exercise of this authority
that the SEC reversed the decision of the PSE to deny
the application for listing in the stock exchange of the
private respondent PALI. The SECs action was
affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the
primary say as to whether or not securities, including
shares of stock of a corporation, may be traded or not
in the stock exchange. This is in line with the SECs
mission to ensure proper compliance with the laws,
such as the Revised Securities Act and to regulate the
sale and disposition of securities in the country.i As the
appellate court explains:
Paramount policy also supports the authority of the
public respondent to review petitioners denial of
the listing. Being a stock exchange, the petitioner
performs a function that is vital to the national
economy, as the business is affected with public
interest. As a matter of fact, it has often been said
that the economy moves on the basis of the rise and
fall of stocks being traded. By its economic power,
the petitioner certainly can dictate which and how
many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to
interpret its own rules liberally as it may please.
Petitioner can either allow or deny the entry to the

market of securities. To repeat, the monopoly,
unless accompanied by control, becomes subject to
abuse; hence, considering public interest, then it
should be subject to government regulation.
The role of the SEC in our national economy
cannot be minimized. The legislature, through the
Revised Securities Act, Presidential Decree No. 902-A,
and other pertinent laws, has entrusted to it the serious
responsibility of enforcing all laws affecting
corporations and other forms of associations not
otherwise vested in some other government office.i
This is not to say, however, that the PSEs
management prerogatives are under the absolute
control of the SEC. The PSE is, after all, a corporation
authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSEs
main concerns, as such, is still the generation of profit
for its stockholders. Moreover, the PSE has all the
rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to
enter (or not to enter) into contracts with third persons,
and to perform all other legal acts within its allocated
express or implied powers.
A corporation is but an association of individuals,
allowed to transact under an assumed corporate name,
and with a distinct legal personality. In organizing itself
as a collective body, it waives no constitutional
immunities and perquisites appropriate to such body.i
As to its corporate and management decisions,
therefore, the state will generally not interfere with the
same. Questions of policy and of management are left
to the honest decision of the officers and directors of a
corporation, and the courts are without authority to
substitute their judgment for the judgment of the board
of directors. The board is the business manager of the
corporation, and so long as it acts in good faith, its
orders are not reviewable by the courts.i
Thus, notwithstanding the regulatory power of the
SEC over the PSE, and the resultant authority to reverse
the PSEs decision in matters of application for listing in
the market, the SEC may exercise such power only if
the PSEs judgment is attended by bad faith. In board of
Liquidators vs. Kalaw,i it was held that bad faith does
not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity
and conscious doing of wrong. It means a breach of a
known duty through some motive or interest of ill will,
partaking of the nature of fraud.
In reaching its decision to deny the application for
listing of PALI, the PSE considered important facts,
which in the general scheme, brings to serious question
the qualification of PALI to sell its shares to the public
through the stock exchange. During the time for
receiving objections to the application, the PSE heard
from the representative of the late President Ferdinand
E. Marcos and his family who claim the properties of
the private respondent to be part of the Marcos estate.
In time, the PCGG confirmed this claim. In fact, an
order of sequestration has been issued covering the
properties of PALI, and suit for reconveyance to the
state has been filed in the Sandiganbayan Court. How
the properties were effectively transferred, despite the
sequestration order, from the TDC and MSDC to
Rebecco Panlilio, and to the private respondent PALI,
in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise
to serious doubt as to the integrity of PALI as a stock
issuer. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the
best interest of the general public. The purpose of the
Revised Securities Act, after all, is to give adequate and
effective protection to the investing public against
fraudulent representations, or false promises, and the
imposition of worthless ventures.i
It is to be observed that the U.S. Securities Act
emphasized its avowed protection to acts detrimental to
legitimate business, thus:
The Securities Act, often referred to as the
truth in securities Act, was designed not only to
provide investors with adequate information
upon which to base their decisions to buy and sell
securities, but also to protect legitimate business
seeking to obtain capital through honest
presentation against competition form crooked
promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities
and Exchange Commission, p. 14).
As has been pointed out, the effects of such
an act are chiefly (1) prevention of excesses and
fraudulent transactions, merely by requirement of
that details be revealed; (2) placing the market
during the early stages of the offering of a
security a body of information, which operating
indirectly through investment services and expert
investors, will tend to produce a more accurate
appraisal of a security. x x x. Thus, the
Commission may refuse to permit a registration
statement to become effective if it appears on its
face to be incomplete or inaccurate in any
material respect, and empower the Commission
to issue a stop order suspending the effectiveness
of any registration statement which is found to
include any untrue statement of a material fact or
to omit to state any material fact required to be
stated therein or necessary to make the statements
therein not misleading. (Idem).
Also, as the primary market for securities, the PSE
has established its name and goodwill, and it has the
right to protect such goodwill by maintaining a
reasonable standard of propriety in the entities who
choose to transact through its facilities. It was
reasonable for PSE, therefore, to exercise its judgment

in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and
public welfare is safeguarded.
In this connection, it is proper to observe that the
concept of government absolutism in a thing of the past,
and should remain so.
The observation that the title of PALI over its
properties is absolute and can no longer be assailed is
of no moment. At this juncture, there is the claim that
the properties were owned by the TDC and MSDC and
were transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the
claim of the Marcoses that such properties belong to
Marcos estate, and were held only in trust by Rebecco
Panlilio. It is also alleged by the petitioner that these
properties belong to naval and forest reserves, and
therefore beyond private dominion. If any of these
claims is established to be true, the certificates of title
over the subject properties now held by PALI may be
disregarded, as it is an established rule that a
registration of a certificate of title does not confer
ownership over the properties described therein to the
person named as owner. The inscription in the registry,
to be effective, must be made in good faith. The defense
of indefeasibility of a Torrens Title does not extend to
a transferee who takes the certificate of title with notice
of a flaw.
In any case, for the purpose of determining whether
PSE acted correctly in refusing the application of PALI,
the true ownership of the properties of PALI need not
be determined as an absolute fact. What is material is
that the uncertainty of the properties ownership and
alienability exists, and this puts to question the
qualification of PALIs public offering. In sum, the
Court finds that the SEC had acted arbitrarily in
arrogating unto itself the discretion of approving the
application for listing in the PSE of the private
respondent PALI, since this is a matter addressed to the
sound discretion of the PSE, a corporate entity, whose
business judgments are respected in the absence of bad
faith.
The question as to what policy is, or should be
relied upon in approving the registration and sale of
securities in the SEC is not for the Court to determine,
but is left to the sound discretion of the Securities and
Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in
performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives
the SEC the power to promulgate such rules and
regulations as it may consider appropriate in the public
interest for the enforcement of the said laws. The
second paragraph of Section 4 of the said law, on the
other hand, provides that no security, unless exempt by
law, shall be issued, endorsed, sold, transferred or in
any other manner conveyed to the public, unless
registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for
the protection of investors by the Commission.
Presidential Decree No. 902-A, on the other hand,
provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over
the securities market as a whole, and as such, is given
ample authority in determining appropriate policies.
Pursuant to this regulatory authority, the SEC has
manifested that it has adopted the policy of full material
disclosure where all companies, listed or applying for
listing, are required to divulge truthfully and accurately,
all material information about themselves and the
securities they sell, for the protection of the investing
public, and under pain of administrative, criminal and
civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale
or purchase of its securities.i While the employment of
this policy is recognized and sanctioned by laws,
nonetheless, the Revised Securities Act sets substantial
and procedural standards which a proposed issuer of
securities must satisfy.i Pertinently, Section 9 of the
Revised Securities Act sets forth the possible Grounds
for the Rejection of the registration of a security:
- - The Commission may reject a registration
statement and refuse to issue a permit to sell the
securities included in such registration statement
if it finds that - -
(1) The registration statement is on its
face incomplete or inaccurate in any material
respect or includes any untrue statement of a
material fact or omits to state a material facts
required to be stated therein or necessary to
make the statements therein not misleading; or
(2) The issuer or registrant - -
(i) is not solvent or not is sound
financial condition;
(ii) has violated or has not complied
with the provisions of this Act, or the rules
promulgated pursuant thereto, or any order of
the Commission;
(iii) has failed to comply with any of the
applicable requirements and conditions that
the Commission may, in the public interest
and for the protection of investors, impose
before the security can be registered;
(iv) had been engaged or is engaged or
is about to engaged in fraudulent transactions;
(v) is in any was dishonest of is not of
good repute; or
(vi) does not conduct its business in
accordance with law or is engaged in a
business that is illegal or contrary or
government rules and regulations.

(3) The enterprise or the business of the
issuer is not shown to be sound or to be based
on sound business principles;
(4) An officer, member of the board of
directors, or principal stockholder of the issuer
is disqualified to such officer, director or
principal stockholder; or
(5) The issuer or registrant has not
shown to the satisfaction of the Commission
that the sale of its security would not work to
the prejudice to the public interest or as a fraud
upon the purchaser or investors. (Emphasis
Ours)
A reading of the foregoing grounds reveals the
intention of the lawmakers to make the registration and
issuance of securities dependent, to a certain extent, on
the merits of the securities themselves, and of the
issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the
interest of the investing public against fraudulent and
worthless securities, and the SEC is mandated by law
to safeguard these interests, following the policies and
rules therefore provided. The absolute reliance on the
full disclosure method in the registration of securities
is, therefore, untenable. At it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1
and 5) has failed to support the propriety of the issue of
its shares with unfailing clarity, thereby lending support
to the conclusion that the PSE acted correctly in
refusing the listing of PALI in its stock exchange. This
does not discount the effectivity of whatever method
the SEC, in the exercise of its vested authority, chooses
in setting the standard for public offerings of
corporations wishing to do so. However, the SEC must
recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions
of which cannot be amended or supplanted my mere
administrative issuance.
In resum, the Court finds that the PSE has acted
with justified circumspection, discounting, therefore,
any imputation of arbitrariness and whimsical
animation on its part. Its action in refusing to allow the
listing of PALI in the stock exchange is justified by the
law and by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing
considerations, the Court hereby GRANTS the Petition
for Review on Certiorari. The decisions of the Court of
Appeals and the Securities and Exchage Commission
dated July 27, 1996 and April 24, 1996, respectively,
are hereby REVERSED and SET ASIDE, and a new
Judgment is hereby ENTERED, affirming the decision
of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto
Azul Land, Inc.
SO ORDERED.
I. Art. XII Section 16, Consti
ENGR. RANULFO C. FELICIANO, in his capacity
as General Manager of the Leyte Metropolitan
Water District (LMWD), Tacloban City, petitioner,
vs. COMMISSION ON AUDIT, Chairman CELSO
D. GANGAN, Commissioners RAUL C. FLORES
and EMMANUEL M. DALMAN, and Regional
Director of COA Region VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorarii to annul the
Commission on Audits (COA) Resolution dated 3
January 2000 and the Decision dated 30 January 2001
denying the Motion for Reconsideration. The COA
denied petitioner Ranulfo C. Felicianos request for
COA to cease all audit services, and to stop charging
auditing fees, to Leyte Metropolitan Water District
(LMWD). The COA also denied petitioners request for
COA to refund all auditing fees previously paid by
LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office
No. VIII audited the accounts of LMWD.
Subsequently, LMWD received a letter from COA
dated 19 July 1999 requesting payment of auditing fees.
As General Manager of LMWD, petitioner sent a reply
dated 12 October 1999 informing COAs Regional
Director that the water district could not pay the
auditing fees. Petitioner cited as basis for his action
Sections 6 and 20 of Presidential Decree 198 (PD 198)i,
as well as Section 18 of Republic Act No. 6758 (RA
6758). The Regional Director referred petitioners reply
to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA
through the Regional Director asking for refund of all
auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA
Chairman Celso D. Gangans Resolution dated 3
January 2000 denying his requests. Petitioner filed a
motion for reconsideration on 31 March 2000, which
COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant
petition. Attached to the petition were resolutions of the
Visayas Association of Water Districts (VAWD) and
the Philippine Association of Water Districts (PAWD)
supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled
COAs audit jurisdiction over local water districts in

Davao City Water District v. Civil Service Commission
and Commission on Audit,i as follows:
The above-quoted provision [referring to
Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private
corporations. It is clear therefrom that the power
to appoint the members who will comprise the
members of the Board of Directors belong to the
local executives of the local subdivision unit
where such districts are located. In contrast, the
members of the Board of Directors or the trustees
of a private corporation are elected from among
members or stockholders thereof. It would not be
amiss at this point to emphasize that a private
corporation is created for the private purpose,
benefit, aim and end of its members or
stockholders. Necessarily, said members or
stockholders should be given a free hand to
choose who will compose the governing body of
their corporation. But this is not the case here and
this clearly indicates that petitioners are not
private corporations.
The COA also denied petitioners request for COA to
stop charging auditing fees as well as petitioners
request for COA to refund all auditing fees already
paid.
The Issues
Petitioner contends that COA committed grave
abuse of discretion amounting to lack or excess of
jurisdiction by auditing LMWD and requiring it to pay
auditing fees. Petitioner raises the following issues for
resolution:
1. Whether a Local Water District (LWD)
created under PD 198, as amended, is a
government-owned or controlled corporation
subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended,
prohibits COAs certified public accountants
from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the
COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing lawsi mandate COA
to audit all government agencies, including
government-owned and controlled corporations
(GOCCs) with original charters. An LWD is a GOCC
with an original charter. Section 2(1), Article IX-D of
the Constitution provides for COAs audit jurisdiction,
as follows:
SECTION 2. (1) The Commission on
Audit shall have the power, authority and duty to
examine, audit, and settle all accounts pertaining
to the revenue and receipts of, and expenditures
or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any
of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled
corporations with original charters, and on a
post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted
fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c)
other government-owned or controlled
corporations and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the
government, which are required by law or the
granting institution to submit to such audit as a
condition of subsidy or equity. However, where
the internal control system of the audited
agencies is inadequate, the Commission may
adopt such measures, including temporary or
special pre-audit, as are necessary and
appropriate to correct the deficiencies. It shall
keep the general accounts of the Government
and, for such period as may be provided by law,
preserve the vouchers and other supporting
papers pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to
government agencies or instrumentalities, but also to
government-owned and controlled corporations with
original charters as well as other government-owned or
controlled corporations without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original
Charters
Petitioner seeks to revive a well-settled issue.
Petitioner asks for a re-examination of a doctrine
backed by a long line of cases culminating in Davao
City Water District v. Civil Service Commissioni and
just recently reiterated in De Jesus v. Commission on
Audit.i Petitioner maintains that LWDs are not
government-owned and controlled corporations with
original charters. Petitioner even argues that LWDs are
private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws,
which would give a new perspective to the issue of the
true character of water districts.i
Petitioner theorizes that what PD 198 created was
the Local Waters Utilities Administration (LWUA) and
not the LWDs. Petitioner claims that LWDs are created
pursuant to and not created directly by PD 198. Thus,
petitioner concludes that PD 198 is not an original
charter that would place LWDs within the audit
jurisdiction of COA as defined in Section 2(1), Article

IX-D of the Constitution. Petitioner elaborates that PD
198 does not create LWDs since it does not expressly
direct the creation of such entities, but only provides for
their formation on an optional or voluntary basis.i
Petitioner adds that the operative act that creates an
LWD is the approval of the Sanggunian Resolution as
specified in PD 198.
Petitioners contention deserves scant
consideration.
We begin by explaining the general framework
under the fundamental law. The Constitution
recognizes two classes of corporations. The first refers
to private corporations created under a general law. The
second refers to government-owned or controlled
corporations created by special charters. Section 16,
Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private
corporations. Government-owned or controlled
corporations may be created or established by
special charters in the interest of the common
good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of
private corporations except by a general law applicable
to all citizens.i The purpose of this constitutional
provision is to ban private corporations created by
special charters, which historically gave certain
individuals, families or groups special privileges denied
to other citizens.i
In short, Congress cannot enact a law creating a
private corporation with a special charter. Such
legislation would be unconstitutional. Private
corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a
general law. Stated differently, only corporations
created under a general law can qualify as private
corporations. Under existing laws, that general law is
the Corporation Code,i except that the Cooperative
Code governs the incorporation of cooperatives.i
The Constitution authorizes Congress to create
government-owned or controlled corporations through
special charters. Since private corporations cannot have
special charters, it follows that Congress can create
corporations with special charters only if such
corporations are government-owned or controlled.
Obviously, LWDs are not private corporations
because they are not created under the Corporation
Code. LWDs are not registered with the Securities and
Exchange Commission. Section 14 of the Corporation
Code states that [A]ll corporations organized under this
code shall file with the Securities and Exchange
Commission articles of incorporation x x x. LWDs have
no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or
members to elect the board directors of LWDs as in the
case of all corporations registered with the Securities
and Exchange Commission. The local mayor or the
provincial governor appoints the directors of LWDs for
a fixed term of office. This Court has ruled that LWDs
are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is
clear that what has been excluded from the
coverage of the CSC are those corporations
created pursuant to the Corporation Code.
Significantly, petitioners are not created
under the said code, but on the contrary, they
were created pursuant to a special law and are
governed primarily by its provision.i
(Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their
special charter. Since under the Constitution only
government-owned or controlled corporations may
have special charters, LWDs can validly exist only if
they are government-owned or controlled. To claim that
LWDs are private corporations with a special charter is
to admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their
legal existence and power from the Corporation Code,
LWDs derive their legal existence and power from PD
198. Sections 6 and 25 of PD 198i provide:
Section 6. Formation of District. This
Act is the source of authorization and power
to form and maintain a district. For purposes
of this Act, a district shall be considered as a
quasi-public corporation performing public
service and supplying public wants. As such, a
district shall exercise the powers, rights and
privileges given to private corporations under
existing laws, in addition to the powers
granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which
shall include the name of the city, municipality,
or province, or region thereof, served by said
system, followed by the words Water District.
(b) A description of the boundary of the district.
In the case of a city or municipality, such
boundary may include all lands within the city or
municipality. A district may include one or more
municipalities, cities or provinces, or portions
thereof.
(c) A statement completely transferring
any and all waterworks and/or sewerage facilities
managed, operated by or under the control of
such city, municipality or province to such
district upon the filing of resolution forming the

district.
(d) A statement identifying the purpose for
which the district is formed, which shall include
those purposes outlined in Section 5 above.
(e) The names of the initial directors of the
district with the date of expiration of term of
office for each.
(f) A statement that the district may only be
dissolved on the grounds and under the
conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers,
rights and obligations as set forth in Section 36 of
this Title.
Nothing in the resolution of formation shall state
or infer that the local legislative body has the
power to dissolve, alter or affect the district
beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces,
or any combination thereof, desire to form a
single district, a similar resolution shall be
adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. The district may
exercise all the powers which are expressly
granted by this Title or which are necessarily
implied from or incidental to the powers and
purposes herein stated. For the purpose of
carrying out the objectives of this Act, a district
is hereby granted the power of eminent domain,
the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis
supplied)
Clearly, LWDs exist as corporations only by
virtue of PD 198, which expressly confers on
LWDs corporate powers. Section 6 of PD 198
provides that LWDs shall exercise the powers,
rights and privileges given to private corporations
under existing laws. Without PD 198, LWDs
would have no corporate powers. Thus, PD 198
constitutes the special enabling charter of LWDs.
The ineluctable conclusion is that LWDs are
government-owned and controlled corporations
with a special charter.
The phrase government-owned and
controlled corporations with original charters
means GOCCs created under special laws and not
under the general incorporation law. There is no
difference between the term original charters and
special charters. The Court clarified this in
National Service Corporation v. NLRCi by
citing the deliberations in the Constitutional
Commission, as follows:
THE PRESIDING OFFICER (Mr.
Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding
Officer, I am amending my original proposed
amendment to now read as follows: including
government-owned or controlled corporations
WITH ORIGINAL CHARTERS. The purpose
of this amendment is to indicate that
government corporations such as the GSIS and
SSS, which have original charters, fall within
the ambit of the civil service. However,
corporations which are subsidiaries of these
chartered agencies such as the Philippine
Airlines, Manila Hotel and Hyatt are excluded
from the coverage of the civil service.
THE PRESIDING OFFICER (Mr.
Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr.
Presiding Officer. By the term original
charters, what exactly do we mean?
MR. ROMULO. We mean that they
were created by law, by an act of Congress,
or by special law.
MR. FOZ. And not under the general
corporation law.
MR. ROMULO. That is correct. Mr.
Presiding Officer.
MR. FOZ. With that understanding and
clarification, the Committee accepts the
amendment.
MR. NATIVIDAD. Mr. Presiding
Officer, so those created by the general
corporation law are out.
MR. ROMULO. That is correct.
(Emphasis supplied)
Again, in Davao City Water District v. Civil
Service Commission,i the Court reiterated the meaning
of the phrase government-owned and controlled
corporations with original charters in this wise:
By government-owned or controlled
corporation with original charter, We mean
government owned or controlled corporation
created by a special law and not under the
Corporation Code of the Philippines. Thus, in
the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service
Corporation (NASECO) v. National Labor
Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988,
quoting extensively from the deliberations
of the 1986 Constitutional Commission in
respect of the intent and meaning of the new

phrase with original charter, in effect held
that government-owned and controlled
corporations with original charter refer to
corporations chartered by special law as
distinguished from corporations organized
under our general incorporation statute the
Corporation Code. In NASECO, the
company involved had been organized under
the general incorporation statute and was a
subsidiary of the National Investment
Development Corporation (NIDC) which in
turn was a subsidiary of the Philippine
National Bank, a bank chartered by a special
statute. Thus, government-owned or
controlled corporations like NASECO are
effectively, excluded from the scope of the
Civil Service. (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan
resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create
corporations. This is a patently baseless assumption.
The Local Government Codei does not vest in the
Sangguniang Bayan the power to create corporations.i
What the Local Government Code empowers the
Sangguniang Bayan to do is to provide for the
establishment of a waterworks system subject to
existing laws. Thus, Section 447(5)(vii) of the Local
Government Code provides:
SECTION 447. Powers, Duties,
Functions and Compensation. (a) The
sangguniang bayan, as the legislative body of the
municipality, shall enact ordinances, approve
resolutions and appropriate funds for the general
welfare of the municipality and its inhabitants
pursuant to Section 16 of this Code and in the
proper exercise of the corporate powers of the
municipality as provided for under Section 22 of
this Code, and shall:
xxx
(vii) Subject to existing laws, provide
for the establishment, operation, maintenance,
and repair of an efficient waterworks system
to supply water for the inhabitants; regulate
the construction, maintenance, repair and use
of hydrants, pumps, cisterns and reservoirs;
protect the purity and quantity of the water
supply of the municipality and, for this
purpose, extend the coverage of appropriate
ordinances over all territory within the
drainage area of said water supply and within
one hundred (100) meters of the reservoir,
conduit, canal, aqueduct, pumping station, or
watershed used in connection with the water
service; and regulate the consumption, use or
wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a
waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has no
power to create a corporate entity that will operate its
waterworks system. However, the Sangguniang Bayan
may avail of existing enabling laws, like PD 198, to
form and incorporate a water district. Besides, even
assuming for the sake of argument that the Sangguniang
Bayan has the power to create corporations, the LWDs
would remain government-owned or controlled
corporations subject to COAs audit jurisdiction. The
resolution of the Sangguniang Bayan would constitute
an LWDs special charter, making the LWD a
government-owned and controlled corporation with an
original charter. In any event, the Court has already
ruled in Baguio Water District v. Trajanoi that the
Sangguniang Bayan resolution is not the special charter
of LWDs, thus:
While it is true that a resolution of a local
sanggunian is still necessary for the final
creation of a district, this Court is of the
opinion that said resolution cannot be
considered as its charter, the same being
intended only to implement the provisions of
said decree.
Petitioner further contends that a law must create
directly and explicitly a GOCC in order that it may have
an original charter. In short, petitioner argues that one
special law cannot serve as enabling law for several
GOCCs but only for one GOCC. Section 16, Article XII
of the Constitution mandates that Congress shall not,
except by general law,i provide for the creation of
private corporations. Thus, the Constitution prohibits
one special law to create one private corporation,
requiring instead a general law to create private
corporations. In contrast, the same Section 16 states that
Government-owned or controlled corporations may be
created or established by special charters. Thus, the
Constitution permits Congress to create a GOCC with
a special charter. There is, however, no prohibition on
Congress to create several GOCCs of the same class
under one special enabling charter.
The rationale behind the prohibition on private
corporations having special charters does not apply to
GOCCs. There is no danger of creating special
privileges to certain individuals, families or groups if
there is one special law creating each GOCC. Certainly,
such danger will not exist whether one special law
creates one GOCC, or one special enabling law creates
several GOCCs. Thus, Congress may create GOCCs
either by special charters specific to each GOCC, or by
one special enabling charter applicable to a class of
GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private
corporations because Section 6 of PD 198i declares that
LWDs shall be considered quasi-public in nature.

Petitioners rationale is that only private corporations
may be deemed quasi-public and not public
corporations. Put differently, petitioner rationalizes that
a public corporation cannot be deemed quasi-public
because such corporation is already public. Petitioner
concludes that the term quasi-public can only apply to
private corporations. Petitioners argument is
inconsequential.
Petitioner forgets that the constitutional criterion
on the exercise of COAs audit jurisdiction depends on
the governments ownership or control of a corporation.
The nature of the corporation, whether it is private,
quasi-public, or public is immaterial.
The Constitution vests in the COA audit
jurisdiction over government-owned and controlled
corporations with original charters, as well as
government-owned or controlled corporations without
original charters. GOCCs with original charters are
subject to COA pre-audit, while GOCCs without
original charters are subject to COA post-audit. GOCCs
without original charters refer to corporations created
under the Corporation Code but are owned or controlled
by the government. The nature or purpose of the
corporation is not material in determining COAs audit
jurisdiction. Neither is the manner of creation of a
corporation, whether under a general or special law.
The determining factor of COAs audit jurisdiction
is government ownership or control of the
corporation. In Philippine Veterans Bank Employees
Union-NUBE v. Philippine Veterans Bank,i the Court
even ruled that the criterion of ownership and control is
more important than the issue of original charter, thus:
This point is important because the
Constitution provides in its Article IX-B,
Section 2(1) that the Civil Service embraces
all branches, subdivisions, instrumentalities,
and agencies of the Government, including
government-owned or controlled corporations
with original charters. As the Bank is not
owned or controlled by the Government
although it does have an original charter in
the form of R.A. No. 3518,i it clearly does
not fall under the Civil Service and should
be regarded as an ordinary commercial
corporation. Section 28 of the said law so
provides. The consequence is that the relations
of the Bank with its employees should be
governed by the labor laws, under which in
fact they have already been paid some of their
claims. (Emphasis supplied)
Certainly, the government owns and controls
LWDs. The government organizes LWDs in
accordance with a specific law, PD 198. There is no
private party involved as co-owner in the creation of an
LWD. Just prior to the creation of LWDs, the national
or local government owns and controls all their assets.
The government controls LWDs because under PD 198
the municipal or city mayor, or the provincial governor,
appoints all the board directors of an LWD for a fixed
term of six years.i The board directors of LWDs are not
co-owners of the LWDs. LWDs have no private
stockholders or members. The board directors and other
personnel of LWDs are government employees subject
to civil service lawsi and anti-graft laws.i
While Section 8 of PD 198 states that [N]o public
official shall serve as director of an LWD, it only means
that the appointees to the board of directors of LWDs
shall come from the private sector. Once such private
sector representatives assume office as directors, they
become public officials governed by the civil service
law and anti-graft laws. Otherwise, Section 8 of PD 198
would contravene Section 2(1), Article IX-B of the
Constitution declaring that the civil service includes
government-owned or controlled corporations with
original charters.
If LWDs are neither GOCCs with original charters
nor GOCCs without original charters, then they would
fall under the term agencies or instrumentalities of the
government and thus still subject to COAs audit
jurisdiction. However, the stark and undeniable fact is
that the government owns LWDs. Section 45i of PD
198 recognizes government ownership of LWDs when
Section 45 states that the board of directors may
dissolve an LWD only on the condition that another
public entity has acquired the assets of the district and
has assumed all obligations and liabilities attached
thereto. The implication is clear that an LWD is a public
and not a private entity.
Petitioner does not allege that some entity other
than the government owns or controls LWDs. Instead,
petitioner advances the theory that the Water Districts
owner is the District itself.i Assuming for the sake of
argument that an LWD is self-owned,i as petitioner
describes an LWD, the government in any event
controls all LWDs. First, government officials appoint
all LWD directors to a fixed term of office. Second, any
per diem of LWD directors in excess of P50 is subject
to the approval of the Local Water Utilities
Administration, and directors can receive no other
compensation for their services to the LWD.i Third, the
Local Water Utilities Administration can require
LWDs to merge or consolidate their facilities or
operations.i This element of government control
subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD
198, LWDs became private entities through the transfer
of ownership of water facilities from local government
units to their respective water districts as mandated by
PD 198. Petitioner is grasping at straws. Privatization
involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets
transferred under Section 6 (c) of PD 198 is no other
than the LWD itself.i The transfer of assets mandated

by PD 198 is a transfer of the water systems facilities
managed, operated by or under the control of such city,
municipality or province to such (water) district.i In
short, the transfer is from one government entity to
another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation
and control of water systems.
Finally, petitioner claims that even on the
assumption that the government owns and controls
LWDs, Section 20 of PD 198 prevents COA from
auditing LWDs. i Section 20 of PD 198 provides:
Sec. 20. System of Business
Administration. The Board shall, as soon as
practicable, prescribe and define by resolution
a system of business administration and
accounting for the district, which shall be
patterned upon and conform to the standards
established by the Administration. Auditing
shall be performed by a certified public
accountant not in the government service.
The Administration may, however, conduct
annual audits of the fiscal operations of the
district to be performed by an auditor retained
by the Administration. Expenses incurred in
connection therewith shall be borne equally by
the water district concerned and the
Administration.i (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA
auditors, or any government auditor for that matter,
from auditing LWDs. Petitioner asserts that this is the
import of the second sentence of Section 20 of PD 198
when it states that [A]uditing shall be performed by a
certified public accountant not in the government
service.i
PD 198 cannot prevail over the Constitution. No
amount of clever legislation can exclude GOCCs like
LWDs from COAs audit jurisdiction. Section 3, Article
IX-C of the Constitution outlaws any scheme or devise
to escape COAs audit jurisdiction, thus:
Sec. 3. No law shall be passed
exempting any entity of the Government or its
subsidiary in any guise whatever, or any
investment of public funds, from the
jurisdiction of the Commission on Audit.
(Emphasis supplied)
The framers of the Constitution added Section 3,
Article IX-D of the Constitution precisely to annul
provisions of Presidential Decrees, like that of Section
20 of PD 198, that exempt GOCCs from COA audit.
The following exchange in the deliberations of the
Constitutional Commission elucidates this intent of the
framers:
MR. OPLE: I propose to add a new
section on line 9, page 2 of the amended
committee report which reads: NO LAW
SHALL BE PASSED EXEMPTING ANY
ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF
PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION
ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of
the government took advantage of the
absence of a legislature in the past to obtain
presidential decrees exempting themselves
from the jurisdiction of the Commission on
Audit, one notable example of which is the
Philippine National Oil Company which is
really an empty shell. It is a holding
corporation by itself, and strictly on its own
account. Its funds were not very impressive in
quantity but underneath that shell there were
billions of pesos in a multiplicity of
companies. The PNOC the empty shell under
a presidential decree was covered by the
jurisdiction of the Commission on Audit, but
the billions of pesos invested in different
corporations underneath it were exempted
from the coverage of the Commission on
Audit.
Another example is the United Coconut
Planters Bank. The Commission on Audit has
determined that the coconut levy is a form of
taxation; and that, therefore, these funds
attributed to the shares of 1,400,000 coconut
farmers are, in effect, public funds. And that
was, I think, the basis of the PCGG in
undertaking that last major sequestration of up
to 94 percent of all the shares in the United
Coconut Planters Bank. The charter of the
UCPB, through a presidential decree,
exempted it from the jurisdiction of the
Commission on Audit, it being a private
organization.
So these are the fetuses of future abuse
that we are slaying right here with this
additional section.
May I repeat the amendment, Madam
President: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN
ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS,
FROM THE JURISDICTION OF THE
COMMISSION ON AUDIT.
THE PRESIDENT: May we know the
position of the Committee on the proposed
amendment of Commissioner Ople?

MR. JAMIR: If the honorable
Commissioner will change the number of the
section to 4, we will accept the amendment.
MR. OPLE: Gladly, Madam President.
Thank you.
MR. DE CASTRO: Madam President,
point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de
Castro is recognized.
MR. DE CASTRO: Thank you. May I
just ask a few questions of Commissioner
Ople.
Is that not included in Section 2 (1) where
it states: (c) government-owned or controlled
corporations and their subsidiaries? So that if
these government-owned and controlled
corporations and their subsidiaries are
subjected to the audit of the COA, any law
exempting certain government corporations or
subsidiaries will be already unconstitutional.
So I believe, Madam President, that the
proposed amendment is unnecessary.
MR. MONSOD: Madam President,
since this has been accepted, we would like to
reply to the point raised by Commissioner de
Castro.
THE PRESIDENT: Commissioner
Monsod will please proceed.
MR. MONSOD: I think the
Commissioner is trying to avoid the situation
that happened in the past, because the same
provision was in the 1973 Constitution and yet
somehow a law or a decree was passed where
certain institutions were exempted from audit.
We are just reaffirming, emphasizing, the role
of the Commission on Audit so that this
problem will never arise in the future.i
There is an irreconcilable conflict between the
second sentence of Section 20 of PD 198 prohibiting
COA auditors from auditing LWDs and Sections 2(1)
and 3, Article IX-D of the Constitution vesting in COA
the power to audit all GOCCs. We rule that the second
sentence of Section 20 of PD 198 is unconstitutional
since it violates Sections 2(1) and 3, Article IX-D of the
Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA
charges LWDs for audit services violate the prohibition
in Section 18 of RA 6758,i which states:
Sec. 18. Additional Compensation of
Commission on Audit Personnel and of other
Agencies. In order to preserve the
independence and integrity of the Commission
on Audit (COA), its officials and employees
are prohibited from receiving salaries,
honoraria, bonuses, allowances or other
emoluments from any government entity,
local government unit, government-owned or
controlled corporations, and government
financial institutions, except those
compensation paid directly by COA out of
its appropriations and contributions.
Government entities, including
government-owned or controlled corporations
including financial institutions and local
government units are hereby prohibited from
assessing or billing other government entities,
including government-owned or controlled
corporations including financial institutions or
local government units for services rendered
by its officials and employees as part of their
regular functions for purposes of paying
additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no
doubt,i petitioner asks COA to discontinue its practice
of charging auditing fees to LWDs since such practice
allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel
from receiving any kind of compensation from any
government entity except compensation paid directly
by COA out of its appropriations and contributions.
Thus, RA 6758 itself recognizes an exception to the
statutory ban on COA personnel receiving
compensation from GOCCs. In Tejada v. Domingo,i
the Court declared:
There can be no question that Section 18 of
Republic Act No. 6758 is designed to
strengthen further the policy x x x to preserve
the independence and integrity of the COA, by
explicitly PROHIBITING: (1) COA officials
and employees from receiving salaries,
honoraria, bonuses, allowances or other
emoluments from any government entity,
local government unit, GOCCs and
government financial institutions, except such
compensation paid directly by the COA out
of its appropriations and contributions, and
(2) government entities, including GOCCs,
government financial institutions and local
government units from assessing or billing
other government entities, GOCCs,
government financial institutions or local
government units for services rendered by the
latters officials and employees as part of their
regular functions for purposes of paying

additional compensation to said officials and
employees.
xxx
The first aspect of the strategy is directed to
the COA itself, while the second aspect is
addressed directly against the GOCCs and
government financial institutions. Under the
first, COA personnel assigned to auditing
units of GOCCs or government financial
institutions can receive only such salaries,
allowances or fringe benefits paid directly
by the COA out of its appropriations and
contributions. The contributions referred
to are the cost of audit services earlier
mentioned which cannot include the extra
emoluments or benefits now claimed by
petitioners. The COA is further barred from
assessing or billing GOCCs and government
financial institutions for services rendered by
its personnel as part of their regular audit
functions for purposes of paying additional
compensation to such personnel. x x x.
(Emphasis supplied)
In Tejada, the Court explained the meaning of the
word contributions in Section 18 of RA 6758, which
allows COA to charge GOCCs the cost of its audit
services:
x x x the contributions from the GOCCs
are limited to the cost of audit services which
are based on the actual cost of the audit
function in the corporation concerned plus a
reasonable rate to cover overhead expenses.
The actual audit cost shall include personnel
services, maintenance and other operating
expenses, depreciation on capital and
equipment and out-of-pocket expenses. In
respect to the allowances and fringe benefits
granted by the GOCCs to the COA personnel
assigned to the formers auditing units, the
same shall be directly defrayed by COA from
its own appropriations x x x. i
COA may charge GOCCs actual audit cost but GOCCs
must pay the same directly to COA and not to COA
auditors. Petitioner has not alleged that COA charges
LWDs auditing fees in excess of COAs actual audit
cost. Neither has petitioner alleged that the auditing
fees are paid by LWDs directly to individual COA
auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the
Commission on Audit dated 3 January 2000 and the
Decision dated 30 January 2001 denying petitioners
Motion for Reconsideration are AFFIRMED. The
second sentence of Section 20 of Presidential Decree
No. 198 is declared VOID for being inconsistent with
Sections 2 (1) and 3, Article IX-D of the Constitution.
No costs.
SO ORDERED.
CORPORATIONS CREATED BY SPECIAL
LAWS
NATIONAL COAL COMPANY, plaintiff-appellee,
vs.
THE COLLECTOR OF INTERNAL REVENUE,
defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.
JOHNSON, J.:
This action was brought in the Court of First Instance
of the City of Manila on the 17th day of July, 1923, for
the purpose of recovering the sum of P12,044.68,
alleged to have been paid under protest by the plaintiff
company to the defendant, as specific tax on 24,089.3
tons of coal. Said company is a corporation created by
Act No. 2705 of the Philippine Legislature for the
purpose of developing the coal industry in the
Philippine Islands and is actually engaged in coal
mining on reserved lands belonging to the Government.
It claimed exemption from taxes under the provision of
sections 14 and 15 of Act No. 2719, and prayed for a
judgment ordering the defendant to refund to the
plaintiff said sum of P12,044.68, with legal interest
from the date of the presentation of the complaint, and
costs against the defendant.
The defendant answered denying generally and
specifically all the material allegations of the
complaint, except the legal existence and personality of
the plaintiff. As a special defense, the defendant alleged
(a) that the sum of P12,044.68 was paid by the plaintiff
without protests, and (b) that said sum was due and

owing from the plaintiff to the Government of the
Philippine Islands under the provisions of section 1496
of the Administrative Code and prayed that the
complaint be dismissed, with costs against the plaintiff.
Upon the issue thus presented, the case was brought on
for trial. After a consideration of the evidence adduced
by both parties, the Honorable Pedro Conception,
judge, held that the words "lands owned by any person,
etc.," in section 15 of Act No. 2719 should be
understood to mean "lands held in lease or usufruct," in
harmony with the other provision of said Act; that the
coal lands possessed by the plaintiff, belonging to the
Government, fell within the provisions of section 15 of
Act No. 2719; and that a tax of P0.04 per ton of 1,016
kilos on each ton of coal extracted therefrom, as
provided in said section, was the only tax which should
be collected from the plaintiff; and sentenced the
defendant to refund to the plaintiff the sum of
P11,081.11 which is the difference between the amount
collected under section 1496 of the Administrative
Code and the amount which should have been collected
under the provisions of said section 15 of Act No. 2719.
From that sentence the defendant appealed, and now
makes the following assignments of error:
I. The court below erred in holding that section 15 of
Act No. 2719 does not refer to coal lands owned by
persons and corporations.
II. The court below erred in holding that the plaintiff
was not subject to the tax prescribed in section 1496 of
the Administrative Code.
The question confronting us in this appeal is whether
the plaintiff is subject to the taxes under section 15 of
Act No. 2719, or to the specific taxes under section
1496 of the Administrative Code.
The plaintiff corporation was created on the 10th day of
March, 1917, by Act No. 2705, for the purpose of
developing the coal industry in the Philippine Island, in
harmony with the general plan of the Government to
encourage the development of the natural resources of
the country, and to provided facilities therefor. By said
Act, the company was granted the general powers of a
corporation "and such other powers as may be
necessary to enable it to prosecute the business of
developing coal deposits in the Philippine Island and of
mining, extracting, transporting and selling the coal
contained in said deposits." (Sec. 2, Act No. 2705.) By
the same law (Act No. 2705) the Government of the
Philippine Islands is made the majority stockholder,
evidently in order to insure proper government
supervision and control, and thus to place the
Government in a position to render all possible
encouragement, assistance and help in the prosecution
and furtherance of the company's business.
On May 14, 1917, two months after the passage of Act
No. 2705, creating the National Coal Company, the
Philippine Legislature passed Act No. 2719 "to provide
for the leasing and development of coal lands in the
Philippine Islands." On October 18, 1917, upon petition
of the National Coal Company, the Governor-General,
by Proclamation No. 39, withdrew "from settlement,
entry, sale or other disposition, all coal-bearing public
lands within the Province of Zamboanga, Department
of Mindanao and Sulu, and the Island of Polillo,
Province of Tayabas." Almost immediately after the
issuance of said proclamation the National Coal
Company took possession of the coal lands within the
said reservation, with an area of about 400 hectares,
without any further formality, contract or lease. Of the
30,000 shares of stock issued by the company, the
Government of the Philippine Islands is the owner of
29,809 shares, that is, of 99 1/3 per centum of the whole
capital stock.
If we understand the theory of the plaintiff-appellee, it
is, that it claims to be the owner of the land from which
it has mined the coal in question and is therefore subject
to the provisions of section 15 of Act No. 2719 and not
to the provisions of the section 1496 of the
Administrative Code. That contention of the plaintiff
leads us to an examination of the evidence upon the
question of the ownership of the land from which the
coal in question was mined. Was the plaintiff the owner
of the land from which the coal in question was mined?
If the evidence shows the affirmative, then the
judgment should be affirmed. If the evidence shows
that the land does not belong to the plaintiff, then the
judgment should be reversed, unless the plaintiff's
rights fall under section 3 of said Act.
The only witness presented by the plaintiff upon the
question of the ownership of the land in question was
Mr. Dalmacio Costas, who stated that he was a member
of the board of directors of the plaintiff corporation;
that the plaintiff corporation took possession of the land
in question by virtue of the proclamation of the
Governor-General, known as Proclamation No. 39 of
the year 1917; that no document had been issued in
favor of the plaintiff corporation; that said corporation
had received no permission from the Secretary of
Agriculture and Natural Resources; that it took
possession of said lands covering an area of about 400
hectares, from which the coal in question was mined,
solely, by virtue of said proclamation (Exhibit B, No.
39).
Said proclamation (Exhibit B) was issued by Francis
Burton Harrison, then Governor-General, on the 18th
day of October, 1917, and provided: "Pursuant to the
provision of section 71 of Act No. 926, I hereby
withdraw from settlement, entry, sale, or other
disposition, all coal-bearing public lands within the
Province of Zamboanga, Department of Mindanao and
Sulu, and the Island of Polillo, Province of Tayabas." It
will be noted that said proclamation only provided that
all coal-bearing public lands within said province and

island should be withdrawn from settlement, entry,
sale, or other disposition. There is nothing in said
proclamation which authorizes the plaintiff or any other
person to enter upon said reversations and to mine coal,
and no provision of law has been called to our attention,
by virtue of which the plaintiff was entitled to enter
upon any of the lands so reserved by said proclamation
without first obtaining permission therefor.
The plaintiff is a private corporation. The mere fact that
the Government happens to the majority stockholder
does not make it a public corporation. Act No. 2705, as
amended by Act No. 2822, makes it subject to all of the
provisions of the Corporation Law, in so far as they are
not inconsistent with said Act (No. 2705). No
provisions of Act No. 2705 are found to be inconsistent
with the provisions of the Corporation Law. As a
private corporation, it has no greater rights, powers or
privileges than any other corporation which might be
organized for the same purpose under the Corporation
Law, and certainly it was not the intention of the
Legislature to give it a preference or right or privilege
over other legitimate private corporations in the mining
of coal. While it is true that said proclamation No. 39
withdrew "from settlement, entry, sale, or other
disposition of coal-bearing public lands within the
Province of Zamboanga . . . and the Island of Polillo,"
it made no provision for the occupation and operation
by the plaintiff, to the exclusion of other persons or
corporations who might, under proper permission, enter
upon the operate coal mines.
On the 14th day of May, 1917, and before the issuance
of said proclamation, the Legislature of the Philippine
Island in "an Act for the leasing and development of
coal lands in the Philippine Islands" (Act No. 2719),
made liberal provision. Section 1 of said Act provides:
"Coal-bearing lands of the public domain in the
Philippine Island shall not be disposed of in any manner
except as provided in this Act," thereby giving a clear
indication that no "coal-bearing lands of the public
domain" had been disposed of by virtue of said
proclamation.
Neither is there any provision in Act No. 2705 creating
the National Coal Company, nor in the amendments
thereof found in Act No. 2822, which authorizes the
National Coal Company to enter upon any of the
reserved coal lands without first having obtained
permission from the Secretary of Agriculture and
Natural Resources.lawphi1.net
The following propositions are fully sustained by the
facts and the law:
(1) The National Coal Company is an ordinary private
corporation organized under Act No. 2705, and has no
greater powers nor privileges than the ordinary private
corporation, except those mentioned, perhaps, in
section 10 of Act No. 2719, and they do not change the
situation here.
(2) It mined on public lands between the month of July,
1920, and the months of March, 1922, 24,089.3 tons of
coal.
(3) Upon demand of the Collector of Internal Revenue
it paid a tax of P0.50 a ton, as taxes under the provisions
of article 1946 of the Administrative Code on the 15th
day of December, 1922.
(4) It is admitted that it is neither the owner nor the
lessee of the lands upon which said coal was mined.
(5) The proclamation of Francis Burton Harrison,
Governor-General, of the 18th day of October, 1917, by
authority of section 1 of Act No. 926, withdrawing from
settlement, entry, sale, or other dispositon all coal-
bearing public lands within the Province of Zamboanga
and the Island of Polillo, was not a reservation for the
benefit of the National Coal Company, but for any
person or corporation of the Philippine Islands or of the
United States.
(6) That the National Coal Company entered upon said
land and mined said coal, so far as the record shows,
without any lease or other authority from either the
Secretary of Agriculture and Natural Resources or any
person having the power to grant a leave or authority.
From all of the foregoing facts we find that the issue is
well defined between the plaintiff and the defendant.
The plaintiff contends that it was liable only to pay the
internal revenue and other fees and taxes provided for
under section 15 of Act No. 2719; while the defendant
contends, under the facts of record, the plaintiff is
obliged to pay the internal revenue duty provided for in
section 1496 of the Administrative Code. That being
the issue, an examination of the provisions of Act No.
2719 becomes necessary.
An examination of said Act (No. 2719) discloses the
following facts important for consideration here:
First. All "coal-bearing lands of the public domain in
the Philippine Islands shall not be disposed of in any
manner except as provided in this Act." Second.
Provisions for leasing by the Secretary of Agriculture
and Natural Resources of "unreserved, unappropriated
coal-bearing public lands," and the obligation to the
Government which shall be imposed by said Secretary
upon the lessee.lawphi1.net
Third. The internal revenue duty and tax which must be
paid upon coal-bearing lands owned by any person,
firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719
provides an internal revenue duty and tax upon
unreserved, unappropriated coal-bearing public lands
which may be leased by the Secretary of Agriculture
and Natural Resources; and, second, that said Act (No.
2719) provides an internal revenue duty and tax
imposed upon any person, firm, association or
corporation, who may be the owner of "coal-bearing

lands." A reading of said Act clearly shows that the tax
imposed thereby is imposed upon two classes of
persons only — lessees and owners.
The lower court had some trouble in determining what
was the correct interpretation of section 15 of said Act,
by reason of what he believed to be some difference in
the interpretation of the language used in Spanish and
English. While there is some ground for confusion in
the use of the language in Spanish and English, we are
persuaded, considering all the provisions of said Act,
that said section 15 has reference only to persons, firms,
associations or corporations which had already, prior to
the existence of said Act, become the owners of coal
lands. Section 15 cannot certainty refer to "holders or
lessees of coal lands' for the reason that practically all
of the other provisions of said Act has reference to
lessees or holders. If section 15 means that the persons,
firms, associations, or corporation mentioned therein
are holders or lessees of coal lands only, it is difficult
to understand why the internal revenue duty and tax in
said section was made different from the obligations
mentioned in section 3 of said Act, imposed upon
lessees or holders.
From all of the foregoing, it seems to be made plain that
the plaintiff is neither a lessee nor an owner of coal-
bearing lands, and is, therefore, not subject to any other
provisions of Act No. 2719. But, is the plaintiff subject
to the provisions of section 1496 of the Administrative
Code?
Section 1496 of the Administrative Code provides that
"on all coal and coke there shall be collected, per metric
ton, fifty centavos." Said section (1496) is a part of
article, 6 which provides for specific taxes. Said article
provides for a specific internal revenue tax upon all
things manufactured or produced in the Philippine
Islands for domestic sale or consumption, and upon
things imported from the United States or foreign
countries. It having been demonstrated that the plaintiff
has produced coal in the Philippine Islands and is not a
lessee or owner of the land from which the coal was
produced, we are clearly of the opinion, and so hold,
that it is subject to pay the internal revenue tax under
the provisions of section 1496 of the Administrative
Code, and is not subject to the payment of the internal
revenue tax under section 15 of Act No. 2719, nor to
any other provisions of said Act.
Therefore, the judgment appealed from is hereby
revoked, and the defendant is hereby relieved from all
responsibility under the complaint. And, without any
finding as to costs, it is so ordered.
. resolution to this effect, subject to the terms of the
G.R. No. 72807 September 9, 1991
MARILAO WATER CONSUMERS
ASSOCIATION, INC., petitioners,
vs.
INTERMEDIATE APPELLATE COURT,
MUNICIPALITY OF MARILAO, BULACAN,
SANGGUNIANG BAYAN, MARILAO,
BULACAN, and MARILAO WATER DISTRICT,
respondents.
Magtanggol C. Gunigundo for petitioner.
Prospero A. Crescini for Marilao Water District.
NARVASA, J.:p
Involved in this appeal is the determination of which
triburial has jurisdiction over the dissolution of a water
district organized and operating as a quasi-public
corporation under the provisions of Presidential Decree
No. 198, as amended;1 the Regional Trial Court, or the
Securities & Exchange Commission.
PD 198 authorizes the formation, lays down the powers
and functions, and governs the operation of water
districts throughout the country; it is "the source of
authorization and power to form and maintain a (water)
district." Once formed, it says, a district is subject to its
provisions and is not under the jurisdiction of any
political subdivision.2
Under PD 198, water districts may be created by the
different local legislative bodies by the passage of a
decree. The primary function of these water districts is
to sell water to residents within their territory, under
such schedules of rates and charges as may be
determined by their boards.3 They shall manage,
administer, operate and maintain all watersheds within
their territorial boundaries, safeguard and protect the
use of the waters therein, supervise and control
structures within their service areas, and prohibit any
person from selling or otherwise disposing of water for
public purposes within their service areas where district
facilities are available to provide such service.4
The decree specifies the terms under which water
districts may be formed and operate. It prescribes,
particularly —
a) the name by which a water district shad be known,
which shall be contained in the enabling resolution, and
shall include the name of the city, municipality, or
province, or region thereof, served by said system,
followed by the words, 'Water District;'5
b) the number and qualifications of the members of the
boards of directors, with the date of expiration of term
of office for each;6 the manner of their selection and

initial appointment by the head of the local political
subdivision;7 their terms of office (which shall be in
staggered periods of two, four and six years);8 the
manner of filling up vacancies in the board;9 the
compensation and liabilities of members of the board.10
The resolution shall contain a "statement that the
district may only be dissolved on the grounds and under
the conditions set forth in Section 44" of the law, but
nothing in the resolution of formation, the decree adds,
"shall state or infer that the local legislative body has
the power to dissolve, alter or affect the district beyond
that specifically provided for in this Act."11
The juridical entities thus created and organized under
PD 198 are considered quasi-public corporations,
performing public services and supplying public wants.
They are authorized not only to "exercise all the powers
which are expressly granted" by said decree, and those
"which are necessarily implied from or incidental to"
said powers, but also "the power of eminent domain,
the exercise .. (of which) shall however be subject to
review by the Administration" (LWUA). In addition to
the powers granted in, and subject to such restrictions
imposed under, the Act, they may also exercise the
powers, rights and privileges given to private
corporations under existing laws.12
The decree also established a government corporation
attached to the Office of the President, known as the
Local Water Utilities Administration (LWUA)13 to
function primarily as "a specialized lending institution
for the promotion development and financing of local
water utilities." It has the following specific powers and
duties;14
(1) prescribe minimum standards and
regulations in order to assure acceptable
standards of construction materials and
supplies, maintenance, operation, personnel
training, accounting and fiscal practices for
local water utilities;
(2) furnish technical assistance and personnel
training programs for local water utilities;
(3) monitor and evaluate local water standards;
and
(4) effect systems integration, joint investment
and operations, district annexation and
deannexation whenever economically
warranted.
It was pursuant to the foregoing rules and norms that
the Marilao Water District was formed by Resolution
of the Sangguniang Bayan of the Municipality of
Marilao dated September 18, 1982, which resolution
was thereafter forwarded to the LWUA and "duly filed"
by it on October 4, 1982 after ascertaining that it
conformed to the requirements of the law.15
The claim was thereafter made that the creation of the
Marilao Water District in the manner aforestated was
defective and illegal. The claim was made by a non-
stock, non-profit corporation known as the Marilao
Water Consumers Association, Inc., in a petition dated
December 12, 1983 filed with the Regional Trial Court
at Malolos, Bulacan. Impleaded as respondents were
the Marilao Water District, as well as the Municipality
of Marilao, Bulacan; its Sangguniang Bayan; and
Mayor Nicanor V. GUILLERMO. The petition prayed
for the dissolution of the water district on the basis
chiefly of the following allegations, to wit:
1) there had been no real, but only a "farcical" public
hearing prior to the creation of the Water District;
2) not only was the waterworks system turned over to
the Water District without compensation. but a subsidy
was illegally authorized for it;
3) the Water District was being run with "negligence,
apathy, indifference and mismanagement," and was not
providing adequate and efficient service to the
community, but this notwithstanding, the consumers
were being billed in full and threatened with
disconnection for failure to pay bills on time; in fact,
one of the consumers who complained had his water
service cut off;
4) the consumers were consequently "forced to
organize themselves into a corporation last October 3,
1983 ... for the purpose of demanding adequate and
sufficient supply of water and efficient management of
the waterworks in Marilao, Bulacan.16
Acting on the complaint, particularly on the application
for temporary restraining order and preliminary
injunction set out therein, the Trial Court issued an
Order on December 22, 1983 setting the application for
preliminary hearing, requiring the respondents to
answer the petition and restraining them until further
orders from collecting any water bill, disconnecting any
water service, transferring any property of the
waterworks, or disbursing any amount in favor of any
person. The order was modified on January 6, 1984 to
allow the respondents to pay the district's outstanding
obligations to Meralco, by way of exception to the
restraining order.
On January 13, 1984 the Marilao Water District filed
its Answer with Compulsory Counterclaim, denying
the material allegations of the petition and asserting as
affirmative defenses (a) the Court's lack of jurisdiction
of the subject matter, and (b) the failure of the petition
to state a cause of action. The answer alleged that the
matter of the water district's dissolution fell under the
original and exclusive jurisdiction of the Securities &
Exchange Commission (SEC); and the matter of the
propriety of water rates, within the primary
administrative jurisdiction of the LWUA and the quasi-

judicial jurisdiction of the National Water Resources
Council. On the same date, Marilao Water District filed
a motion for admission of its third-party complaint
against the officers and directors of the petitioner
corporation, it being claimed that they had instigated
the filing of the petition simply because one of them
was a political adversary of the respondent Mayor.
The other respondents also filed their answer through
the Provincial Fiscal of Bulacan, setting up the same
affirmative defense of lack of jurisdiction on the part of
the Trial Court; and failure of the petition to state a
cause of action since it admitted that it was by
resolution of the Marilao Sangguniang Bayan that the
Marilao Water District was constituted.
The petitioner — the Marilao Consumers Association
filed a reply, and an answer to the counterclaim, on
January 26, 1984. It averred that since the Marilao
Water District had not been organized under the
Corporation Code, the SEC had no jurisdiction over a
proceeding for its dissolution; and that under Section 45
of PD 198, the proceeding to determine if the
dissolution of the water district is for the best interest of
the people, is within the competence of a regular court
of justice, and neither the LWUA nor the National
Water Resources Council is competent to take
cognizance of the matter of dissolution of the water
district and recovery of its waterworks system, or the
exorbitant rates imposed by it. The Consumers
Association also opposed admission of the third-party
complaint on the ground that its individual officers are
not personally amenable to suit for acts of the
corporation,17 which has a personality distinct from
theirs.
The Trial Court found for the respondents. It dismissed
the Consumers Association's suit by Order handed
down on June 8, 1984 which pertinently reads as
follows:
After a consideration of the arguments raised by
the herein parties, the Court is more inclined to
take the position of the respondents that the
Securities and Exchange Commission has the
exclusive and original jurisdiction over this case.
WHEREFORE, the instant petition, the third-
party complaint, and the compulsory
counterclaim filed herein are hereby
DISMISSED, for lack of jurisdiction.
Its motion for reconsideration having been denied, by
Order dated September 20, 1984, the Consumers
Association filed with this Court a petition for review
on certiorari, which was docketed as G.R. No. 68742.
The case was however referred to the Intermediate
Appellate Court by this Court's Second Division, in a
Resolution dated November 19, 1984, where it was
docketed as AC-G.R. S.P. No. 04862.
But there in the Intermediate Appellate Court, the
Consumers Association's cause also met with failure.
The Appellate Court, in its Decision promulgated on
September 10, 1985, ruled that its cause could not
prosper because —
1) it had availed of the wrong remedy, i.e., the special
civil action of certiorari; the Order of June 8, 1984
being a final order in the sense that it "left nothing else
to be done in the case the proper remedy was appeal
under Rule 41 of the Rules of Court and not a certiorari
suit under Rule 65; and
2) even if the certiorari action be treated as an appeal, it
was 14 unerringly clear that the controversy ... falls
within the competence of the SEC in virtue of P.D. 902-
A18 Which provides that said agency "shall have
original and exclusive jurisdiction to hear and decide
cases involving:
a) xxx xxx xxx
b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members or associates; between
any or all of them and the corporation,
partnership or association of which they are
stockholders, members or associates,
respectively; and between such corporation,
partnership or association and the state insofar as
it concerns their individual franchise or right to
exist as such entity ...
The Appellate Court subsequently denied the
petitioner's motion for reconsideration, by Resolution
dated November 4, 1985. Hence, the petition for review
on certiorari at bar, in which reversal of the Appellate
Tribunal's decision is sought, the petitioner insisting
that the remedy resorted to by it was correct but
misunderstood by the I.A.C. and that the law does
indeed vest exclusive jurisdiction over the subject
matter of the case in the Regional Trial Court, not the
Securities and Exchange Commission.
Turning first to the adjective issue, it is quite evident
that the Order of the Trial Court of June 8, 1984,
dismissing the action of the Consumers Association, is
really a final order; it finally disposed of the proceeding
and left nothing more to be done by the Court on the
merits. Now, the firmly settled principle is that the
remedy against such a final order is the ordinary
remedy of an appeal, either solely on questions of law
— in which case the appeal may be taken only to the
Supreme Court — or questions of fact and law — in
which event the appeal should be brought to the Court
of Appeals. The extraordinary remedy of a special civil
action of certiorari or prohibition is not the appropriate
recourse because precisely, one of the conditions for
availing of it is that there should be "no appeal, nor any
plain, speedy and adequate remedy in the ordinary
course of law.19 A resort to the latter instead of the
former would ordinarily be fatal, unless it should

appear in a given case that appeal would otherwise be
an inefficacious or inadequate remedy.20
In holding that Marilao Water District had resorted to
the wrong remedy against the Trial Court's order
dismissing its suit, i.e., the special civil action of
certiorari, instead of an appeal, the Intermediate
Appellate Court quite overlooked the fact, not seriously
disputed by the Marilao Water District and its co-
respondents, that the former had in fact availed of the
remedy of appeal by certiorari under Rule 45 of the
Rules of Court, as required by paragraph 25 of the
Interim Rules & Guidelines of this Court,
implementing Batas Pambansa Bilang 129; that before
doing so, it had first asked for and been granted an
extension of thirty (30) days within which to file a
petition for review on certiorari; but that subsequently,
by Resolution of this Court's Second Division dated
November 19, 1984, the case was referred to the
Intermediate Appellate Court, evidently because it was
felt that certain factual issues had yet to be determined.
In any case, all things considered, the Court is not
prepared to have the case at bar finally determined on
this procedural issue.
The juridical entities known as water districts created
by PD 198, although considered as quasi-public
corporations and authorized to exercise the powers,
rights and privileges given to private corporations
under existing laws21 are entirely distinct from
corporations organized under the Corporation Code,
PD 902-A, as amended. The Corporation Code has
nothing whatever to do with their formation and
organization, all the terms and conditions for their
organization and operation being particularly spelled
out in PD 198. The resolutions creating them, their
charters, in other words, are filed not with the Securities
and Exchange Commission but with the LWUA. It is
these resolutions qua charters, and not articles of
incorporation drawn up under the Corporation Code,
which set forth the name of the water districts, the
number of their directors, the manner of their selection
and replacement, their powers, etc. The SEC which is
charged with enforcement of the Corporation Code as
regards corporations, partnerships and associations
formed or operating under its provisions, has no power
of supervision or control over the activities of water
districts. More particularly, the SEC has no power of
oversight over such activities of water districts as
selling water, fuling the rates and charges therefor22 or
the management, administration, operation and
maintenance of watersheds within their territorial
boundaries, or the safeguarding and protection of
the use of the waters therein, or the supervision and
control of structures within the service areas of the
district, and the prohibition of any person from
selling or otherwise disposing of water for public
purposes within their service areas where district
facilities are available to provide such service.23
That function of supervision or control over water
districts is entrusted to the Local Water Utilities
Administration.24 Consequently, as regards the
activities of water districts just mentioned, the SEC
obviously can have no claim to any expertise.
The "Provincial Water Utilities Act of 1973" has a
specific provision governing dissolution of water
districts created thereunder This is Section 45 of PD
19825 reading as follows:
SEC. 45. Dissolution. — A district may be
dissolved by resolution of its board of directors
filed in the manner of filing the resolution
forming the district: Provided, however, That
prior to the adoption of any such resolution:
(1) another public entity has acquired the
assets of the district and has assumed all
obligations and liabilities attached thereto; (2)
all bondholders and other creditors have been
notified and they consent to said transfer and
dissolution; and (3) a court of competent
jurisdiction has found that said transfer and
dissolution are in the best interest of the
public.
Under this provision, it is the LWUA which is the
administrative body involved in the voluntary
dissolution of a water district; it is with it that the
resolution of dissolution is filed, not the Securities
and Exchange Commission. And this provision is
evidently quite distinct and different from those on
dissolution of corporations "formed or organized
under the provisions of xx (the Corporation) Code"
set out in Sections 117 to 121, inclusive, of said Code,
under which dissolution may be voluntary (by vote
of the stockholders or members), generally effected
by the filing of the corresponding resolution with the
Securities and Exchange Commission, or
involuntary, commenced by the filing of a verified
complaint also with the SEC.
All these argue against conceding jurisdiction in the
Securities and Exchange Commission over
proceedings for the dissolution of water districts.
For although described as quasipublic corporations,
and granted the same powers as private
corporations, water districts are not really
corporations. They have no incorporators,
stockholders or members, who have the right to vote
for directors, or amend the articles of incorporation
or by-laws, or pass resolutions, or otherwise
perform such other acts as are authorized to
stockholders or members of corporations by the
Corporation Code. In a word, there can be no such
thing as a relation of corporation and stockholders
or members in a water district for the simple reason
that in the latter there are no stockholders or
members. Between the water district and those who
are recipients of its water services there exists not
the relationship of corporation-and-stockholder,

but that of a service agency and users or customers.
There can therefore be no such thing in a water
district as "intra-corporate or partnership
relations, between and among stockholders,
members or associates (or) between any or all of
them and the corporation, partnership or
association of which they are stockholders, members
or associates, respectively," within the
contemplation of Section 5 of the Corporation Code
so as to bring controversies involving them within
the competence and cognizance of the SEC.
There can be even less debate about the fact that the
SEC has no jurisdiction over the co-respondents of
the Marilao Water District — the Municipality of
Marilao, its Sangguniang Bayan and its Mayor —
who are accused of a "conspiracy" with the water
district in respect of the anomalies described in the
Consumer Associations' petition.26
The controversy, therefore, between the Consumers
Association, on the one hand, and Marilao District
and its co-respondents, on the other, is not within
the jurisdiction of the SEC.
In their answer with counterclaim in the
proceedings a quo, the respondents advocated the
theory that the case falls within the jurisdiction of
the LWUA and/or the National Water Resources
Council.
The LWUA does not appear to have any
adjudicatory functions. It is, as already pointed out,
"primarily a specialized lending institution for the
promotion, development and financing of local
water utilities,27 with power to prescribe minimum
standards and regulations regarding maintenance,
operation, personnel training, accounting and fiscal
practices for local water utilities, to furnish
technical assistance and personnel training
programs therefor; monitor and evaluate local
water standards; and effect systems integration,
joint investment and operations, district annexation
and deannexation whenever economically
28
warranted. The LWUA has quasi-judicial power
only as regards rates or charges fixed by water
districts, which it may review to establish
compliance with the provisions of PD 198, without
prejudice to appeal being taken therefrom by a
water concessionaire to the National Water
Resources Council whose decision thereon shall be
appealable to the Office of the President.29 The rates
or charges established by respondent Marilao
Water District do not appear to be at issue in the
controversy at bar.
The National Water Resources Council, on the other
hand, is conferred "original jurisdiction over all
disputes relating to appropriation, utilization,
exploitation, development, control, conservation
and protection of waters within the meaning and
context of the provisions of ..." (the Code by which
said Council was created, Presidential Decree No.
1067, otherwise known as the Water Code of the
Philippines);30 and its decision on water rights
controversies may be appealed to the Court of First
Instance of the province where the subject matter of
the controversy is situated.31 It also has authority to
review questions of annexations and deannexations
(addition to or exclusion from the district of
territory). Again it does not appear that the case at
bar is a water rights controversy or one involving
annexation or deannexation.
What essentially is sought by the Consumers
Association is the dissolution of the Marilao Water
District, on the ground that its formation was illegal
and invalid; the waterworks system had been turned
over to it without compensation and a subsidy
illegally authorized for it; and the Water District
was being run with "negligence, apathy,
indifference and mismanagement," and was not
providing adequate and efficient service to the
community.32
Now, as already above stated, the dissolution of a water
district is governed by Section 45 of PD 198, as
amended, stating that it "may be dissolved by resolution
of its board of directors filed in the manner of filing the
resolution forming the district," subject to enumerated
pre-requisites.33 The procedure for dissolution thus
consists of the following steps:
1) the initiation by the board of directors of the
water district motu proprio or at the relation of an
interested party, of proceedings for the dissolution
of the water district, including:
a) the ascertainment by said board that —
1) another public entity has acquired the assets of
the district and has assumed all obligations and
liabilities attached thereto; and
2) all bondholders and other creditors have been
notified and consent to said transfer and dissolution;
b) the commencement by the water district in a
court of competent jurisdiction of a proceeding to
obtain a declaration that "said transfer and
dissolution are in the best interest of the public;
2) after compliance with the foregoing requisites,
the adoption by the board of directors of the water
district of a resolution dissolving the water district
and its submission to the Sangguniang Bayan
concerned for approval;
3) submission of the resolution of the Sangguniang
Bayan dissolving the water district to the head of the
local government concerned for approval, and
ultimately to the LWUA for final approval and
filing.

The Consumer Association's action therefore is, in
fine, in the nature of a mandamus suit, seeking to
compel the board of directors of the Marilao Water
District, and its alleged co-conspirators, the
Sangguniang Bayan and the Mayor of Marilao to go
through the process above described for the
dissolution of the water district. In this sense, and
indeed, taking account of the nature of the
proceedings for dissolution just described, it seems
plain that the case does not fall within the limited
jurisdiction of the SEC., but within the general
jurisdiction of Regional Trial Courts.
WHEREFORE, the Decision of the Intermediate
Appellate Court of September 10, 1985 — affirming
that of the Regional Trial Court of June 8, 1984 —
is REVERSED and SET ASIDE, and the case is
remanded to the Regional Trial Court for further
proceedings and adjudication in accordance with
law. No costs.
SO ORDERED.
CLASSIFICATION OF CORP.
SAPPARI K. SAWADJAAN, petitioner, vs.
HONORABLE COURT OF APPEALS,
CIVIL SERVICE COMMISSION and
AMANAH INVESTMENT BANK OF
PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the
Rules of Court of the Decision[1] of the Court of
Appeals of 30 March 1999 affirming Resolutions No.
94-4483 and No. 95-2754 of the Civil Service
Commission (CSC) dated 11 August 1994 and 11 April
1995, respectively, which in turn affirmed Resolution
No. 2309 of the Board of Directors of the Al-Amanah
Islamic Investment Bank of the Philippines (AIIBP)
dated 13 December 1993, finding petitioner guilty of
Dishonesty in the Performance of Official Duties
and/or Conduct Prejudicial to the Best Interest of the
Service and dismissing him from the service, and its
Resolution[2] of 15 December 1999 dismissing
petitioners Motion for Reconsideration.
The records show that petitioner Sappari K.
Sawadjaan was among the first employees of the
Philippine Amanah Bank (PAB) when it was created by
virtue of Presidential Decree No. 264 on 02 August
1973. He rose through the ranks, working his way up
from his initial designation as security guard, to settling
clerk, bookkeeper, credit investigator, project analyst,
appraiser/ inspector, and eventually, loans analyst.[3]
In February 1988, while still designated as
appraiser/investigator, Sawadjaan was assigned to
inspect the properties offered as collaterals by
Compressed Air Machineries and Equipment
Corporation (CAMEC) for a credit line of Five Million
Pesos (P5,000,000.00). The properties consisted of two
parcels of land covered by Transfer Certificates of Title
(TCTs) No. N-130671 and No. C-52576. On the basis
THE
of his Inspection and Appraisal Report,[4] the PAB
THE
granted the loan application. When the loan matured on
AL-
17 May 1989, CAMEC requested an extension of 180
THE
days, but was granted only 120 days to repay the loan.[5]
In the meantime, Sawadjaan was promoted to
Loans Analyst I on 01 July 1989.[6]
In January 1990, Congress passed Republic Act
6848 creating the AIIBP and repealing P.D. No. 264
(which created the PAB). All assets, liabilities and
capital accounts of the PAB were transferred to the
AIIBP,[7] and the existing personnel of the PAB were to
continue to discharge their functions unless
discharged.[8] In the ensuing reorganization, Sawadjaan
was among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given
extension, the bank, now referred to as the AIIBP,
discovered that TCT No. N-130671 was spurious, the
property described therein non-existent, and that the
property covered by TCT No. C-52576 had a prior
existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the
AIIBP created an Investigating Committee to look into
the CAMEC transaction, which had cost the bank Six

[9]
Million Pesos (P6,000,000.00) in losses. The
subsequent events, as found and decided upon by the
Court of Appeals,[10] are as follows:
On 18 June 1993, petitioner received a
memorandum from Islamic Bank [AIIBP]
Chairman Roberto F. De Ocampo charging him
with Dishonesty in the Performance of Official
Duties and/or Conduct Prejudicial to the Best
Interest of the Service and preventively
suspending him.
In his memorandum dated 8 September
1993, petitioner informed the Investigating
Committee that he could not submit himself to
the jurisdiction of the Committee because of its
alleged partiality. For his failure to appear
before the hearing set on 17 September 1993,
after the hearing of 13 September 1993 was
postponed due to the Manifestation of even date
filed by petitioner, the Investigating Committee
declared petitioner in default and the
prosecution was allowed to present its evidence
ex parte.
On 08 December 1993, the Investigating
Committee rendered a decision, the pertinent
portions of which reads as follows:
In view of respondent SAWADJAANS
abject failure to perform his duties and
assigned tasks as appraiser/inspector, which
resulted to the prejudice and substantial
damage to the Bank, respondent should be
held liable therefore. At this juncture,
however, the Investigating Committee is of
the considered opinion that he could not be
held liable for the administrative offense of
dishonesty considering the fact that no
evidence was adduced to show that he profited
or benefited from being remiss in the
performance of his duties. The record is bereft
of any evidence which would show that he
received any amount in consideration for his
non-performance of his official duties.
This notwithstanding, respondent cannot
escape liability. As adverted to earlier, his
failure to perform his official duties resulted to
the prejudice and substantial damage to the
Islamic Bank for which he should be held
liable for the administrative offense of
CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.
Premises considered, the Investigating
Committee recommends that respondent
SAPPARI SAWADJAAN be meted the
penalty of SIX (6) MONTHS and ONE (1)
DAY SUSPENSION from office in
accordance with the Civil Service
Commissions Memorandum Circular No. 30,
Series of 1989.
On 13 December 1993, the Board of
Directors of the Islamic Bank [AIIBP] adopted
Resolution No. 2309 finding petitioner guilty
of Dishonesty in the Performance of Official
Duties and/or Conduct Prejudicial to the Best
Interest of the Service and imposing the
penalty of Dismissal from the Service.
On reconsideration, the Board of
Directors of the Islamic Bank [AIIBP] adopted
the Resolution No. 2332 on 20 February 1994
reducing the penalty imposed on petitioner
from dismissal to suspension for a period of
six (6) months and one (1) day.
On 29 March 1994, petitioner filed a
notice of appeal to the Merit System
Protection Board (MSPB).
On 11 August 1994, the CSC adopted
Resolution No. 94-4483 dismissing the appeal
for lack of merit and affirming Resolution No.
2309 dated 13 December 1993 of the Board of
Directors of Islamic Bank.
On 11 April 1995, the CSC adopted
Resolution No. 95-2574 denying petitioners
Motion for Reconsideration.
On 16 June 1995, the instant petition was
filed with the Honorable Supreme Court on
the following assignment of errors:
I. Public respondent Al-
Amanah Islamic Investment Bank of
the Philippines has committed a
grave abuse of discretion amounting
to excess or lack of jurisdiction when
it initiated and conducted
administrative investigation without
a validly promulgated rules of
procedure in the adjudication of
administrative cases at the Islamic
Bank.
II. Public respondent Civil
Service Commission has committed
a grave abuse of discretion
amounting to lack of jurisdiction
when it prematurely and falsely
assumed jurisdiction of the case not
appealed to it, but to the Merit
System Protection Board.
III. Both the Islamic Bank and
the Civil Service Commission erred
in finding petitioner Sawadjaan of
having deliberately reporting false
information and therefore guilty of
Dishonesty and Conduct Prejudicial

to the Best Interest of the Service and
penalized with dismissal from the
service.
On 04 July 1995, the Honorable Supreme
Court En Banc referred this petition to this
Honorable Court pursuant to Revised
Administrative Circular No. 1-95, which took
effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a
reading of the records would reveal that
petitioner raises for the first time the alleged
failure of the Islamic Bank [AIIBP] to
promulgate rules of procedure governing the
adjudication and disposition of administrative
cases involving its personnel. It is a rule that
issues not properly brought and ventilated
below may not be raised for the first time on
appeal, save in exceptional circumstances
(Casolita, Sr. v. Court of Appeals, 275 SCRA
257) none of which, however, obtain in this
case. Granting arguendo that the issue is of
such exceptional character that the Court may
take cognizance of the same, still, it must fail.
Section 26 of Republic Act No. 6848 (1990)
provides:
Section 26. Powers of the Board.
The Board of Directors shall have the
broadest powers to manage the
Islamic Bank, x x x The Board shall
adopt policy guidelines necessary to
carry out effectively the provisions of
this Charter as well as internal rules
and regulations necessary for the
conduct of its Islamic banking
business and all matters related to
personnel organization, office
functions and salary administration.
(Italics ours)
On the other hand, Item No. 2 of
Executive Order No. 26 (1992) entitled
Prescribing Procedure and Sanctions to
Ensure Speedy Disposition of Administrative
Cases directs, all administrative agencies to
adopt and include in their respective Rules of
Procedure provisions designed to abbreviate
administrative proceedings.
The above two (2) provisions relied upon
by petitioner does not require the Islamic Bank
[AIIBP] to promulgate rules of procedure
before administrative discipline may be
imposed upon its employees. The internal
rules of procedures ordained to be adopted by
the Board refers to that necessary for the
conduct of its Islamic banking business and all
matters related to personnel organization,
office functions and salary administration. On
the contrary, Section 26 of RA 6848 gives the
Board of Directors of the Islamic Bank the
broadest powers to manage the Islamic Bank.
This grant of broad powers would be an idle
ceremony if it would be powerless to
discipline its employees.
The second assignment of error must
likewise fail. The issue is raised for the first
time via this petition for certiorari. Petitioner
submitted himself to the jurisdiction of the
CSC. Although he could have raised the
alleged lack of jurisdiction in his Motion for
Reconsideration of Resolution No. 94-4483 of
the CSC, he did not do so. By filing the Motion
for Reconsideration, he is estopped from
denying the CSCs jurisdiction over him, as it
is settled rule that a party who asks for an
affirmative relief cannot later on impugn the
action of the tribunal as without jurisdiction
after an adverse result was meted to him.
Although jurisdiction over the subject matter
of a case may be objected to at any stage of the
proceedings even on appeal, this particular
rule, however, means that jurisdictional issues
in a case can be raised only during the
proceedings in said case and during the appeal
of said case (Aragon v. Court of Appeals, 270
SCRA 603). The case at bar is a petition [for]
certiorari and not an appeal.
But even on the merits the argument must
falter. Item No. 1 of CSC Resolution No. 93-
2387 dated 29 June 1993, provides:
Decisions in administrative
cases involving officials and
employees of the civil service
appealable to the Commission
pursuant to Section 47 of Book V of
the Code (i.e., Administrative Code
of 1987) including personnel actions
such as contested appointments shall
now be appealed directly to the
Commission and not to the MSPB.
In Rubenecia v. Civil Service
Commission, 244 SCRA 640, 651, it was
categorically held:
. . . The functions of the MSPB
relating to the determination of
administrative disciplinary cases
were, in other words, re-allocated to
the Commission itself.
Be that as it may, (i)t is hornbook doctrine
that in order `(t)o ascertain whether a court (in
this case, administrative agency) has

jurisdiction or not, the provisions of the law
should be inquired into. Furthermore, `the
jurisdiction of the court must appear clearly
from the statute law or it will not be held to
exist.(Azarcon v. Sandiganbayan, 268 SCRA
747, 757) From the provision of law
abovecited, the Civil Service Commission
clearly has jurisdiction over the
Administrative Case against petitioner.
Anent the third assignment of error, we
likewise do not find merit in petitioners
proposition that he should not be liable, as in
the first place, he was not qualified to perform
the functions of appraiser/investigator because
he lacked the necessary training and expertise,
and therefore, should not have been found
dishonest by the Board of Directors of Islamic
Bank [AIIBP] and the CSC. Petitioner himself
admits that the position of appraiser/inspector
is one of the most serious [and] sensitive job
in the banking operations. He should have
been aware that accepting such a designation,
he is obliged to perform the task at hand by the
exercise of more than ordinary prudence. As
appraiser/investigator, he is expected, among
others, to check the authenticity of the
documents presented by the borrower by
comparing them with the originals on file with
the proper government office. He should have
made it sure that the technical descriptions in
the location plan on file with the Bureau of
Lands of Marikina, jibe with that indicated in
the TCT of the collateral offered by CAMEC,
and that the mortgage in favor of the Islamic
Bank was duly annotated at the back of the
copy of the TCT kept by the Register of Deeds
of Marikina. This, petitioner failed to do, for
which he must be held liable. That he did not
profit from his false report is of no moment.
Neither the fact that it was not deliberate or
willful, detracts from the nature of the act as
dishonest. What is apparent is he stated
something to be a fact, when he really was not
sure that it was so.
WHEREFORE, above premises
considered, the instant Petition is
DISMISSED, and the assailed Resolutions of
the Civil Service Commission are hereby
AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified
the court a quo of his change of address,[11] but
apparently neglected to notify his client of this fact.
Thus, on 23 July 1999, Sawadjaan, by himself, filed a
Motion for New Trial[12] in the Court of Appeals based
on the following grounds: fraud, accident, mistake or
excusable negligence and newly discovered evidence.
He claimed that he had recently discovered that at the
time his employment was terminated, the AIIBP had
not yet adopted its corporate by-laws. He attached a
Certification[13] by the Securities and Exchange
Commission (SEC) that it was only on 27 May 1992
that the AIIBP submitted its draft by-laws to the SEC,
and that its registration was being held in abeyance
pending certain corrections being made thereon.
Sawadjaan argued that since the AIIBP failed to file its
by-laws within 60 days from the passage of Rep. Act
No. 6848, as required by Sec. 51 of the said law, the
bank and its stockholders had already forfeited its
franchise or charter, including its license to exist and
operate as a corporation,[14] and thus no longer have the
legal standing and personality to initiate an
administrative case.
Sawadjaans counsel subsequently adopted his
motion, but requested that it be treated as a motion for
reconsideration.[15] This motion was denied by the court
a quo in its Resolution of 15 December 1999.[16]
Still disheartened, Sawadjaan filed the present
petition for certiorari under Rule 65 of the Rules of
Court challenging the above Decision and Resolution
of the Court of Appeals on the ground that the court a
quo erred: i) in ignoring the facts and evidences that the
alleged Islamic Bank has no valid by-laws; ii) in
ignoring the facts and evidences that the Islamic Bank
lost its juridical personality as a corporation on 16 April
1990; iii) in ignoring the facts and evidences that the
alleged Islamic Bank and its alleged Board of Directors
have no jurisdiction to act in the manner they did in the
absence of a valid by-laws; iv) in not correcting the acts
of the Civil Service Commission who erroneously
rendered the assailed Resolutions No. 94-4483 and No.
95-2754 as a result of fraud, falsification and/or
misrepresentations committed by Farouk A. Carpizo
and his group, including Roberto F. de Ocampo; v) in
affirming an unconscionably harsh and/or excessive
penalty; and vi) in failing to consider newly discovered
evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-
parte Urgent Motion for Additional Extension of Time
to File a Reply (to the Comments of Respondent Al-
Amanah Investment Bank of the Philippines),[17] Reply
(to Respondents Consolidated Comment,)[18] and Reply
(to the Alleged Comments of Respondent Al-Amanah
Islamic Bank of the Philippines).[19] On 13 October
2000, he informed this Court that he had terminated his
lawyers services, and, by himself, prepared and filed
the following: 1) Motion for New Trial;[20] 2) Motion to
Declare Respondents in Default and/or Having Waived
their Rights to Interpose Objection to Petitioners
Motion for New Trial;[21] 3) Ex-Parte Urgent Motions
to Punish Attorneys Amado D. Valdez, Elpidio J. Vega,
Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon
A. Diaz for Being in Contempt of Court& to Inhibit

them from Appearing in this Case Until they Can
Present Valid Evidence of Legal Authority;[22] 4)
Opposition/Reply (to Respondent AIIBPs Alleged
Comment);[23] 5) Ex-Parte Urgent Motion to Punish
Atty. Reynaldo A. Pineda for Contempt of Court and
the Issuance of a Commitment Order/Warrant for His
Arrest;[24] 6) Reply/Opposition (To the Formal Notice
of Withdrawal of Undersigned Counsel as Legal
Counsel for the Respondent Islamic Bank with
Opposition to Petitioners Motion to Punish
Undersigned Counsel for Contempt of Court for the
Issuance of a Warrant of Arrest);[25] 7) Memorandum
for Petitioner;[26] 8) Opposition to SolGens Motion for
Clarification with Motion for Default and/or Waiver of
Respondents to File their Memorandum;[27] 9) Motion
for Contempt of Court and Inhibition/Disqualification
with Opposition to OGCCs Motion for Extension of
Time to File Memorandum;[28] 10) Motion for
Enforcement (In Defense of the Rule of Law);[29] 11)
Motion and Opposition (Motion to Punish OGCCs
Attorneys Amado D. Valdez, Efren B. Gonzales, Alda
G. Reyes, Odilon A. Diaz and Dominador R. Isidoro,
Jr., for Contempt of Court and the Issuance of a Warrant
for their Arrest; and Opposition to their Alleged
Manifestation and Motion Dated February 5, 2002);[30]
12) Motion for Reconsideration of Item (a) of
Resolution dated 5 February 2002 with Supplemental
Motion for Contempt of Court;[31] 13) Motion for
Reconsideration of Portion of Resolution Dated 12
March 2002;[32] 14) Ex-Parte Urgent Motion for
Extension of Time to File Reply Memorandum (To:
CSC and AIIBPs Memorandum);[33] 15) Reply
Memorandum (To: CSCs Memorandum) With Ex-
Parte Urgent Motion for Additional Extension of time
to File Reply Memorandum (To: AIIBPs
Memorandum);[34] and 16) Reply Memorandum (To:
OGCCs Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his
petition for its procedural and substantive flaws.
The general rule is that the remedy to obtain
reversal or modification of the judgment on the merits
is appeal. This is true even if the error, or one of the
errors, ascribed to the court rendering the judgment is
its lack of jurisdiction over the subject matter, or the
exercise of power in excess thereof, or grave abuse of
discretion in the findings of fact or of law set out in the
decision.[36]
The records show that petitioners counsel received
the Resolution of the Court of Appeals denying his
motion for reconsideration on 27 December 1999. The
fifteen day reglamentary period to appeal under Rule 45
of the Rules of Court therefore lapsed on 11 January
2000. On 23 February 2000, over a month after receipt
of the resolution denying his motion for
reconsideration, the petitioner filed his petition for
certiorari under Rule 65.
It is settled that a special civil action for certiorari
will not lie as a substitute for the lost remedy of
appeal,[37] and though there are instances[38] where the
extraordinary remedy of certiorari may be resorted to
despite the availability of an appeal,[39] we find no
special reasons for making out an exception in this case.
Even if we were to overlook this fact in the broader
interests of justice and treat this as a special civil action
for certiorari under Rule 65,[40] the petition would
nevertheless be dismissed for failure of the petitioner to
show grave abuse of discretion. Petitioners recurrent
argument, tenuous at its very best, is premised on the
fact that since respondent AIIBP failed to file its by-
laws within the designated 60 days from the effectivity
of Rep. Act No. 6848, all proceedings initiated by
AIIBP and all actions resulting therefrom are a patent
nullity. Or, in his words, the AIIBP and its officers and
Board of Directors,
. . . [H]ave no legal authority nor
jurisdiction to manage much less operate the
Islamic Bank, file administrative charges and
investigate petitioner in the manner they did
and allegedly passed Board Resolution No.
2309 on December 13, 1993 which is null and
void for lack of an (sic) authorized and valid
by-laws. The CIVIL SERVICE
COMMISSION was therefore affirming,
erroneously, a null and void Resolution No.
2309 dated December 13, 1993 of the Board
of Directors of Al-Amanah Islamic
Investment Bank of the Philippines in CSC
Resolution No. 94-4483 dated August 11,
1994. A motion for reconsideration thereof
was denied by the CSC in its Resolution No.
95-2754 dated April 11, 1995. Both
acts/resolutions of the CSC are erroneous,
resulting from fraud, falsifications and
misrepresentations of the alleged Chairman
and CEO Roberto F. de Ocampo and the
alleged Director Farouk A. Carpizo and his
group at the alleged Islamic Bank.[41]
Nowhere in petitioners voluminous pleadings is
there a showing that the court a quo committed grave
abuse of discretion amounting to lack or excess of
jurisdiction reversible by a petition for certiorari.
Petitioner already raised the question of AIIBPs
corporate existence and lack of jurisdiction in his
Motion for New Trial/Motion for Reconsideration of 27
May 1997 and was denied by the Court of Appeals.
Despite the volume of pleadings he has submitted thus
far, he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It
has a main office where it conducts business, has
shareholders, corporate officers, a board of directors,
assets, and personnel. It is, in fact, here represented by
the Office of the Government Corporate Counsel, the

principal law office of government-owned
corporations, one of which is respondent bank.[42] At
the very least, by its failure to submit its by-laws on
time, the AIIBP may be considered a de facto
corporation[43] whose right to exercise corporate
powers may not be inquired into collaterally in any
private suit to which such corporations may be a
party.[44]
Moreover, a corporation which has failed to file its
by-laws within the prescribed period does not ipso facto
lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of
Registration of Corporations,[45] details the procedures
and remedies that may be availed of before an order of
revocation can be issued. There is no showing that such
a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant
because this case is not a corporate controversy, but a
labor dispute; and it is an employers basic right to freely
select or discharge its employees, if only as a measure
of self-protection against acts inimical to its interest.[46]
Regardless of whether AIIBP is a corporation, a
partnership, a sole proprietorship, or a sari-sari store, it
is an undisputed fact that AIIBP is the petitioners
employer. AIIBP chose to retain his services during its
reorganization, controlled the means and methods by
which his work was to be performed, paid his wages,
and, eventually, terminated his services.[47]
And though he has had ample opportunity to do so,
the petitioner has not alleged that he is anything other
than an employee of AIIBP. He has neither claimed, nor
shown, that he is a stockholder or an officer of the
corporation. Having accepted employment from
AIIBP, and rendered his services to the said bank,
received his salary, and accepted the promotion given
him, it is now too late in the day for petitioner to
question its existence and its power to terminate his
services. One who assumes an obligation to an
ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact
no corporation.[48]
Even if we were to consider the facts behind
petitioner Sawadjaans dismissal from service, we
would be hard pressed to find error in the decision of
the AIIBP.
As appraiser/investigator, the petitioner was
expected to conduct an ocular inspection of the
properties offered by CAMEC as collaterals and check
the copies of the certificates of title against those on file
with the Registry of Deeds. Not only did he fail to
conduct these routine checks, but he also deliberately
misrepresented in his appraisal report that after
reviewing the documents and conducting a site
inspection, he found the CAMEC loan application to be
in order. Despite the number of pleadings he has filed,
he has failed to offer an alternative explanation for his
actions.
When he was informed of the charges against him
and directed to appear and present his side on the
matter, the petitioner sent instead a memorandum
questioning the fairness and impartiality of the
members of the investigating committee and refusing to
recognize their jurisdiction over him. Nevertheless, the
investigating committee rescheduled the hearing to
give the petitioner another chance, but he still refused
to appear before it.
Thereafter, witnesses were presented, and a
decision was rendered finding him guilty of dishonesty
and dismissing him from service. He sought a
reconsideration of this decision and the same
committee whose impartiality he questioned reduced
their recommended penalty to suspension for six
months and one day. The board of directors, however,
opted to dismiss him from service.
On appeal to the CSC, the Commission found that
Sawadjaans failure to perform his official duties greatly
prejudiced the AIIBP, for which he should be held
accountable. It held that:
. . . (I)t is crystal clear that respondent
SAPPARI SAWADJAAN was remiss in the
performance of his duties as
appraiser/inspector. Had respondent
performed his duties as appraiser/inspector, he
could have easily noticed that the property
located at Balintawak, Caloocan City covered
by TCT No. C-52576 and which is one of the
properties offered as collateral by CAMEC is
encumbered to Divina Pablico. Had
respondent reflected such fact in his
appraisal/inspection report on said property
the ISLAMIC BANK would not have
approved CAMECs loan of P500,000.00 in
1987 and CAMECs P5 Million loan in 1988,
respondent knowing fully well the Banks
policy of not accepting encumbered properties
as collateral.
Respondent SAWADJAANs
reprehensible act is further aggravated when
he failed to check and verify from the Registry
of Deeds of Marikina the authenticity of the
property located at Mayamot, Antipolo, Rizal
covered by TCT No. N-130671 and which is
one of the properties offered as collateral by
CAMEC for its P5 Million loan in 1988. If he
only visited and verified with the Register of
Deeds of Marikina the authenticity of TCT
No. N-130671 he could have easily discovered
that TCT No. N-130671 is fake and the
property described therein non-existent.
...

This notwithstanding, respondent cannot
escape liability. As adverted to earlier, his
failure to perform his official duties resulted to
the prejudice and substantial damage to the
ISLAMIC BANK for which he should be held
liable for the administrative offense of
CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.[49]
From the foregoing, we find that the CSC and the
court a quo committed no grave abuse of discretion
when they sustained Sawadjaans dismissal from
service. Grave abuse of discretion implies such
capricious and whimsical exercise of judgment as
equivalent to lack of jurisdiction, or, in other words,
where the power is exercised in an arbitrary or despotic
manner by reason of passion or personal hostility, and
it must be so patent and gross as to amount to an evasion
of positive duty or to a virtual refusal to perform the
duty enjoined or to act at all in contemplation of law.[50]
The records show that the respondents did none of
these; they acted in accordance with the law.
WHEREFORE, the petition is DISMISSED. The
Decision of the Court of Appeals of 30 March 1999
affirming Resolutions No. 94-4483 and No. 95-2754 of
the Civil Service Commission, and its Resolution of 15
December 1999 are hereby AFFIRMED. Costs against
the petitioner.
SO ORDERED.
GRANDFATHER RULE
GAMBOA VS TEVES
The Case
This is an original petition for prohibition, injunction,
declaratory relief and declaration of nullity of the sale
of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of
the Republic of the Philippines to Metro Pacific Assets
Holdings, Inc. (MPAH), an affiliate of First Pacific
Company Limited (First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a
stockholder of Philippine Long Distance Telephone
Company (PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature
enacted Act No. 3436 which granted PLDT a franchise
and the right to engage in telecommunications business.
In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major
PLDT stockholder, sold 26 percent of the outstanding
common shares of PLDT to PTIC. In 1977, Prime
Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr.
Subsequently, PHI became the owner of 111,415 shares
of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon
Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415
shares of stock of PTIC held by PHI were sequestered
by the Presidential Commission on Good Government
(PCGG). The 111,415 PTIC shares, which represent
about 46.125 percent of the outstanding capital stock of
PTIC, were later declared by this Court to be owned by
the Republic of the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong
Kong-based investment firm, acquired the remaining
54 percent of the outstanding capital stock of PTIC. On
20 November 2006, the Inter-Agency Privatization
Council (IPC) of the Philippine Government
announced that it would sell the 111,415 PTIC shares,
or 46.125 percent of the outstanding capital stock of
PTIC, through a public bidding to be conducted on 4
December 2006. Subsequently, the public bidding was
reset to 8 December 2006, and only two bidders,

Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won
with a bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would
exercise its right of first refusal as a PTIC stockholder
and buy the 111,415 PTIC shares by matching the bid
price of Parallax. However, First Pacific failed to do so
by the 1 February 2007 deadline set by IPC and instead,
yielded its right to PTIC itself which was then given by
IPC until 2 March 2007 to buy the PTIC shares. On 14
February 2007, First Pacific, through its subsidiary,
MPAH, entered into a Conditional Sale and Purchase
Agreement of the 111,415 PTIC shares, or 46.125
percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of
P25,217,556,000 or US$510,580,189. The sale was
completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the
Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares
or about 6.3 percent of the outstanding common shares
of PLDT. With the sale, First Pacifics common
shareholdings in PLDT increased from 30.7 percent
to 37 percent, thereby increasing the common
shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the
1987 Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more
than 40 percent.3
On the other hand, public respondents Finance
Secretary Margarito B. Teves, Undersecretary John P.
Sevilla, and PCGG Commissioner Ricardo Abcede
allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had
since engaged in the business of investment holdings.
PTIC held 26,034,263 PLDT common shares, or
13.847 percent of the total PLDT outstanding common
shares. PHI, on the other hand, was incorporated in
1977, and became the owner of 111,415 PTIC shares or
46.125 percent of the outstanding capital stock of PTIC
by virtue of three Deeds of Assignment executed by
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by
the PCGG, and subsequently declared by this Court as
part of the ill-gotten wealth of former President
Ferdinand Marcos. The sequestered PTIC shares were
reconveyed to the Republic of the Philippines in
accordance with this Courts decision4 which became
final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415
PTIC shares, which represent 6.4 percent of the
outstanding common shares of stock of PLDT, and
designated the Inter-Agency Privatization Council
(IPC), composed of the Department of Finance and the
PCGG, as the disposing entity. An invitation to bid was
published in seven different newspapers from 13 to 24
November 2006. On 20 November 2006, a pre-bid
conference was held, and the original deadline for
bidding scheduled on 4 December 2006 was reset to 8
December 2006. The extension was published in nine
different newspapers.
During the 8 December 2006 bidding, Parallax Capital
Management LP emerged as the highest bidder with a
bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the
bidding results and gave First Pacific until 1 February
2007 to exercise its right of first refusal in accordance
with PTICs Articles of Incorporation. First Pacific
announced its intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives
(HR) Committee on Good Government conducted a
public hearing on the particulars of the then impending
sale of the 111,415 PTIC shares. Respondents Teves
and Sevilla were among those who attended the public
hearing. The HR Committee Report No. 2270
concluded that: (a) the auction of the governments
111,415 PTIC shares bore due diligence, transparency
and conformity with existing legal procedures; and (b)
First Pacifics intended acquisition of the
governments 111,415 PTIC shares resulting in First
Pacifics 100% ownership of PTIC will not violate
the 40 percent constitutional limit on foreign
ownership of a public utility since PTIC holds only
13.847 percent of the total outstanding common
shares of PLDT.5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of
stock of PTIC.
Respondent Manuel V. Pangilinan admits the following
facts: (a) the IPC conducted a public bidding for the sale
of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of
PTIC shares was already owned by First Pacific and its
affiliates); (b) Parallax offered the highest bid
amounting to P25,217,556,000; (c) pursuant to the right
of first refusal in favor of PTIC and its shareholders
granted in PTICs Articles of Incorporation, MPAH, a
First Pacific affiliate, exercised its right of first refusal
by matching the highest bid offered for PTIC shares on
13 February 2007; and (d) on 28 February 2007, the
sale was consummated when MPAH paid IPC
P25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares. Respondent

Pangilinan denies the other allegations of facts of
petitioner.
On 28 February 2007, petitioner filed the instant
petition for prohibition, injunction, declaratory relief,
and declaration of nullity of sale of the 111,415 PTIC
shares. Petitioner claims, among others, that the sale of
the 111,415 PTIC shares would result in an increase in
First Pacifics common shareholdings in PLDT from
30.7 percent to 37 percent, and this, combined with
Japanese NTT DoCoMos common shareholdings in
PLDT, would result to a total foreign common
shareholdings in PLDT of 51.56 percent which is over
the 40 percent constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics
equity in PLDT will go up from 30.7 percent to
37.0 percent of its common or voting-
stockholdings, x x x. Hence, the consummation
of the sale will put the two largest foreign
investors in PLDT First Pacific and Japans NTT
DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent
of PLDT common equity. x x x With the
completion of the sale, data culled from the
official website of the New York Stock
Exchange (www.nyse.com) showed that those
foreign entities, which own at least five percent
of common equity, will collectively own 81.47
percent of PLDTs common equity. x x x
x x x as the annual disclosure
reports, also referred to as Form
20-K reports x x x which PLDT
submitted to the New York
Stock Exchange for the period
2003-2005, revealed that First
Pacific and several other foreign
entities breached the
constitutional limit of 40 percent
ownership as early as 2003. x x
x7
Petitioner raises the following issues: (1) whether the
consummation of the then impending sale of 111,415
PTIC shares to First Pacific violates the constitutional
limit on foreign ownership of a public utility; (2)
whether public respondents committed grave abuse of
discretion in allowing the sale of the 111,415 PTIC
shares to First Pacific; and (3) whether the sale of
common shares to foreigners in excess of 40 percent of
the entire subscribed common capital stock violates the
constitutional limit on foreign ownership of a public
utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V.
Sanidad filed a Motion for Leave to Intervene and
Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the
motion and noted the Petition-in-Intervention.
Petitioners-in-intervention join petitioner Wilson
Gamboa x x x in seeking, among others, to enjoin
and/or nullify the sale by respondents of the 111,415
PTIC shares to First Pacific or assignee. Petitioners-in-
intervention claim that, as PLDT subscribers, they have
a stake in the outcome of the controversy x x x where
the Philippine Government is completing the sale of
government owned assets in [PLDT], unquestionably a
public utility, in violation of the nationality restrictions
of the Philippine Constitution.
The Issue
This Court is not a trier of facts. Factual questions such
as those raised by petitioner,9 which indisputably
demand a thorough examination of the evidence of the
parties, are generally beyond this Courts jurisdiction.
Adhering to this well-settled principle, the Court shall
confine the resolution of the instant controversy solely
on the threshold and purely legal issue of whether the
term capital in Section 11, Article XII of the
Constitution refers to the total common shares only or
to the total outstanding capital stock (combined total of
common and non-voting preferred shares) of PLDT, a
public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for
mandamus
At the outset, petitioner is faced with a procedural
barrier. Among the remedies petitioner seeks, only the
petition for prohibition is within the original
jurisdiction of this court, which however is not
exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for
declaratory relief,10 injunction, and annulment of sale
are not embraced within the original jurisdiction of the

Supreme Court. On this ground alone, the petition could
have been dismissed outright.
While direct resort to this Court may be justified in a
petition for prohibition,11 the Court shall nevertheless
refrain from discussing the grounds in support of the
petition for prohibition since on 28 February 2007, the
questioned sale was consummated when MPAH paid
IPC P25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on
the definition of the term capital in Section 11, Article
XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for
declaratory relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the
Court treated the petition for declaratory relief as one
for mandamus considering the grave injustice that
would result in the interpretation of a banking law. In
that case, which involved the crime of rape committed
by a foreign tourist against a Filipino minor and the
execution of the final judgment in the civil case for
damages on the tourists dollar deposit with a local bank,
the Court declared Section 113 of Central Bank
Circular No. 960, exempting foreign currency deposits
from attachment, garnishment or any other order or
process of any court, inapplicable due to the peculiar
circumstances of the case. The Court held that injustice
would result especially to a citizen aggrieved by a
foreign guest like accused x x x that would negate
Article 10 of the Civil Code which provides that in case
of doubt in the interpretation or application of laws, it
is presumed that the lawmaking body intended right and
justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local
bank, and the accused to comply with the writ of
execution issued in the civil case for damages and to
release the dollar deposit of the accused to satisfy the
judgment.
In Alliance of Government Workers v. Minister of
Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory
relief and treated the same as one for mandamus. In
Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government
employees, from the enjoyment of rights to which they
were entitled under the law. Specifically, the question
was: Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including
government owned or controlled corporations included
among the four employers under Presidential Decree
No. 851 which are required to pay their employees x x
x a thirteenth (13th) month pay x x x ? The
Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation
of the technical rules of procedure, and certainly
requiring the interpretation of the assailed presidential
decree.
In short, it is well-settled that this Court may treat a
petition for declaratory relief as one for mandamus if
the issue involved has far-reaching implications. As
this Court held in Salvacion:
The Court has no original and exclusive
jurisdiction over a petition for declaratory relief.
However, exceptions to this rule have been
recognized. Thus, where the petition has far-
reaching implications and raises questions
that should be resolved, it may be treated as
one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the
interpretation of the term capital in Section 11, Article
XII of the Constitution. He prays that this Court declare
that the term capital refers to common shares only, and
that such shares constitute the sole basis in determining
foreign equity in a public utility. Petitioner further asks
this Court to declare any ruling inconsistent with such
interpretation unconstitutional.
The interpretation of the term capital in Section 11,
Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos
are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or
foreigners will have effective control of the national
economy. Indeed, if ever there is a legal issue that has
far-reaching implications to the entire nation, and to
future generations of Filipinos, it is the threshhold legal
issue presented in this case.
The Court first encountered the issue on the definition
of the term capital in Section 11, Article XII of the
Constitution in the case of Fernandez v. Cojuangco,
docketed as G.R. No. 157360.16 That case involved the
same public utility (PLDT) and substantially the same
private respondents. Despite the importance and
novelty of the constitutional issue raised therein and
despite the fact that the petition involved a purely legal
question, the Court declined to resolve the case on the
merits, and instead denied the same for disregarding the
hierarchy of courts.17 There, petitioner Fernandez

assailed on a pure question of law the Regional Trial
Courts Decision of 21 February 2003 via a petition for
review under Rule 45. The Courts Resolution, denying
the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with
another opportunity to finally settle this purely legal
issue which is of transcendental importance to the
national economy and a fundamental requirement to a
faithful adherence to our Constitution. The Court must
forthwith seize such opportunity, not only for the
benefit of the litigants, but more significantly for the
benefit of the entire Filipino people, to ensure, in the
words of the Constitution, a self-reliant and
independent national economy effectively controlled
by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on
this purely legal issue, present and future foreign
investors in this country deserve, as a matter of basic
fairness, a categorical ruling from this Court on the
extent of their participation in the capital of public
utilities and other nationalized businesses.
Despite its far-reaching implications to the national
economy, this purely legal issue has remained
unresolved for over 75 years since the 1935
Constitution. There is no reason for this Court to evade
this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in
Section 11, Article XII of the Constitution, but also in
Section 2, Article XII on co-production and joint
venture agreements for the development of our natural
resources,19 in Section 7, Article XII on ownership of
private lands,20 in Section 10, Article XII on the
reservation of certain investments to Filipino citizens,21
in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article
XVI on the ownership of advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of
PLDT. As such, he has the right to question the subject
sale, which he claims to violate the nationality
requirement prescribed in Section 11, Article XII of the
Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs
franchise could be revoked, a dire consequence directly
affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant
petition raises matters of transcendental importance to
the public. The fundamental and threshold legal issue
in this case, involving the national economy and the
economic welfare of the Filipino people, far outweighs
any perceived impediment in the legal personality of
the petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a
citizen to bring a suit on matters of transcendental
importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the
issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public
duty, the people are regarded as the real parties in
interest; and because it is sufficient that petitioner is
a citizen and as such is interested in the execution of
the laws, he need not show that he has any legal or
special interest in the result of the action. In the
aforesaid case, the petitioners sought to enforce their
right to be informed on matters of public concern, a
right then recognized in Section 6, Article IV of the
1973 Constitution, in connection with the rule that laws
in order to be valid and enforceable must be published
in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal
standing, the Court declared that the right they sought
to be enforced is a public right recognized by no less
than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating
Taada, further declared that when a mandamus
proceeding involves the assertion of a public right,
the requirement of personal interest is satisfied by
the mere fact that petitioner is a citizen and,
therefore, part of the general public which possesses
the right.
Further, in Albano v. Reyes, we said that while
expenditure of public funds may not have been
involved under the questioned contract for the
development, management and operation of the Manila
International Container Terminal, public interest
[was] definitely involved considering the important
role [of the subject contract] . . . in the economic
development of the country and the magnitude of
the financial consideration involved. We concluded
that, as a consequence, the disclosure provision in the
Constitution would constitute sufficient authority for
upholding the petitioners standing. (Emphasis
supplied)
Clearly, since the instant petition, brought by a citizen,
involves matters of transcendental public importance,
the petitioner has the requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and
Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any
other form of authorization for the operation
of a public utility shall be granted except to
citizens of the Philippines or to corporations
or associations organized under the laws of
the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization
be exclusive in character or for a longer period
than fifty years. Neither shall any such franchise
or right be granted except under the condition
that it shall be subject to amendment, alteration,
or repeal by the Congress when the common
good so requires. The State shall encourage
equity participation in public utilities by the
general public. The participation of foreign
investors in the governing body of any public
utility enterprise shall be limited to their
proportionate share in its capital, and all the
executive and managing officers of such
corporation or association must be citizens of
the Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5,
Article XIV of the 1973 Constitution, thus:
Section 5. No franchise, certificate, or any
other form of authorization for the operation
of a public utility shall be granted except to
citizens of the Philippines or to corporations
or associations organized under the laws of
the Philippines at least sixty per centum of
the capital of which is owned by such citizens,
nor shall such franchise, certificate, or
authorization be exclusive in character or for a
longer period than fifty years. Neither shall any
such franchise or right be granted except under
the condition that it shall be subject to
amendment, alteration, or repeal by the
National Assembly when the public interest so
requires. The State shall encourage equity
participation in public utilities by the general
public. The participation of foreign investors in
the governing body of any public utility
enterprise shall be limited to their proportionate
share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution
reproduced Section 8, Article XIV of the 1935
Constitution, viz:
Section 8. No franchise, certificate, or any
other form of authorization for the operation
of a public utility shall be granted except to
citizens of the Philippines or to corporations
or other entities organized under the laws of
the Philippines sixty per centum of the
capital of which is owned by citizens of the
Philippines, nor shall such franchise,
certificate, or authorization be exclusive in
character or for a longer period than fifty years.
No franchise or right shall be granted to any
individual, firm, or corporation, except under
the condition that it shall be subject to
amendment, alteration, or repeal by the
Congress when the public interest so requires.
(Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the
1986 Constitutional Commission, reminds us that the
Filipinization provision in the 1987 Constitution is one
of the products of the spirit of nationalism which
gripped the 1935 Constitutional Convention.25 The
1987 Constitution provides for the Filipinization of
public utilities by requiring that any form of
authorization for the operation of public utilities should
be granted only to citizens of the Philippines or to
corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose
capital is owned by such citizens. The provision is [an
express] recognition of the sensitive and vital
position of public utilities both in the national
economy and for national security.26 The evident
purpose of the citizenship requirement is to prevent
aliens from assuming control of public utilities, which
may be inimical to the national interest.27 This specific
provision explicitly reserves to Filipino citizens control
of public utilities, pursuant to an overriding economic
goal of the 1987 Constitution: to conserve and develop
our patrimony28 and ensure a self-reliant and
independent national economy effectively controlled
by Filipinos.29
Any citizen or juridical entity desiring to operate a
public utility must therefore meet the minimum
nationality requirement prescribed in Section 11,
Article XII of the Constitution. Hence, for a corporation

to be granted authority to operate a public utility, at
least 60 percent of its capital must be owned by Filipino
citizens.
The crux of the controversy is the definition of the term
capital. Does the term capital in Section 11, Article XII
of the Constitution refer to common shares or to the
total outstanding capital stock (combined total of
common and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity
limitation in domestic public utilities refers only to
common shares because such shares are entitled to vote
and it is through voting that control over a corporation
is exercised. Petitioner posits that the term capital in
Section 11, Article XII of the Constitution refers to the
ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the
corporate set-up of PLDT, can vote and elect members
of the board of directors. It is undisputed that PLDTs
non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No.
217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT
telephone line to subscribe to non-voting preferred
shares to pay for the investment cost of installing the
telephone line.32
Petitioners-in-intervention basically reiterate
petitioners arguments and adopt petitioners definition
of the term capital.33 Petitioners-in-intervention allege
that the approximate foreign ownership of common
capital stock of PLDT x x x already amounts to at least
63.54% of the total outstanding common stock, which
means that foreigners exercise significant control over
PLDT, patently violating the 40 percent foreign equity
limitation in public utilities prescribed by the
Constitution.
Respondents, on the other hand, do not offer any
definition of the term capital in Section 11, Article XII
of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not
dispute that more than 40 percent of the common shares
of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum,
consisting of 73 pages, harps mainly on the procedural
infirmities of the petition and the supposed violation of
the due process rights of the affected foreign common
shareholders. Respondent Nazareno does not deny
petitioners allegation of foreigners dominating the
common shareholdings of PLDT. Nazareno stressed
mainly that the petition seeks to divest foreign
common shareholders purportedly exceeding 40%
of the total common shareholdings in PLDT of their
ownership over their shares. Thus, the foreign natural
and juridical PLDT shareholders must be impleaded in
this suit so that they can be heard.34 Essentially,
Nazareno invokes denial of due process on behalf of the
foreign common shareholders.
While Nazareno does not introduce any definition of
the term capital, he states that among the factual
assertions that need to be established to counter
petitioners allegations is the uniform interpretation
by government agencies (such as the SEC),
institutions and corporations (such as the Philippine
National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both
preferred shares and common shares in controlling
interest in view of testing compliance with the 40%
constitutional limitation on foreign ownership in
public utilities.35
Similarly, respondent Manuel V. Pangilinan does not
define the term capital in Section 11, Article XII of the
Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs
common shares. Instead, respondent Pangilinan focuses
on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners.
Respondent Pangilinan emphasizes in his
Memorandum (1) the absence of this Courts
jurisdiction over the petition; (2) petitioners lack of
standing; (3) mootness of the petition; (4) non-
availability of declaratory relief; and (5) the denial of
due process rights. Moreover, respondent Pangilinan
alleges that the issue should be whether owners of
shares in PLDT as well as owners of shares in
companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies
without any law requiring them to surrender their shares
and also without notice and trial.
Respondent Pangilinan further asserts that Section 11,
[Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the
utility company as a condition for keeping their
shares in the utility company. According to him,
Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company)
on the basis of another partys alleged failure to satisfy
a requirement that is a condition only for that other
partys retention of another piece of property (the utility
company being at least 60% Filipino-owned to keep its
franchise).36

The OSG, representing public respondents Secretary
Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe
Barin, is likewise silent on the definition of the term
capital. In its Memorandum37 dated 24 September
2007, the OSG also limits its discussion on the
supposed procedural defects of the petition, i.e. lack of
standing, lack of jurisdiction, non-inclusion of
interested parties, and lack of basis for injunction. The
OSG does not present any definition or interpretation of
the term capital in Section 11, Article XII of the
Constitution. The OSG contends that the petition
actually partakes of a collateral attack on PLDTs
franchise as a public utility, which in effect requires a
full-blown trial where all the parties in interest are
given their day in court.38
Respondent Francisco Ed Lim, impleaded as President
and Chief Executive Officer of the Philippine Stock
Exchange (PSE), does not also define the term capital
and seeks the dismissal of the petition on the following
grounds: (1) failure to state a cause of action against
Lim; (2) the PSE allegedly implemented its rules and
required all listed companies, including PLDT, to make
proper and timely disclosures; and (3) the reliefs prayed
for in the petition would adversely impact the stock
market.
In the earlier case of Fernandez v. Cojuangco,
petitioner Fernandez who claimed to be a stockholder
of record of PLDT, contended that the term capital in
the 1987 Constitution refers to shares entitled to vote or
the common shares. Fernandez explained thus:
The forty percent (40%) foreign equity
limitation in public utilities prescribed by the
Constitution refers to ownership of shares of
stock entitled to vote, i.e., common shares,
considering that it is through voting that control
is being exercised. x x x
Obviously, the intent of the framers of the
Constitution in imposing limitations and
restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals
to be always in control of the corporation
undertaking said activities. Otherwise, if the
Trial Courts ruling upholding respondents
arguments were to be given credence, it would
be possible for the ownership structure of a
public utility corporation to be divided into one
percent (1%) common stocks and ninety-nine
percent (99%) preferred stocks. Following the
Trial Courts ruling adopting respondents
arguments, the common shares can be owned
entirely by foreigners thus creating an absurd
situation wherein foreigners, who are supposed
to be minority shareholders, control the public
utility corporation.
xxxx
Thus, the 40% foreign ownership limitation
should be interpreted to apply to both the
beneficial ownership and the controlling
interest.
xxxx
Clearly, therefore, the forty percent (40%)
foreign equity limitation in public utilities
prescribed by the Constitution refers to
ownership of shares of stock entitled to vote,
i.e., common shares. Furthermore, ownership of
record of shares will not suffice but it must be
shown that the legal and beneficial ownership
rests in the hands of Filipino citizens.
Consequently, in the case of petitioner PLDT,
since it is already admitted that the voting
interests of foreigners which would gain entry
to petitioner PLDT by the acquisition of
SMART shares through the Questioned
Transactions is equivalent to 82.99%, and the
nominee arrangements between the foreign
principals and the Filipino owners is likewise
admitted, there is, therefore, a violation of
Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February
15, 1988 and April 14, 1987 cited by the Trial
Court to support the proposition that the
meaning of the word capital as used in Section
11, Article XII of the Constitution allegedly
refers to the sum total of the shares subscribed
and paid-in by the shareholder and it allegedly
is immaterial how the stock is classified,
whether as common or preferred, cannot stand
in the face of a clear legislative policy as stated
in the FIA which took effect in 1991 or way
after said opinions were rendered, and as
clarified by the above-quoted Amendments. In
this regard, suffice it to state that as between the
law and an opinion rendered by an
administrative agency, the law indubitably
prevails. Moreover, said Opinions are merely
advisory and cannot prevail over the clear intent
of the framers of the Constitution.

In the same vein, the SECs construction of
Section 11, Article XII of the Constitution is at
best merely advisory for it is the courts that
finally determine what a law means.39
On the other hand, respondents therein, Antonio O.
Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano,
Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-
Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and
Orlando B. Vea, argued that the term capital in Section
11, Article XII of the Constitution includes preferred
shares since the Constitution does not distinguish
among classes of stock, thus:
16. The Constitution applies its foreign ownership
limitation on the corporations capital, without
distinction as to classes of shares. x x x
In this connection, the Corporation Code which
was already in force at the time the present
(1987) Constitution was drafted defined
outstanding capital stock as follows:
Section 137. Outstanding capital stock defined.
The term outstanding capital stock, as used in
this Code, means the total shares of stock issued
under binding subscription agreements to
subscribers or stockholders, whether or not fully
or partially paid, except treasury shares.
Section 137 of the Corporation Code also does
not distinguish between common and preferred
shares, nor exclude either class of shares, in
determining the outstanding capital stock (the
capital) of a corporation. Consequently,
petitioners suggestion to reckon PLDTs foreign
equity only on the basis of PLDTs outstanding
common shares is without legal basis. The
language of the Constitution should be
understood in the sense it has in common use.
xxxx
17. But even assuming that resort to the
proceedings of the Constitutional Commission
is necessary, there is nothing in the Record of
the Constitutional Commission (Vol. III) which
petitioner misleadingly cited in the Petition x x
x which supports petitioners view that only
common shares should form the basis for
computing a public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency
primarily responsible for implementing the
Corporation Code, and which also has the
responsibility of ensuring compliance with the
Constitutions foreign equity restrictions as
regards nationalized activities x x x has
categorically ruled that both common and
preferred shares are properly considered in
determining outstanding capital stock and the
nationality composition thereof.40
We agree with petitioner and petitioners-in-
intervention. The term capital in Section 11, Article XII
of the Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the
present case only to common shares,41 and not to the
total outstanding capital stock comprising both
common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies
shares as common or preferred, thus:
Sec. 6. Classification of shares. - The shares of
stock of stock corporations may be divided into
classes or series of shares, or both, any of which
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no
share may be deprived of voting rights except
those classified and issued as preferred or
redeemable shares, unless otherwise
provided in this Code: Provided, further, That
there shall always be a class or series of shares
which have complete voting rights. Any or all
of the shares or series of shares may have a par
value or have no par value as may be provided
for in the articles of incorporation: Provided,
however, That banks, trust companies,
insurance companies, public utilities, and
building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation in
case of liquidation and in the distribution of
dividends, or such other preferences as may be
stated in the articles of incorporation which are
not violative of the provisions of this Code:
Provided, That preferred shares of stock may be
issued only with a stated par value. The Board
of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions

of preferred shares of stock or any series
thereof: Provided, That such terms and
conditions shall be effective upon the filing of a
certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable
to the corporation or to its creditors in respect
thereto: Provided; That shares without par value
may not be issued for a consideration less than
the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration
received by the corporation for its no-par value
shares shall be treated as capital and shall not be
available for distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance
with constitutional or legal requirements.
Except as otherwise provided in the articles of
incorporation and stated in the certificate of
stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation provide for
non-voting shares in the cases allowed by this
Code, the holders of such shares shall
nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation or
other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to
approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks
with voting rights.
Indisputably, one of the rights of a stockholder is the
right to participate in the control or management of the
corporation.43 This is exercised through his vote in the
election of directors because it is the board of directors
that controls or manages the corporation.44 In the
absence of provisions in the articles of incorporation
denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares.
However, preferred shareholders are often excluded
from any control, that is, deprived of the right to vote in
the election of directors and on other matters, on the
theory that the preferred shareholders are merely
investors in the corporation for income in the same
manner as bondholders.45 In fact, under the Corporation
Code only preferred or redeemable shares can be
deprived of the right to vote.46 Common shares cannot
be deprived of the right to vote in any corporate
meeting, and any provision in the articles of
incorporation restricting the right of common
shareholders to vote is invalid.47
Considering that common shares have voting rights
which translate to control, as opposed to preferred
shares which usually have no voting rights, the term
capital in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred
shares also have the right to vote in the election of
directors, then the term capital shall include such
preferred shares because the right to participate in the
control or management of the corporation is exercised
through the right to vote in the election of directors. In
short, the term capital in Section 11, Article XII of
the Constitution refers only to shares of stock that
can vote in the election of directors.
This interpretation is consistent with the intent of the
framers of the Constitution to place in the hands of
Filipino citizens the control and management of public
utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting
stock or controlling interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the
Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-
40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are
always faced with this question: Where do we
base the equity requirement, is it on the

authorized capital stock, on the subscribed
capital stock, or on the paid-up capital stock of
a corporation? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long
discussion with the members of the team from
the UP Law Center who provided us a draft.
The phrase that is contained here which we
adopted from the UP draft is 60 percent of
voting stock.
MR. NOLLEDO. That must be based on the
subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall
be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one
corporation in another corporation, say, a
corporation with 60-40 percent equity invests in
another corporation which is permitted by the
Corporation Code, does the Committee adopt
the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding
of the Committee.
MR. NOLLEDO. Therefore, we need additional
Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that
portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the
Committee is the deletion of the phrase voting
stock or controlling interest.
MR. AZCUNA. Hence, without the Davide
amendment, the committee report would read:
corporations or associations at least sixty
percent of whose CAPITAL is owned by such
citizens.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is
lost, we are stuck with 60 percent of the capital
to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with
the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned
by them, but it is the voting capital, whereas,
the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is
controlled by foreigners despite being the
minority because they have the voting
capital. That is the anomaly that would result
here.
MR. BENGZON. No, the reason we
eliminated the word stock as stated in the
1973 and 1935 Constitutions is that
according to Commissioner Rodrigo, there
are associations that do not have stocks. That
is why we say CAPITAL.
MR. AZCUNA. We should not eliminate the
phrase controlling interest.
MR. BENGZON. In the case of stock
corporations, it is assumed.49 (Emphasis
supplied)
Thus, 60 percent of the capital assumes, or should result
in, controlling interest in the corporation. Reinforcing
this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the
definition of a Philippine national in the Foreign
Investments Act of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean a
citizen of the Philippines; or a domestic
partnership or association wholly owned by
citizens of the Philippines; or a corporation
organized under the laws of the Philippines

of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote
is owned and held by citizens of the
Philippines; or a corporation organized abroad
and registered as doing business in the
Philippines under the Corporation Code of
which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos or a trustee of funds
for pension or other employee retirement or
separation benefits, where the trustee is a
Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both
corporations must be owned and held by
citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of
Directors of each of both corporations must be
citizens of the Philippines, in order that the
corporation, shall be considered a Philippine
national. (Emphasis supplied)
In explaining the definition of a Philippine national, the
Implementing Rules and Regulations of the Foreign
Investments Act of 1991 provide:
b. Philippine national shall mean a citizen of the
Philippines or a domestic partnership or
association wholly owned by the citizens of the
Philippines; or a corporation organized under
the laws of the Philippines of which at least
sixty percent [60%] of the capital stock
outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee
of funds for pension or other employee
retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
percent [60%] of the fund will accrue to the
benefit of the Philippine nationals; Provided,
that where a corporation its non-Filipino
stockholders own stocks in a Securities and
Exchange Commission [SEC] registered
enterprise, at least sixty percent [60%] of the
capital stock outstanding and entitled to vote of
both corporations must be owned and held by
citizens of the Philippines and at least sixty
percent [60%] of the members of the Board of
Directors of each of both corporation must be
citizens of the Philippines, in order that the
corporation shall be considered a Philippine
national. The control test shall be applied for
this purpose.
Compliance with the required Filipino
ownership of a corporation shall be
determined on the basis of outstanding
capital stock whether fully paid or not, but
only such stocks which are generally entitled
to vote are considered.
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the
required Filipino equity. Full beneficial
ownership of the stocks, coupled with
appropriate voting rights is essential. Thus,
stocks, the voting rights of which have been
assigned or transferred to aliens cannot be
considered held by Philippine citizens or
Philippine nationals.
Individuals or juridical entities not meeting
the aforementioned qualifications are
considered as non-Philippine nationals.
(Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent
Filipino-owned capital required in the Constitution.
Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine
national[s].
Under Section 10, Article XII of the Constitution,
Congress may reserve to citizens of the Philippines or
to corporations or associations at least sixty per centum
of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain
areas of investments. Thus, in numerous laws Congress
has reserved certain areas of investments to Filipino
citizens or to corporations at least sixty percent of the
capital of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government

Contracts or R.A. No. 5183; (2) Philippine Inventors
Incentives Act or R.A. No. 3850; (3) Magna Carta for
Micro, Small and Medium Enterprises or R.A. No.
6977; (4) Philippine Overseas Shipping Development
Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6)
Philippine Technology Transfer Act of 2009 or R.A.
No. 10055; and (7) Ship Mortgage Decree or P.D. No.
1521. Hence, the term capital in Section 11, Article XII
of the Constitution is also used in the same context in
numerous laws reserving certain areas of investments
to Filipino citizens.
To construe broadly the term capital as the total
outstanding capital stock, including both common and
non-voting preferred shares, grossly contravenes the
intent and letter of the Constitution that the State shall
develop a self-reliant and independent national
economy effectively controlled by Filipinos. A broad
definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates to
control of the public utility.
We shall illustrate the glaring anomaly in giving a
broad definition to the term capital. Let us assume that
a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares
owned by Filipinos, with both classes of share having a
par value of one peso (P1.00) per share. Under the
broad definition of the term capital, such corporation
would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999
percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.
In the example given, only the foreigners holding the
common shares have voting rights in the election of
directors, even if they hold only 100 shares. The
foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the
other hand, the Filipinos, holding more than 99.999
percent of the equity, cannot vote in the election of
directors and hence, have no control over the public
utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear
language of the Constitution, to place the control of
public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national
economy effectively controlled by Filipinos.
The example given is not theoretical but can be found
in the real world, and in fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied
of the right to vote in the election of directors. PLDTs
Articles of Incorporation expressly state that the
holders of Serial Preferred Stock shall not be
entitled to vote at any meeting of the stockholders
for the election of directors or for any other purpose
or otherwise participate in any action taken by the
corporation or its stockholders, or to receive notice of
any meeting of stockholders.51
On the other hand, holders of common shares are
granted the exclusive right to vote in the election of
directors. PLDTs Articles of Incorporation52 state that
each holder of Common Capital Stock shall have one
vote in respect of each share of such stock held by him
on all matters voted upon by the stockholders, and the
holders of Common Capital Stock shall have the
exclusive right to vote for the election of directors
and for all other purposes.53
In short, only holders of common shares can vote in the
election of directors, meaning only common
shareholders exercise control over PLDT. Conversely,
holders of preferred shares, who have no voting rights
in the election of directors, do not have any control over
PLDT. In fact, under PLDTs Articles of Incorporation,
holders of common shares have voting rights for all
purposes, while holders of preferred shares have no
voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute,
that foreigners hold a majority of the common shares of
PLDT. In fact, based on PLDTs 2010 General
Information Sheet (GIS),54 which is a document
required to be submitted annually to the Securities and
Exchange Commission,55 foreigners hold 120,046,690
common shares of PLDT whereas Filipinos hold only
66,750,622 common shares.56 In other words,
foreigners hold 64.27% of the total number of PLDTs
common shares, while Filipinos hold only 35.73%.
Since holding a majority of the common shares equates
to control, it is clear that foreigners exercise control
over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign
ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for
2009,57 as submitted to the SEC, shows that per share
the SIP58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared
dividends for the common shares at P70.00 per share,
while the declared dividends for the preferred shares

59
amounted to a measly P1.00 per share. So the
preferred shares not only cannot vote in the election of
directors, they also have very little and obviously
negligible dividend earning capacity compared to
common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the
SEC, the par value of PLDT common shares is P5.00
per share, whereas the par value of preferred shares is
P10.00 per share. In other words, preferred shares have
twice the par value of common shares but cannot elect
directors and have only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred
shares are owned by Filipinos while foreigners own
only a minuscule 0.56% of the preferred shares.61
Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that
beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership in a
public utility.
The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional
mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of
the voting rights, is constitutionally required for the
States grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44%
owned by Filipinos, are non-voting and earn only 1/70
of the dividends that PLDT common shares earn,
grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial
ownership of a public utility.
In short, Filipinos hold less than 60 percent of the
voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the
express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other
form of authorization for the operation of a public
utility shall be granted except to x x x corporations x x
x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such
citizens x x x.
To repeat, (1) foreigners own 64.27% of the common
shares of PLDT, which class of shares exercises the sole
right to vote in the election of directors, and thus
exercise control over PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a
minority of the voting stock, and thus do not exercise
control over PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common
shares earn;63 (5) preferred shares have twice the par
value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of
PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery
of the Constitution.
Incidentally, the fact that PLDT common shares with a
par value of P5.00 have a current stock market value of
P2,328.00 per share,64 while PLDT preferred shares
with a par value of P10.00 per share have a current
stock market value ranging from only P10.92 to P11.06
per share,65 is a glaring confirmation by the market that
control and beneficial ownership of PLDT rest with the
common shares, not with the preferred shares.
Indisputably, construing the term capital in Section 11,
Article XII of the Constitution to include both voting
and non-voting shares will result in the abject surrender
of our telecommunications industry to foreigners,
amounting to a clear abdication of the States
constitutional duty to limit control of public utilities to
Filipino citizens. Such an interpretation certainly runs
counter to the constitutional provision reserving certain
areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the
ownership of land, educational institutions and
advertising businesses. The Court should never open to
foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the
Constitution and of the national interest. The Court
must perform its solemn duty to defend and uphold the
intent and letter of the Constitution to ensure, in the
words of the Constitution, a self-reliant and
independent national economy effectively controlled by
Filipinos.
Section 11, Article XII of the Constitution, like other
provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the
development of natural resources and ownership of
land, educational institutions and advertising business,
is self-executing. There is no need for legislation to
implement these self-executing provisions of the
Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila
Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that
a legislative act is necessary to enforce a
constitutional mandate, the presumption now is
that all provisions of the constitution are self-
executing. If the constitutional provisions are
treated as requiring legislation instead of self-

executing, the legislature would have the power
to ignore and practically nullify the mandate of
the fundamental law. This can be cataclysmic.
That is why the prevailing view is, as it has
always been, that
. . . in case of doubt, the Constitution should be
considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution
should be considered self-executing, as a
contrary rule would give the legislature
discretion to determine when, or whether,
they shall be effective. These provisions would
be subordinated to the will of the lawmaking
body, which could make them entirely
meaningless by simply refusing to pass the
needed implementing statute. (Emphasis
supplied)
In Manila Prince Hotel, even the Dissenting Opinion of
then Associate Justice Reynato S. Puno, later Chief
Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the
Constitution as self-executing, rather than as
requiring future legislation for their
enforcement. The reason is not difficult to
discern. For if they are not treated as self-
executing, the mandate of the fundamental
law ratified by the sovereign people can be
easily ignored and nullified by Congress.
Suffused with wisdom of the ages is the
unyielding rule that legislative actions may
give breath to constitutional rights but
congressional inaction should not suffocate
them.
Thus, we have treated as self-executing the
provisions in the Bill of Rights on arrests,
searches and seizures, the rights of a person
under custodial investigation, the rights of an
accused, and the privilege against self-
incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate
constitutional provisions guaranteeing the
fundamental rights of life, liberty and the
protection of property. The same treatment is
accorded to constitutional provisions forbidding
the taking or damaging of property for public
use without just compensation. (Emphasis
supplied)
Thus, in numerous cases,67 this Court, even in the
absence of implementing legislation, applied directly
the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong
Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the
effects or consequences of a sale by a citizen of
his land to an alien, and as both the citizen and
the alien have violated the law, none of them
should have a recourse against the other, and it
should only be the State that should be allowed
to intervene and determine what is to be done
with the property subject of the violation. We
have said that what the State should do or could
do in such matters is a matter of public policy,
entirely beyond the scope of judicial authority.
(Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G.
R. No. L-5996, June 27, 1956.) While the
legislature has not definitely decided what
policy should be followed in cases of
violations against the constitutional
prohibition, courts of justice cannot go
beyond by declaring the disposition to be null
and void as violative of the Constitution. x x
x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as
not self-executing would mean that since the 1935
Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific
areas of investments to corporations, at least 60 percent
of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and
1987 Constitutions miserably failed to effectively
reserve to Filipinos specific areas of investment, like
the operation by corporations of public utilities, the
exploitation by corporations of mineral resources, the
ownership by corporations of real estate, and the
ownership of educational institutions. All the
legislatures that convened since 1935 also miserably
failed to enact legislations to implement these vital
constitutional provisions that determine who will
effectively control the national economy, Filipinos or

foreigners. This Court cannot allow such an absurd
interpretation of the Constitution.
This Court has held that the SEC has both regulatory
and adjudicative functions.69 Under its regulatory
functions, the SEC can be compelled by mandamus to
perform its statutory duty when it unlawfully neglects
to perform the same. Under its adjudicative or quasi-
judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of
any law it administers or enforces when it is mandated
by law to investigate such violation.
70
Under Section 17(4) of the Corporation Code, the
SEC has the regulatory function to reject or disapprove
the Articles of Incorporation of any corporation where
the required percentage of ownership of the capital
stock to be owned by citizens of the Philippines has
not been complied with as required by existing laws
or the Constitution. Thus, the SEC is the government
agency tasked with the statutory duty to enforce the
nationality requirement prescribed in Section 11,
Article XII of the Constitution on the ownership of
public utilities. This Court, in a petition for declaratory
relief that is treated as a petition for mandamus as in the
present case, can direct the SEC to perform its statutory
duty under the law, a duty that the SEC has apparently
unlawfully neglected to do based on the 2010 GIS that
respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation
Code,71 the SEC is vested with the power and function
to suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration
of corporations, partnerships or associations, upon
any of the grounds provided by law. The SEC is
mandated under Section 5(d) of the same Code with the
power and function to investigate x x x the activities
of persons to ensure compliance with the laws and
regulations that SEC administers or enforces. The GIS
that all corporations are required to submit to SEC
annually should put the SEC on guard against violations
of the nationality requirement prescribed in the
Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present
case, to hear and decide a possible violation of Section
11, Article XII of the Constitution in view of the
ownership structure of PLDTs voting shares, as
admitted by respondents and as stated in PLDTs 2010
GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition
and rule that the term capital in Section 11, Article XII
of the 1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in
the present case only to common shares, and not to the
total outstanding capital stock (common and non-
voting preferred shares). Respondent Chairperson of
the Securities and Exchange Commission is
DIRECTED to apply this definition of the term capital
in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose
the appropriate sanctions under the law.
SO ORDERED.
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
ERNESTO CEASE, CECILIA CEASE, MARION
CEASE, TERESA CEASE-LACEBAL and the F.L.
CEASE PLANTATION CO., INC. as Trustee of
properties of the defunct TIAONG MILLING &
PLANTATION CO., petitioners,
vs.
HONORABLE COURT OF APPEALS, (Special
Seventh Division), HON. MANOLO L. MADDELA,
Presiding Judge, Court of First Instance of Quezon,
BENJAMIN CEASE and FLORENCE CEASE,
respondents.
GUERRERO, J:
Appeal by certiorari from the decision of the Court of
Appeals in CA-G.R. No. 45474, entitled "Ernesto
Cease, et al. vs. Hon. Manolo L. Maddela, Judge of the
Court of First Instance of Quezon, et al." 1 which
dismissed the petition for certiorari, mandamus, and
prohibition instituted by the petitioners against the
respondent judge and the private respondents.
The antecedents of the case, as found by the appellate
court, are as follows:
IT RESULTING: That the antecedents
are not difficult to understand; sometime
in June 1908, one Forrest L. Cease
common predecessor in interest of the
parties together with five (5) other
American citizens organized the Tiaong
Milling and Plantation Company and in
the course of its corporate existence the
company acquired various properties
but at the same time all the other original
incorporators were bought out by
Forrest L. Cease together with his
children namely Ernest, Cecilia,
Teresita, Benjamin, Florence and one

Bonifacia Tirante also considered a
member of the family; the charter of the
company lapsed in June 1958; but
whether there were steps to liquidate it,
the record is silent; on 13 August 1959,
Forrest L. Cease died and by
extrajudicial partition of his shares,
among the children, this was disposed of
on 19 October 1959; it was here where
the trouble among them came to arise
because it would appear that Benjamin
and Florence wanted an actual division
while the other children wanted
reincorporation; and proceeding on that,
these other children Ernesto, Teresita
and Cecilia and aforementioned other
stockholder Bonifacia Tirante
proceeded to incorporate themselves
into the F.L. Cease Plantation Company
and registered it with the Securities and
Exchange Commission on 9 December,
1959; apparently in view of that,
Benjamin and Florence for their part
initiated a Special Proceeding No. 3893
of the Court of First Instance of Tayabas
for the settlement of the estate of Forest
L. Cease on 21 April, 1960 and one
month afterwards on 19 May 1960 they
filed Civil Case No. 6326 against
Ernesto, Teresita and Cecilia Cease
together with Bonifacia Tirante asking
that the Tiaong Milling and Plantation
Corporation be declared Identical to
F.L. Cease and that its properties be
divided among his children as his
intestate heirs; this Civil Case was
resisted by aforestated defendants and
notwithstanding efforts of the plaintiffs
to have the properties placed under
receivership, they were not able to against the defendants
succeed because defendants filed a bond declaring that:
to remain as they have remained in 1) The assets or
possession; after that and already, properties of the defunct
during the pendency of Civil Case No. Tiaong Milling and
6326 specifically on 21 May, 1961 Plantation Company
apparently on the eve of the expiry of the now appearing under the
three (3) year period provided by the law name of F.L. Cease
for the liquidation of corporations, the Plantation Company as
board of liquidators of Tiaong Milling Trustee, is the estate also
executed an assignment and conveyance
of the deceased Forrest
of properties and trust agreement in L. Cease and ordered
favor of F.L. Cease Plantation Co. Inc. divided, share and share
as trustee of the Tiaong Milling and alike, among his six
Plantation Co. so Chat upon motion of children the plaintiffs
the plaintiffs trial Judge ordered that this and the defendants in
alleged trustee be also included as party accordance with Rule 69,
defendant; now this being the situation, Rules of Court;
it will be remembered that there were
thus two (2) proceedings pending in the 2) The Resolution to Sell
Court of First Instance of Quezon dated October 12, 1959
namely Civil Case No. 6326 and Special and the Transfer and
Proceeding No. 3893 but both of these Conveyance with Trust
were assigned to the Honorable Agreement is hereby set
Respondent Judge Manolo L. Maddela aside as improper and
p. 43 and the case was finally heard and illegal for the purposes
submitted upon stipulation of facts pp, and effect that it was
34-110, rollo; and trial Judge by intended and, therefore,
decision dated 27 December 1969 held null and void;
for the plaintiffs Benjamin and 3) That F.L. Cease
Florence, the decision containing the Plantation Company is
following dispositive part: removed as 'Trustee for
interest against the estate
VIEWED IN THE
and essential to the
LIGHT OF ALL THE
protection of plaintiffs'
FOREGOING, judgment
rights and is hereby
is hereby rendered in
ordered to deliver and
favor of plaintiffs and
convey all the properties

and assets of the defunct
Tiaong Milling now
under its name, custody
and control to
whomsoever be
appointed as Receiver -
disqualifying and of the
parties herein - the latter
to act accordingly upon
proper assumption of
office; and
4) Special Proceedings
No. 3893 for
administration is
terminated and
dismissed; the instant
case to proceed but on
issues of damages only
and for such action
inherently essential for
partition.
SO ORDERED.
Lucena City, December
27, 1969., pp. 122-a-123,
rollo.
upon receipt of that, defendants there
filled a notice of appeal p. 129, rollo
together with an appeal bond and a
record on appeal but the plaintiffs
moved to dismiss the appeal on the
ground that the judgment was in fact
interlocutory and not appealable p. 168
rollo and this position of defendants was
sustained by trial Judge, His Honor
ruling that
IN VIEW OF THE
FOREGOING, the
appeal interposed by
plaintiffs is hereby
dismissed as premature
and the Record on
Appeal is necessarily
disapproved as improper
at this stage of the
proceedings.
SO ORDERED.
Lucena City, April 27,
1970.
and so it was said defendants brought
the matter first to the Supreme Court, on
mandamus on 20 May, 1970 to compel
the appeal and certiorari and prohibition
to annul the order of 27 April, 1970 on
the ground that the decision was
"patently erroneous" p. 16, rollo; but the
Supreme Court remanded the case to
this Court of Appeals by resolution of 27
May 1970, p. 173, and this Court of
Appeals on 1 July 1970 p. 175 dismissed
the petition so far as the mandamus was
concerned taking the view that the
decision sought to be appealed dated 27
December, 1969 was interlocutory and
not appealable but on motion for
reconsideration of petitioners and since
there was possible merit so far as its
prayer for certiorari and prohibition was
concerned, by resolution of the Court on
19 August, 1970, p. 232, the petition
was permitted to go ahead in that
capacity; and it is the position of
petitioners that the decision of 27
December, 1969 as well as the order of
27 April, 1970 suffered of certain fatal
defects, which respondents deny and on
their part raise the preliminary point that
this Court of Appeals has no authority to
give relief to petitioners because not
in aid of its appellate jurisdiction,
and that the questions presented cannot
be raised for the first time before this
Court of Appeals;
Respondent Court of Appeals in its decision
promulgated December 9, 1970 dismissed the petition
with costs against petitioners, hence the present petition
to this Court on the following assignment of errors:
THE COURT OF APPEALS ERRED -
I. IN SANCTIONING THE WRONGFUL EXERCISE
OF JURISDICTION BEYOND THE LIMITS OF
AUTHORITY CONFERRED BY LAW UPON THE
LOWER COURT, WHEN IT PROCEEDED TO
HEAR, ADJUDGE AND ADJUDICATE -
(a) Special Proceedings No. 3893 for the
settlement of the Estate of Forrest L.
Cease, simultaneously and concurrently
with -
(b) Civil Case No. 6326, wherein the
lower Court ordered Partition under
Rule 69, Rules of Court -
THE ISSUE OF LEGAL OWNERSHIP OF THE
PROPERTIES COMMONLY INVOLVED IN BOTH
ACTIONS HAVING BEEN RAISED AT THE
OUTSET BY THE TIAONG MILLING AND
PLANTATION COMPANY, AS THE REGISTERED
OWNER OF SUCH PROPERTIES UNDER ACT 496.
II. IN AFFIRMING - UNSUPPORTED BY ANY
EVIDENCE WHATSOEVER NOR CITATION OF

ANY LAW TO JUSTIFY - THE UNWARRANTED
CONCLUSION THAT SUBJECT PROPERTIES,
FOUND BY THE LOWER COURT AND THE
COURT OF APPEALS AS ACTUALLY
REGISTERED IN THE NAME OF PETITIONER
CORPORATION AND/OR ITS PREDECESSOR IN
INTEREST, THE TIAONG MILLING AND
PLANTATION COMPANY, DURING ALL THE 50
YEARS OF ITS CORPORATE EXISTENCE "ARE
ALSO PROPERTIES OF THE ESTATE OF FOREST
L. CEASE."
III. IN AFFIRMING THE ARBITRARY
CONCLUSION OF THE LOWER COURT THAT ITS
DECISION OF DECEMBER 27,1969 IS AN
"INTERLUCUTORY DECISION." IN DISMISSED
NG THE PETITION FOR WRIT OF MANDAMUS,
AND IN AFFIRMING THE MANIFESTLY UNJUST
JUDGMENT RENDERED WHICH CONTRADICTS
THE FINDINGS OF ULTIMATE FACTS THEREIN
CONTAINED.
During the period that ensued after the filing in this
Court of the respective briefs and the subsequent
submission of the case for decision, some incidents had
transpired, the summary of which may be stated as
follows:
1. Separate from this present appeal, petitioners filed a
petition for certiorari and prohibition in this Court,
docketed as G.R. No. L-35629 (Ernesto Cease, et al. vs.
Hon. Manolo L. Maddela, et al.) which challenged the
order of respondent judge dated September 27, 1972
appointing his Branch Clerk of Court, Mr. Eleno M.
Joyas, as receiver of the properties subject of the
appealed civil case, which order, petitioners saw as a
virtual execution of the lower court's judgment (p. 92,
rollo). In Our resolution of November 13, 1972, issued
in G.R. No. L-35629, the petition was denied since
respondent judge merely appointed an auxilliary
receiver for the preservation of the properties as well as
for the protection of the interests of all parties in Civil
Case No. 6326; but at the same time, We expressed Our
displeasure in the appointment of the branch clerk of
court or any other court personnel for that matter as
receiver. (p. 102, rollo).
2. Meanwhile, sensing that the appointed receiver was
making some attempts to take possession of the
properties, petitioners filed in this present appeal an
urgent petition to restrain proceedings in the lower
court. We resolved the petition on January 29, 1975 by
issuing a corresponding temporary restraining order
enjoining the court a quo from implementing its
decision of December 27, 1969, more particularly, the
taking over by a receiver of the properties subject of the
litigation, and private respondents Benjamin and
Florence Cease from proceeding or taking any action
on the matter until further orders from this Court (pp.
99-100, rollo). Private respondents filed a motion for
reconsideration of Our resolution of January 29, 1975.
After weighing the arguments of the parties and taking
note of Our resolution in G.R. No. L-35629 which
upheld the appointment of a receiver, We issued
another resolution dated April 11, 1975 lifting effective
immediately Our previous temporary restraining order
which enforced the earlier resolution of January 29,
1975 (pp. 140-141, rollo).
3. On February 6, 1976, private respondents filed an
urgent petition to restrain proceedings below in view of
the precipitate replacement of the court appointed
receiver Mayor Francisco Escueta (vice Mr. Eleno M.
Joyas) and the appointment of Mr. Guillermo Lagrosa
on the eve of respondent Judge Maddela's retirement (p.
166, rollo). The urgent petition was denied in Our
resolution of February 18, 1976 (p. 176, rollo).
4. Several attempts at a compromise agreement failed
to materialize. A Tentative Compromise Agreement
dated July 30, 1975 was presented to the Court on
August 6, 1976 for the signature of the parties, but
respondents "unceremoniously" repudiated the same by
leaving the courtroom without the permission of the
court (Court of First Instance of Quezon, Branch 11) as
a result of which respondents and their counsel were
cited for contempt (p. 195, 197, rollo) that respondents'
reason for the repudiation appears to be petitioners'
failure to render an audited account of their
administration covering the period from May 31, 1961
up to January 29, 1974, plus the inclusion of a provision
on waiver and relinquishment by respondents of
whatever rights that may have accrued to their favor by
virtue of the lower court's decision and the affirmative
decision of the appellate court.
We go now to the alleged errors committed by the
respondent Court of Appeals.
As can be gleaned from petitioners' brief and the
petition itself, two contentions underlie the first
assigned error. First, petitioners argue that there was an
irregular and arbitrarte termination and dismissal of the
special proceedings for judicial administration
simultaneously ordered in the lower court . s decision
in Civil Case No. 6326 adjudicating the partition of the
estate, without categorically, reasoning the opposition
to the petition for administration Second, that the issue
of ownership had been raised in the lower court when
Tiaong Milling asserted title over the properties
registered in its corporate name adverse to Forrest L.
Cease or his estate, and that the said issue was
erroneously disposed of by the trial court in the
partition proceedings when it concluded that the assets
or properties of the defunct company is also the estate
of the deceased proprietor.
The propriety of the dismissal and termination of the
special proceedings for judicial administration must be
affirmed in spite of its rendition in another related case

in view of the established jurisprudence which favors
partition when judicial administration become,
unnecessary. As observed by the Court of Appeals, the
dismissal at first glance is wrong, for the reason that
what was actually heard was Civil Case No. 6326. The
technical consistency, however, it is far less importance
than the reason behind the doctrinal rule against placing
an estate under administration. Judicial rulings
consistently hold the view that where partition is
possible, either judicial or extrajudicial, the estate
should not be burdened with an administration
proceeding without good and compelling reason. When
the estate has no creditors or pending obligations to be
paid, the beneficiaries in interest are not bound to
submit the property to judicial administration which is
always long and costly, or to apply for the appointment
of an administrator by the court, especially when
judicial administration is unnecessary and superfluous.
Thus -
When a person dies without leaving
pending obligations to be paid, his heirs,
whether of age or not, are bound to
submit the property to a judicial
administration, which is always long
and costly, or to apply for the
appointment of an administrator by the
court. It has been uniformly held that in
such case the judicial administration and
the appointment of an administrator are
superfluous and unnecessary
proceedings (Ilustre vs. Alaras
Frondosa, 17 Phil., 321; Malahacan vs.
Ignacio, 19 Phil, 434; Bondad vs.
Bondad, 34 Phil., 232; Baldemor vs.
Malangyaon, 34 Phil., 367; Fule vs.
Fule, 46 Phil., 317). Syllabus, Intestate
estate of the deceased Luz Garcia. Pablo
G. Utulo vs. Leona Pasion Viuda de case, We cannot see in the records any compelling
Garcia, 66 Phil. 302. reason why it may not be dismissed just the same even
if considered in a separate action. This is inevitably
Where the estate has no debts, recourse
certain specially when the subject property has already
may be had to an administration
been found appropriate for partition, thus reducing the
proceeding only if the heirs have good
petition for administration to a mere unnecessary
reasons for not resorting to an action for
solicitation.
partition. Where partition is possible,
either in or out of court, the estate should The second point raised by petitioners in their first
not be burdened with an administration assigned error is equally untenable. In effect,
proceeding without good and petitioners argue that the action for partition should not
compelling reasons. (Intestate Estate of have prospered in view of the repudiation of the co-
Mercado vs. Magtibay, 96 Phil. 383) ownership by Tiaong Milling and Plantation Company
when, as early in the trial court, it already asserted
In the records of this case, We find no indication of any
ownership and corporate title over the properties
indebtedness of the estate. No creditor has come up to
adverse to the right of ownership of Forrest L. Cease or
charge the estate within the two-year period after the
his estate. We are not unmindful of the doctrine relied
death of Forrest L. Cease, hence, the presumption under
upon by petitioners in Rodriguez vs. Ravilan, 17 Phil.
Section 1, Rule 74 that the estate is free from creditors
63 wherein this Court held that in an action for
must apply. Neither has the status of the parties as legal
partition, it is assumed that the parties by whom it is
heirs, much less that of respondents, been raised as an
prosecuted are all co-owners or co-proprietors of the
issue. Besides, extant in the records is the stipulation of
property to be divided, and that the question of common
the parties to submit the pleadings and contents of the
ownership is not to be argued, not the fact as to whether
administration proceedings for the cognizance of the
the intended parties are or are not the owners of the
trial judge in adjudicating the civil case for partition
property in question, but only as to how and in what
(Respondents' Brief, p, 20, rollo). As respondents
manner and proportion the said property of common
observe, the parties in both cases are the same, so are
ownership shall be distributed among the interested
the properties involved; that actual division is the
parties by order of the Court. Consistent with this
primary objective in both actions; the theory and
dictum, it has been field that if any party to a suit for
defense of the respective parties are likewise common;
partition denies the pro-indiviso character of the estate
and that both cases have been assigned to the same
whose partition is sought, and claims instead, exclusive
respondent judge. We feel that the unifying effect of the
title thereto the action becomes one for recovery of
foregoing circumstances invites the wholesome
property cognizable in the courts of ordinary
exception to the structures of procedural rule, thus
jurisdiction. 2
allowing, instead, room for judicial flexibility.
Respondent judge's dismissal of the administration Petitioners' argument has only theoretical persuasion, to
proceedings then, is a judicious move, appreciable in say the least, rather apparent than real. It must be
today's need for effective and speedy administration of remembered that when Tiaong Milling adduced its
justice. There being ample reason to support the defense and raised the issue of ownership, its corporate
dismissal of the special proceedings in this appealed existence already terminated through the expiration of

its charter. It is clear in Section 77 of Act No. 1459
(Corporation Law) that upon the expiration of the
charter period, the corporation ceases to exist and is
dissolved ipso facto except for purposes connected with
the winding up and liquidation. The provision allows a
three year, period from expiration of the charter within
which the entity gradually settles and closes its affairs,
disposes and convey its property and to divide its
capital stock, but not for the purpose of continuing the
business for which it was established. At this terminal
stage of its existence, Tiaong Milling may no longer
persist to maintain adverse title and ownership of the
corporate assets as against the prospective distributees
when at this time it merely holds the property in trust,
its assertion of ownership is not only a legal
contradiction, but more so, to allow it to maintain
adverse interest would certainly thwart the very
purpose of liquidation and the final distribute loll of the
assets to the proper, parties.
We agree with the Court of Appeals in its reasoning that
substance is more important than form when it
sustained the dismissal of Special Proceedings No.
3893, thus -
a) As to the dismissal of Special
Proceedings No. 3893, of course, at first
glance, this was wrong, for the reason
that the case trial had been heard was
Civil Case No. 6326; but what should
not be overlooked either is Chat
respondent Judge was the same Judge
that had before him in his own sala, said
Special Proceedings No. 3893, p. 43
rollo, and the parties to the present Civil
Case No. 6326 had themselves asked
respondent Judge to take judicial notice
of the same and its contents page 34,
rollo; it is not difficult to see that when
respondent Judge in par. 4 of the
dispositive part of his decision
complained of, ordered that,
4) Special Proceedings
No. 3893 for
administration is
terminated and
dismissed; the instant
case to proceed but on
issues of damages only
and for such action
inherently essential or
partition. p. 123, rollo,
in truth and in fact, His Honor was
issuing that order also within Civil Case
No. 632 but in connection with Special
Proceedings No. 389:3: for substance is
more important Chan form, the
contending par ties in both proceedings
being exactly the same, but not only this,
let it not be forgotten that when His
Honor dismissed Special Proceedings
No. 3893, that dismissal precisely was a
dismissal that petitioners herein had
themselves sought and solicited from
respondent Judge as petitioners
themselves are in their present petition
pp. 5-6, rollo; this Court must find
difficulty in reconciling petitioners'
attack with the fact that it was they
themselves that had insisted on that
dismissal; on the principle that not he
who is favored but he who is hurt by a
judicial order is he only who should be
heard to complain and especially since
extraordinary legal remedies are
remedies in extermies granted to parties
' who have been the victims not merely
of errors but of grave wrongs, and it
cannot be seen how one who got what
he had asked could be heard to claim
that he had been the victim of a wrong,
petitioners should not now complain of
an order they had themselves asked in
order to attack such an order afterwards;
if at all, perhaps, third parties, creditors,
the Bureau of Internal Revenue, might
have been prejudiced, and could have
had the personality to attack that
dismissal of Special Proceedings No.
3893, but not petitioners herein, and it is
not now for this Court of Appeals to
protect said third persons who have not
come to the Court below or sought to
intervene herein;
On the second assigned error, petitioners argue that no
evidence has been found to support the conclusion that
the registered properties of Tiaong Milling are also
properties of the estate of Forrest L. Cease; that on the
contrary, said properties are registered under Act No.
496 in the name of Tiaong Milling as lawful owner and
possessor for the last 50 years of its corporate existence.
We do not agree. In reposing ownership to the estate of
Forrest L. Cease, the trial court indeed found strong
support, one that is based on a well-entrenched
principle of law. In sustaining respondents' theory of
"merger of Forrest L. Cease and The Tiaong Milling as
one personality", or that "the company is only the
business conduit and alter ego of the deceased Forrest
L. Cease and the registered properties of Tiaong
Milling are actually properties of Forrest L. Cease and
should be divided equally, share and share alike among
his six children, ... ", the trial court did aptly apply the
familiar exception to the general rule by disregarding
the legal fiction of distinct and separate corporate
personality and regarding the corporation and the
individual member one and the same. In shredding the

fictitious corporate veil, the trial judge narrated the
undisputed factual premise, thus:
While the records showed that originally
its incorporators were aliens, friends or
third-parties in relation of one to
another, in the course of its existence, it
developed into a close family
corporation. The Board of Directors and
stockholders belong to one family the
head of which Forrest L. Cease always
retained the majority stocks and hence
the control and management of its
affairs. In fact, during the reconstruction
of its records in 1947 before the Security
and Exchange Commission only 9
nominal shares out of 300 appears in the
name of his 3 eldest children then and
another person close to them. It is
likewise noteworthy to observe that as
his children increase or perhaps become
of age, he continued distributing his
shares among them adding Florence,
Teresa and Marion until at the time of
his death only 190 were left to his name.
Definitely, only the members of his
family benefited from the Corporation.
The accounts of the corporation and
therefore its operation, as well as that of
the family appears to be
indistinguishable and apparently joined
together. As admitted by the defendants
(Manifestation of Compliance with
Order of March 7, 1963 [Exhibit "21"]
the corporation 'never' had any account
with any banking institution or if any
account was carried in a bank on its
behalf, it was in the name of Mr. Forrest
L. Cease. In brief, the operation of the
Corporation is merged with those of the
majority stockholders, the latter using
the former as his instrumentality and for
the exclusive benefits of all his family.
From the foregoing indication,
therefore, there is truth in plaintiff's
allegation that the corporation is only a
business conduit of his father and an
extension of his personality, they are
one and the same thing. Thus, the assets
of the corporation are also the estate of
Forrest L. Cease, the father of the parties
herein who are all legitimate children of
full blood.
A rich store of jurisprudence has established the rule
known as the doctrine of disregarding or piercing the
veil of corporate fiction. Generally, a corporation is
invested by law with a personality separate and distinct
from that of the persons composing it as well as from
that of any other legal entity to which it may be related.
By virtue of this attribute, a corporation may not,
generally, be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it
may be connected, and vice versa. This separate and
distinct personality is, however, merely a fiction
created by law for convenience and to promote the ends
of justice (Laguna Transportation Company vs. Social
Security System, L-14606, April 28, 1960; La
Campana Coffee Factory, Inc. vs. Kaisahan ng mga
Manggagawa sa La Campana, L-5677, May 25, 1953).
For this reason, it may not be used or invoked for ends
subversive of the policy and purpose behind its creation
(Emiliano Cano Enterprises, Inc. vs. CIR, L-20502,
Feb. 26, 1965) or which could not have been intended
by law to which it owes its being McConnel vs. Court
of Appeals, L- 10510, March 17, 1961, 1 SCRA 722).
This is particularly true where the fiction is used to
defeat public convenience, justify wrong, protect fraud,
defend crime (Yutivo Sons Hardware Company vs.
Court of Tax Appeals, L-13203, Jan. 28, 1961, 1 SCRA
160), confuse legitimate legal or judicial issues (R. F.
Sugay & Co. vs. Reyes, L-20451, Dec. 28, 1964),
perpetrate deception or otherwise circumvent the law
(Gregorio Araneta, Inc. vs. reason de Paterno, L-2886,
Aug. 22, 1952, 49 O.G. 721). This is likewise true
where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity (McConnel
vs. Court of Appeals, supra; Commissioner of Internal
Revenue vs. Norton Harrison Co., L-7618, Aug. 31,
1964).
In any of these cases, the notion of corporate entity will
be pierced or disregarded, and the corporation will be
treated merely as an association of persons or, where
there are two corporations, they will be merged as one,
the one being merely regarded as part or the
instrumentality of the otter (Koppel [Phil.] Inc. vs.
Yatco, 77 Phil. 496, Yutivo Sons Hardware Company
vs. Court of Tax Appeals, supra).
So must the case at bar add to this jurisprudence. An
indubitable deduction from the findings of the trial
court cannot but lead to the conclusion that the business
of the corporation is largely, if not wholly, the personal
venture of Forrest L. Cease. There is not even a shadow
of a showing that his children were subscribers or
purchasers of the stocks they own. Their participation
as nominal shareholders emanated solely from Forrest
L. Cease's gratuitous dole out of his own shares to the
benefit of his children and ultimately his family.
Were we sustain the theory of petitioners that the trial
court acted in excess of jurisdiction or abuse of
discretion amounting to lack of jurisdiction in deciding
Civil Case No. 6326 as a case for partition when the
defendant therein, Tiaong Milling and Plantation
Company, Inc. as registered owner asserted ownership

of the assets and properties involved in the litigation,
which theory must necessarily be based on the
assumption that said assets and properties of Tiaong
Milling and Plantation Company, Inc. now appearing
under the name of F. L. Cease Plantation Company as
Trustee are distinct and separate from the estate of
Forrest L. Cease to which petitioners and respondents
as legal heirs of said Forrest L. Cease are equally
entitled share and share alike, then that legal fiction of
separate corporate personality shall have been used to
delay and ultimately deprive and defraud the
respondents of their successional rights to the estate of
their deceased father. For Tiaong Milling and
Plantation Company shall have been able to extend its
corporate existence beyond the period of its charter
which lapsed in June, 1958 under the guise and cover
of F. L, Cease Plantation Company, Inc. as Trustee
which would be against the law, and as Trustee shall
have been able to use the assets and properties for the
benefit of the petitioners, to the great prejudice and
defraudation. of private respondents. Hence, it becomes
necessary and imperative to pierce that corporate veil.
Under the third assigned error, petitioners claim that the
decision of the lower court in the partition case is not
interlocutory but rather final for it consists of final and
determinative dispositions of the contentions of the
parties. We find no merit in petitioners' stand.
Under the 1961 pronouncement and ruling of the
Supreme Court in Vda. de Zaldarriaga vs. Enriquez, 1
SCRA 1188 (and the sequel case of Vda. de
Zaldarriaga vs. Zaldarriaga, 2 SCRA 356), the lower
court's dismissal of petitioners' proposed appeal from
its December 27, 1969 judgment as affirmed by the
Court of Appeals on the ground of prematurity in that
the judgment was not final but interlocutory was in
order. As was said in said case:
It is true that in Africa vs. Africa, 42 Phil.
934 and other cases it was held -
contrary to the rule laid down in Ron vs.
Mojica, 8 Phil. 328; Rodriguez vs.
Ravilan, 17 Phil. 63 - that in a partition
case where defendant relies on the
defense of exclusive ownership, the
action becomes one for title and the
decision or order directing partition is
final, but the ruling to this effect has
been expressly reversed in the
Fuentebella case which, in our opinion,
expresses the correct view, considering
that a decision or order directing
partition is not final because it leaves
something more to be done in the trial
court for the complete disposition of the
case, namely, the appointment of
commissioners, the proceedings to be
had before them, the submission of their
report which, according to law, must be
set for hearing. In fact, it is only after
said hearing that the court may render a
final judgment finally disposing of the
action (Rule 71, section 7, Rules of
Court). (1 SCRA at page 1193).
It should be noted, however, that the said ruling in
Zaldarriaga as based on Fuentebella vs. Carrascoso,
XIV Lawyers Journal 305 (May 27, 1942), has been
expressly abandoned by the Court in Miranda vs. Court
of Appeals, 71 SCRA 295; 331-333 (June 18, 1976)
wherein Mr. Justice Teehankee, speaking for the Court,
laid down the following doctrine:
The Court, however, deems it proper for
the guidance of the bench and bar to now
declare as is clearly indicated from the
compelling reasons and considerations
hereinabove stated:
- that the Court considers the better rule
to be that stated in H. E. Heacock Co. vs.
American Trading Co., to wit, that
where the primary purpose of a case is
to ascertain and determine who between
plaintiff and defendant is the true owner
and entitled to the exclusive use of the
disputed property, "the judgment . . .
rendered by the lower court [is] a
judgment on the merits as to those
questions, and [that] the order of the
court for an accounting was based upon,
and is incidental to the judgment on the
merits. That is to say, that the judgment
. . . [is] a final judgment ... that in this
kind of a case an accounting is a mere
incident to the judgment; that an appeal
lies from the rendition of the judgment
as rendered ... "(as is widely held by a
great number of judges and members of
the bar, as shown by the cases so
decided and filed and still pending with
the Court) for the fundamental reasons
therein stated that "this is more in
harmony with the administration of
justice and the spirit and intent of the
[Rules]. If on appeal the judgment of the
lower court is affirmed, it would not in
the least work an injustice to any of the
legal rights of [appellee]. On the other
hand, if for any reason this court should
reverse the judgment of the lower court,
the accounting would be a waste of time
and money, and might work a material
injury to the [appellant]; and
- that accordingly, the contrary ruling in
Fuentebella vs. Carrascoso which
expressly reversed the Heacock case and

a line of similar decisions and ruled that
such a decision for recovery of property
with accounting "is not final but merely
interlocutory and therefore not
appealable" and subsequent cases
adhering to the same must be now in turn
abandoned and set aside.
Fuentebella adopted instead the
opposite line of conflicting decisions
mostly in partition proceedings and
exemplified by Ron vs. Mojica 8 Phil.
928 (under the old Code of Civil
Procedure) that an order for partition of
real property is not final and appealable
until after the actual partition of the
property as reported by the court
appointed commissioners and approved
by the court in its judgment accepting
the report. lt must be especially noted
that such rule governing partitions is
now so expressly provided and spelled
out in Rule 69 of the Rules of Court,
with special reference to Sections 1, 2,
3, 6, 7 and 11, to wit, that there must first
be a preliminar, order for partition of the
real estate (section 2) and where the
parties-co-owners cannot agree, the
court appointed commissioners make a
plan of actual partition which must first
be passed upon and accepted by the trial
court and embodied in a judgment to be
rendered by it (sections 6 and 11). In
partition cases, it must be further borne
in mind that Rule 69, section 1 refers to
"a person having the right to compel the
partition of real estate," so that the
general rule of partition that an appeal
will not lie until the partition or
distribution proceedings are terminated
will not apply where appellant claims
exclusive ownership of the whole
property and denies the adverse party's
right to any partition, as was the ruling
in Villanueva vs. Capistrano and Africa
vs .Africa, supra, Fuentebellas express
rehearsal of these cases must likewise be
deemed now also abandoned in view of
the Court's expressed preference for the
rationale of the Heacock case.
The Court's considered opinion is that
imperative considerations of public
policy and of sound practice in the
courts and adherence to the
constitutional mandate of simplified,
just, speedy and inexpensive
determination of every action call for
considering such judgments for
recovery of property with accounting as
final judgments which are duly
appealable (and would therefore
become final and executory if not
appealed within the reglementary
period) with the accounting as a mere
incident of the judgment to be rendered
during the course of the appeal as
provided in Rule 39, section 4 or to be
implemented at the execution stage
upon final affirmance on appeal of the
judgment (as in Court of Industrial
Relations unfair labor practice cases
ordering the reinstatement of the worker
with accounting, computation and
payment of his backwages less earnings
elsewhere during his layoff) and that the
only reason given in Fuentebelia for the
contrary ruling, viz, "the general harm
that would follow from throwing the
door open to multiplicity of appeals in a
single case" of lesser import and
consequence. (Emphasis copied).
The miranda ruling has since then been applied as the
new rule by a unanimous Court in Valdez vs. Bagasao,
82 SCRA 22 (March 8, 1978).
If there were a valid genuine claim of Exclusive
ownership of the inherited properties on the part of
petitioners to respondents' action for partition, then
under the Miranda ruling, petitioners would be
sustained, for as expressly held therein " the general
rule of partition that an appeal will not lie until the
partition or distribution proceedings are terminated will
not apply where appellant claims exclusive ownership
of the whole property and denies the adverse party's
right to any partition."
But this question has now been rendered moot and
academic for the very issue of exclusive ownership
claimed by petitioners to deny and defeat respondents'
right to partition - which is the very core of their
rejected appeal - has been squarely resolved herein
against them, as if the appeal had been given due
course. The Court has herein expressly sustained the
trial court's findings, as affirmed by the Court of
Appeals, that the assets or properties of the defunct
company constitute the estate of the deceased
proprietor (supra at page 7) and the defunct company's
assertion of ownership of the properties is a legal
contradiction and would but thwart the liquidation and
final distribution and partition of the properties among
the parties hereof as children of their deceased father
Forrest L. Cease. There is therefore no further
hindrance to effect the partition of the properties among
the parties in implementation of the appealed judgment.
One last consideration. Parties are brothers and sisters,
legal heirs of their deceased father, Forrest L. Cease. By

all rights in law and jurisprudence, each is entitled to
share and share alike in the estate, which the trial court
correctly ordained and sustained by the appellate court.
Almost 20 years have lapsed since the filing of Special
Proceedings No. 3893 for the administration of the
Estate of Forrest L. Cease and Civil Case No. 6326 for
liquidation and partition of the assets of the defunct
Tiaong Milling and Plantation Co., Inc. A succession of
receivers were appointed by the court to take, keep in
possession, preserve and manage properties of the
corporation which at one time showed an income of
P386,152.90 and expenses of P308,405.01 for the
period covering January 1, 1960 to August 31, 1967 as
per Summary of Operations of Commissioner for
Finance appointed by the Court (Brief for Respondents,
p. 38). In the meantime, ejectment cases were filed by
and against the heirs in connection with the properties
involved, aggravating the already strained relations of
the parties. A prudent and practical realization of these
circumstances ought and must constrain the parties to
give each one his due in law and with fairness and
dispatch that their basic rights be enjoyed. And by
remanding this case to the court a quo for the actual
partition of the properties, the substantial rights of
everyone of the heirs have not been impaired, for in
fact, they have been preserved and maintained.
WHEREFORE, IN VIEW OF THE FOREGOING, the
judgment appealed from is hereby AFFIRMED with
costs against the petitioners.
SO ORDERED.
DOCTRINE OF PIERCING THE CORPORATE
VEIL
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
NORTON and HARRISON COMPANY,
respondent.
Office of the Solicitor General for petitioner.
Pio Joven for respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of
Internal Revenue against the following judgment of the
Court of Tax Appeals:
IN VIEW OF THE FOREGOING, we
find no legal basis to support the
assessment in question against
petitioner. If at all, the assessment
should have been directed against
JACKBILT, the manufacturer.
Accordingly, the decision appealed
from is reversed, and the surety bond
filed to guarantee payment of said
assessment is ordered cancelled. No
pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911,
(1) to buy and sell at wholesale and retail, all kinds of
goods, wares, and merchandise; (2) to act as agents of
manufacturers in the United States and foreign
countries; and (3) to carry on and conduct a general
wholesale and retail mercantile establishment in the
Philippines. Jackbilt is, likewise, a corporation
organized on February 16, 1948 primarily for the
purpose of making, producing and manufacturing
concrete blocks. Under date of July 27, 1948. Norton
and Jackbilt entered into an agreement whereby Norton
was made the sole and exclusive distributor of concrete
blocks manufactured by Jackbilt. Pursuant to this
agreement, whenever an order for concrete blocks was
received by the Norton & Harrison Co. from a
customer, the order was transmitted to Jackbilt which
delivered the merchandise direct to the customer.
Payment for the goods is, however, made to Norton,
which in turn pays Jackbilt the amount charged the
customer less a certain amount, as its compensation or
profit. To exemplify the sales procedures adopted by
the Norton and Jackbilt, the following may be cited. In
the case of the sale of 420 pieces of concrete blocks to
the American Builders on April 1, 1952, the purchaser
paid to Norton the sum of P189.00 the purchase price.
Out of this amount Norton paid Jackbilt P168.00, the
difference obviously being its compensation. As per
records of Jackbilt, the transaction was considered a
sale to Norton. It was under this procedure that the sale
of concrete blocks manufactured by Jackbilt was
conducted until May 1, 1953, when the agency
agreement was terminated and a management
agreement between the parties was entered into. The
management agreement provided that Norton would
sell concrete blocks for Jackbilt, for a fixed monthly fee
of P2,000.00, which was later increased to P5,000.00.
During the existence of the distribution or agency
agreement, or on June 10, 1949, Norton & Harrison
acquired by purchase all the outstanding shares of stock
of Jackbilt. Apparently, due to this transaction, the
Commissioner of Internal Revenue, after conducting an
investigation, assessed the respondent Norton &
Harrison for deficiency sales tax and surcharges in the
amount of P32,662.90, making as basis thereof the sales
of Norton to the Public. In other words, the
Commissioner considered the sale of Norton to the
public as the original sale and not the transaction from
Jackbilt. The period covered by the assessment was
from July 1, 1949 to May 31, 1953. As Norton and
Harrison did not conform with the assessment, the
matter was brought to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that
since Jackbilt was owned and controlled by Norton &
Harrison, the corporate personality of the former
(Jackbilt) should be disregarded for sales tax purposes,

and the sale of Jackbilt blocks by petitioner to the public
must be considered as the original sales from which the
sales tax should be computed. The Norton & Harrison
Company contended otherwise — that is, the
transaction subject to tax is the sale from Jackbilt to
Norton.
Wherefore, the parties respectfully pray that the
foregoing stipulation of facts be admitted and approved
by this Honorable Court, without prejudice to the
parties adducing other evidence to prove their case not
covered by this stipulation of facts. 1äwphï1.ñët
The majority of the Tax Court, in relieving Norton &
Harrison of liability under the assessment, made the
following observations:
The law applicable to the case is Section
186 of the National Internal Revenue
Code which imposes a percentage tax of
7% on every original sale of goods,
wares or merchandise, such tax to be
based on the gross selling price of such
goods, wares or merchandise. The term
"original sale" has been defined as the
first sale by every manufacturer,
producer or importer. (Sec. 5, Com. Act
No. 503.) Subsequent sales by persons
other than the manufacturer, producer or
importer are not subject to the sales tax.
If JACKBILT actually sold concrete
blocks manufactured by it to petitioner
under the distributorship or agency
agreement of July 27, 1948, such sales
constituted the original sales which are
taxable under Section 186 of the
Revenue Code, while the sales made to
the public by petitioner are subsequent
sales which are not taxable. But it
appears to us that there was no such sale
by JACKBILT to petitioner. Petitioner
merely acted as agent for JACKBILT in
the marketing of its products. This is
shown by the fact that petitioner merely
accepted orders from the public for the
purchase of JACKBILT blocks. The
purchase orders were transmitted to
JACKBILT which delivered the blocks
to the purchaser directly. There was no
instance in which the blocks ordered by
the purchasers were delivered to the
petitioner. Petitioner never purchased
concrete blocks from JACKBILT so that
it never acquired ownership of such
concrete blocks. This being so,
petitioner could not have sold
JACKBILT blocks for its own account.
It did so merely as agent of JACKBILT.
The distributorship agreement of July
27, 1948, is denominated by the parties
themselves as an "agency for
marketing" JACKBILT products. ... .
xxx xxx xxx
Therefore, the taxable selling price of
JACKBILT blocks under the aforesaid
agreement is the price charged to the
public and not the amount billed by
JACKBILT to petitioner. The
deficiency sales tax should have been
assessed against JACKBILT and not
against petitioner which merely acted as
the former's agent.
xxx xxx xxx
Presiding Judge Nable of the same Court expressed a
partial dissent, stating:
Upon the aforestated circumstances,
which disclose Norton's control over
and direction of Jackbilt's affairs, the
corporate personality of Jackbilt should
be disregarded, and the transactions
between these two corporations relative
to the concrete blocks should be ignored
in determining the percentage tax for
which Norton is liable. Consequently,
the percentage tax should be computed
on the basis of the sales of Jackbilt
blocks to the public.
The majority opinion is now before Us on appeal by the
Commissioner of Internal Revenue, on four (4)
assigned errors, all of which pose the following
propositions: (1) whether the acquisition of all the
stocks of the Jackbilt by the Norton & Harrison Co.,
merged the two corporations into a single corporation;
(2) whether the basis of the computation of the
deficiency sales tax should be the sale of the blocks to
the public and not to Norton.
It has been settled that the ownership of all the stocks
of a corporation by another corporation does not
necessarily breed an identity of corporate interest
between the two companies and be considered as a
sufficient ground for disregarding the distinct
personalities (Liddell & Co., Inc. v. Coll. of Int. Rev.
L-9687, June 30, 1961). However, in the case at bar, we
find sufficient grounds to support the theory that the
separate identities of the two companies should be
disregarded. Among these circumstances, which we
find not successfully refuted by appellee Norton are: (a)
Norton and Harrison owned all the outstanding stocks
of Jackbilt; of the 15,000 authorized shares of Jackbilt
on March 31, 1958, 14,993 shares belonged to Norton
and Harrison and one each to seven others; (b) Norton
constituted Jackbilt's board of directors in such a way
as to enable it to actually direct and manage the other's

affairs by making the same officers of the board for
both companies. For instance, James E. Norton is the
President, Treasurer, Director and Stockholder of
Norton. He also occupies the same positions in Jackbilt
corporation, the only change being, in the Jackbilt, he
is merely a nominal stockholder. The same is true with
Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert
Golden and Gerardo Garcia, while they are merely
employees of the North they are Directors and nominal
stockholders of the Jackbilt (c) Norton financed the
operations of the Jackbilt, and this is shown by the fact
that the loans obtained from the RFC and Bank of
America were used in the expansion program of
Jackbilt, to pay advances for the purchase of equipment,
materials rations and salaries of employees of Jackbilt
and other sundry expenses. There was no limit to the
advances given to Jackbilt so much so that as of May
31, 1956, the unpaid advances amounted to
P757,652.45, which were not paid in cash by Jackbilt,
but was offset by shares of stock issued to Norton, the
absolute and sole owner of Jackbilt; (d) Norton treats
Jackbilt employees as its own. Evidence shows that
Norton paid the salaries of Jackbilt employees and gave
the same privileges as Norton employees, an indication
that Jackbilt employees were also Norton's employees.
Furthermore service rendered in any one of the two
companies were taken into account for purposes of
promotion; (e) Compensation given to board members
of Jackbilt, indicate that Jackbilt is merely a department
of Norton. The income tax return of Norton for 1954
shows that as President and Treasurer of Norton and
Jackbilt, he received from Norton P56,929.95, but
received from Jackbilt the measly amount of P150.00,
a circumstance which points out that remuneration of
purported officials of Jackbilt are deemed included in
the salaries they received from Norton. The same is true
in the case of Eduardo Garcia, an employee of Norton
but a member of the Board of Jackbilt. His Income tax
return for 1956 reveals that he received from Norton in
salaries and bonuses P4,220.00, but received from
Jackbilt, by way of entertainment, representation,
travelling and transportation allowances P3,000.00.
However, in the withholding statement (Exh. 28-A), it
was shown that the total of P4,200.00 and P3,000.00
(P7,220.00) was received by Garcia from Norton, thus
portraying the oneness of the two companies. The
Income Tax Returns of Albert Golden and Dioscoro
Ramos both employees of Norton but board members
of Jackbilt, also disclose the game method of payment
of compensation and allowances. The offices of Norton
and Jackbilt are located in the same compound.
Payments were effected by Norton of accounts for
Jackbilt and vice versa. Payments were also made to
Norton of accounts due or payable to Jackbilt and vice
versa.
Norton and Harrison, while not denying the presence of
the set up stated above, tried to explain that the control
over the affairs of Jackbilt was not made in order to
evade payment of taxes; that the loans obtained by it
which were given to Jackbilt, were necessary for the
expansion of its business in the manufacture of concrete
blocks, which would ultimately benefit both
corporations; that the transactions and practices just
mentioned, are not unusual and extraordinary, but
pursued in the regular course of business and trade; that
there could be no confusion in the present set up of the
two corporations, because they have separate Boards,
their cash assets are entirely and strictly separate;
cashiers and official receipts and bank accounts are
distinct and different; they have separate income tax
returns, separate balance sheets and profit and loss
statements. These explanations notwithstanding an
over-all appraisal of the circumstances presented by the
facts of the case, yields to the conclusion that the
Jackbilt is merely an adjunct, business conduit or alter
ego, of Norton and Harrison and that the fiction of
corporate entities, separate and distinct from each,
should be disregarded. This is a case where the doctrine
of piercing the veil of corporate fiction, should be made
to apply. In the case of Liddell & Co. Inc. v. Coll. of Int.
Rev., supra, it was held:
There are quite a series of conspicuous
circumstances that militates against the
separate and distinct personality of
Liddell Motors Inc., from Liddell & Co.
We notice that the bulk of the business
of Liddell & Co. was channel Red
through Liddell Motors, Inc. On the
other hand, Liddell Motors Inc. pursued
no activities except to secure cars,
trucks, and spare parts from Liddell &
Co., Inc. and then sell them to the
general public. These sales of vehicles
by Liddell & Co, to Liddell Motors. Inc.
for the most part were shown to have
taken place on the same day that Liddell
Motors, Inc. sold such vehicles to the
public. We may even say that the cars
and trucks merely touched the hands of
Liddell Motors, Inc. as a matter of
formality.
xxx xxx xxx
Accordingly, the mere fact that Liddell
& Co. and Liddell Motors, Inc. are
corporations owned and controlled by
Frank Liddell directly or indirectly is
not by itself sufficient to justify the
disregard of the separate corporate
identity of one from the other. There is
however, in this instant case, a peculiar
sequence of the organization and
activities of Liddell Motors, Inc.
As opined in the case of Gregory v.
Helvering "the legal right of a tax payer

to decrease the amount of what
otherwise would be his taxes, or
altogether avoid them, by means which
the law permits, cannot be doubted". But
as held in another case, "where a
corporation is a dummy, is unreal or a
sham and serves no business purpose
and is intended only as a blind, the
corporate form may be ignored for the
law cannot countenance a form that is
bald and a mischievous fictions".
... a taxpayer may gain advantage of
doing business thru a corporation if he
pleases, but the revenue officers in
proper cases, may disregard the separate
corporate entity where it serves but as a
shield for tax evasion and treat the
person who actually may take benefits
of the transactions as the person
accordingly taxable.
... to allow a taxpayer to deny tax
liability on the ground that the sales
were made through another and distinct
corporation when it is proved that the
latter is virtually owned by the former or
that they are practically one and the
same is to sanction a circumvention of
our tax laws. (and cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of
Tax Appeals, L-13203, Jan. 28, 1961, this Court made
a similar ruling where the circumstances of unity of
corporate identities have been shown and which are
identical to those obtaining in the case under
consideration. Therein, this Court said:
We are, however, inclined to agree with
the court below that SM was actually
owned and controlled by petitioner as to
make it a mere subsidiary or branch of
the latter created for the purpose of
selling the vehicles at retail (here
concrete blocks) ... .
It may not be amiss to state in this connection, the
advantages to Norton in maintaining a semblance of
separate entities. If the income of Norton should be
considered separate from the income of Jackbilt, then
each would declare such earning separately for income
tax purposes and thus pay lesser income tax. The
combined taxable Norton-Jackbilt income would
subject Norton to a higher tax. Based upon the 1954-
1955 income tax return of Norton and Jackbilt (Exhs. 7
& 8), and assuming that both of them are operating on
the same fiscal basis and their returns are accurate, we
would have the following result: Jackbilt declared a
taxable net income of P161,202.31 in which the income
tax due was computed at P37,137.00 (Exh. 8); whereas
Norton declared as taxable, a net income of
P120,101.59, on which the income tax due was
computed at P25,628.00. The total of these liabilities is
P50,764.84. On the other hand, if the net taxable
earnings of both corporations are combined, during the
same taxable year, the tax due on their total which is
P281,303.90 would be P70,764.00. So that, even on the
question of income tax alone, it would be to the
advantages of Norton that the corporations should be
regarded as separate entities.
WHEREFORE, the decision appealed from should be
as it is hereby reversed and another entered making the
appellee Norton & Harrison liable for the deficiency
sales taxes assessed against it by the appellant
Commissioner of Internal Revenue, plus 25%
surcharge thereon. Costs against appellee Norton &
Harrison.
JOHN F. McLEOD, Petitioner,
vs.
NATIONAL LABOR RELATIONS
COMMISSION (First Division), FILIPINAS
SYNTHETIC FIBER CORPORATION (FILSYN),
FAR EASTERN TEXTILE MILLS, INC., STA.
ROSA TEXTILES, INC., (PEGGY MILLS, INC.),
PATRICIO L. LIM, and ERIC HU, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 to set aside the Decision2
dated 15 June 2000 and the Resolution3 dated 27
December 2000 of the Court of Appeals in CA-G.R. SP
No. 55130. The Court of Appeals affirmed with
modification the 29 December 1998 Decision4 of the
National Labor Relations Commission (NLRC) in
NLRC NCR 02-00949-95.
The Facts
The facts, as summarized by the Labor Arbiter and
adopted by the NLRC and the Court of Appeals, are as
follows:
On February 2, 1995, John F. McLeod filed a complaint
for retirement benefits, vacation and sick leave benefits,
non-payment of unused airline tickets, holiday pay,
underpayment of salary and 13th month pay, moral and
exemplary damages, attorney’s fees plus interest
against Filipinas Synthetic Corporation (Filsyn), Far
Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc.,
Patricio Lim and Eric Hu.
In his Position Paper, complainant alleged that he is an
expert in textile manufacturing process; that as early as

1956 he was hired as the Assistant Spinning Manager
of Universal Textiles, Inc. (UTEX); that he was
promoted to Senior Manager and worked for UTEX till
1980 under its President, respondent Patricio Lim; that
in 1978 Patricio Lim formed Peggy Mills, Inc. with
respondent Filsyn having controlling interest; that
complainant was absorbed by Peggy Mills as its Vice
President and Plant Manager of the plant at Sta. Rosa,
Laguna; that at the time of his retirement complainant
was receiving P60,000.00 monthly with vacation and
sick leave benefits; 13th month pay, holiday pay and
two round trip business class tickets on a Manila-
London-Manila itinerary every three years which is
convertible to cas[h] if unused; that in January 1986,
respondents failed to pay vacation and leave credits and
requested complainant to wait as it was short of funds
but the same remain unpaid at present; that complainant
is entitled to such benefit as per CBA provision (Annex
"A"); that respondents likewise failed to pay
complainant’s holiday pay up to the present; that
complainant is entitled to such benefits as per CBA
provision (Annex "B"); that in 1989 the plant union
staged a strike and in 1993 was found guilty of staging
an illegal strike; that from 1989 to 1992 complainant
was entitled to 4 round trip business class plane tickets
on a Manila-London-Manila itinerary but this benefit
not (sic) its monetary equivalent was not given; that on
August 1990 the respondents reduced complainant’s
monthly salary of P60,000.00 by P9,900.00 till
November 1993 or a period of 39 months; that in 1991
Filsyn sold Peggy Mills, Inc. to Far Eastern Textile
Mills, Inc. as per agreement (Annex "D") and this was
renamed as Sta. Rosa Textile with Patricio Lim as
Chairman and President; that complainant worked for
Sta. Rosa until November 30 that from time to time the
owners of Far Eastern consulted with complainant on
technical aspects of reoperation of the plant as per
correspondence (Annexes "D-1" and "D-2"); that when
complainant reached and applied retirement age at the
end of 1993, he was only given a reduced 13th month
pay of P44,183.63, leaving a balance of P15,816.87;
that thereafter the owners of Far Eastern Textiles
decided for cessation of operations of Sta. Rosa
Textiles; that on two occasions, complainant wrote
letters (Annexes "E-1" to "E-2") to Patricio Lim
requesting for his retirement and other benefits; that in
the last quarter of 1994 respondents offered
complainant compromise settlement of only
P300,000.00 which complainant rejected; that again
complainant wrote a letter (Annex "F") reiterating his
demand for full payment of all benefits and to no avail,
hence this complaint; and that he is entitled to all his
money claims pursuant to law.
On the other hand, respondents in their Position Paper
alleged that complainant was the former Vice-President
and Plant Manager of Peggy Mills, Inc.; that he was
hired in June 1980 and Peggy Mills closed operations
due to irreversible losses at the end of July 1992 but the
corporation still exists at present; that its assets were
acquired by Sta. Rosa Textile Corporation which was
established in April 1992 but still remains non-
operational at present; that complainant was hired as
consultant by Sta. Rosa Textile in November 1992 but
he resigned on November 30, 1993; that Filsyn and Far
Eastern Textiles are separate legal entities and have no
employer relationship with complainant; that
respondent Patricio Lim is the President and Board
Chairman of Sta. Rosa Textile Corporation; that
respondent Eric Hu is a Taiwanese and is Director of
Sta. Rosa Textiles, Inc.; that complainant has no cause
of action against Filsyn, Far Eastern Textile Ltd., Sta.
Rosa Textile Corporation and Eric Hu; that Sta. Rosa
only acquired the assets and not the liabilities of Peggy
Mills, Inc.; that Patricio Lim was only impleaded as
Board Chairman of Sta. Rosa Textile and not as private
individual; that while complainant was Vice President
and Plant Manager of Peggy Mills, the union staged a
strike up to July 1992 resulting in closure of operations
due to irreversible losses as per Notice (Annex "1");
that complainant was relied upon to settle the labor
problem but due to his lack of attention and absence the
strike continued resulting in closure of the company;
and losses to Sta. Rosa which acquired its assets as per
their financial statements (Annexes "2" and "3"); that
the attendance records of complainant from April 1992
to November 1993 (Annexes "4" and "5") show that he
was either absent or worked at most two hours a day;
that Sta. Rosa and Peggy Mills are interposing
counterclaims for damages in the total amount of
P36,757.00 against complainant; that complainant’s
monthly salary at Peggy Mills was P50,495.00 and not
P60,000.00; that Peggy Mills, does not have a
retirement program; that whatever amount complainant
is entitled should be offset with the counterclaims; that
complainant worked only for 12 years from 1980 to
1992; that complainant was only hired as a consultant
and not an employee by Sta. Rosa Textile; that
complainant’s attendance record of absence and two
hours daily work during the period of the strike wipes
out any vacation/sick leave he may have accumulated;
that there is no basis for complainant’s claim of two (2)
business class airline tickets; that complainant’s pay
already included the holiday pay; that he is entitled to
holiday pay as consultant by Sta. Rosa; that he has
waived this benefit in his 12 years of work with Peggy
Mills; that he is not entitled to 13th month pay as
consultant; and that he is not entitled to moral and
exemplary damages and attorney’s fees.
In his Reply, complainant alleged that all respondents
being one and the same entities are solidarily liable for
all salaries and benefits and complainant is entitled to;
that all respondents have the same address at 12/F B.A.
Lepanto Building, Makati City; that their counsel holds
office in the same address; that all respondents have the
same offices and key personnel such as Patricio Lim

and Eric Hu; that respondents’ Position Paper is
verified by Marialen C. Corpuz who knows all the
corporate officers of all respondents; that the veil of
corporate fiction may be pierced if it is used as a shield
to perpetuate fraud and confuse legitimate issues; that
complainant never accepted the change in his position
from Vice-President and Plant Manger to consultant
and it is incumbent upon respondents to prove that he
was only a consultant; that the Deed of Dation in
Payment with Lease (Annex "C") proves that Sta. Rosa
took over the assets of Peggy Mills as early as June 15,
1992 and not 1995 as alleged by respondents; that
complainant never resigned from his job but applied for
retirement as per letters (Annexes "E-1", "E-2" and
"F"); that documents "G", "H" and "I" show that Eric
Hu is a top official of Peggy Mills that the closure of
Peggy Mills cannot be the fault of complainant; that the
strike was staged on the issue of CBA negotiations
which is not part of the usual duties and responsibilities
as Plant Manager; that complainant is a British national
and is prohibited by law in engaging in union activities;
that as per Resolution (Annex "3") of the NLRC in the
proper case, complainant testified in favor of
management; that the alleged attendance record of
complainant was lifted from the logbook of a security
agency and is hearsay evidence; that in the other
attendance record it shows that complainant was
reporting daily and even on Saturdays; that his limited
hours was due to the strike and cessation of operations;
that as plant manager complainant was on call 24 hours
a day; that respondents must pay complainant the
unpaid portion of his salaries and his retirement benefits
that cash voucher No. 17015 (Annex "K") shows that
complainant drew the monthly salary of P60,000.00
which was reduced to P50,495.00 in August 1990 and
therefore without the consent of complainant; that
complainant was assured that he will be paid the
deduction as soon as the company improved its
financial standing but this assurance was never
fulfilled; that Patricio Lim promised complainant his
retirement pay as per the latter’s letters (Annexes "E-
1", "E-2" and "F"); that the law itself provides for
retirement benefits; that Patricio Lim by way of
Memorandum (Annex "M") approved vacation and sick
leave benefits of 22 days per year effective 1986; that
Peggy Mills required monthly paid employees to sign
an acknowledgement that their monthly compensation
includes holiday pay; that complainant was not made to
sign this undertaking precisely because he is entitled to
holiday pay over and above his monthly pay; that the
company paid for complainant’s two (2) round trip
tickets to London in 1983 and 1986 as reflected in the
complainant’s passport (Annex "N"); that respondents
claim that complainant is not entitled to 13th month pay
but paid in 1993 and all the past 13 years; that
complainant is entitled to moral and exemplary
damages and attorney’s fees; that all doubts must be
resolved in favor of complainant; and that complainant
reserved the right to file perjury cases against those
concerned.
In their Reply, respondents alleged that except for
Peggy Mills, the other respondents are not proper
persons in interest due to the lack of employer-
employee relationship between them and complainant;
that undersigned counsel does not represent Peggy
Mills, Inc.
In a separate Position Paper, respondent Peggy Mills
alleged that complainant was hired on February 10,
1991 as per Board Minutes (Annex "A"); that on
August 19, 1987, the workers staged an illegal strike
causing cessation of operations on July 21, 1992; that
respondent filed a Notice of Closure with the DOLE
(Annex "B"); that all employees were given separation
pay except for complainant whose task was extended to
December 31, 1992 to wind up the affairs of the
company as per vouchers (Annexes "C" and "C-1");
that respondent offered complainant his retirement
benefits under RA 7641 but complainant refused; that
the regular salaries of complainant from closure up to
December 31, 1992 have offset whatever vacation and
sick leaves he accumulated; that his claim for unused
plane tickets from 1989 to 1992 has no policy basis, the
company’s formula of employees monthly rate x 314
days over 12 months already included holiday pay; that
complainant’s unpaid portion of the 13th month pay in
1993 has no basis because he was only an employee up
to December 31, 1992; that the 13th month pay was
based on his last salary; and that complainant is not
entitled to damages.5
On 3 April 1998, the Labor Arbiter rendered his
decision with the following dispositive portion:
WHEREFORE, premises considered, We hold all
respondents as jointly and solidarily liable for
complainant’s money claims as adjudicated above and
computed below as follows:
Retirement Benefits (one month salary for
every year of service)
6/80 - 11/30/93 = 14 years
P60,000 x 14.0 mos. ……………………
P840,000.00
Vacation and Sick Leave (3 yrs.)
P2,000.00 x 22 days x 3 yrs. ……………
132,000.00
Underpayment of Salaries (3 yrs.)
P60,000 - P50,495 = P9,505
P 9,505 x 36.0 mos. …………………...
342,180.00
Holiday Pay (3 yrs.)
P2,000 x 30 days ……………………….
60,000.00

Underpayment of 13th month pay (1993)
……... 15,816.87
Moral Damages
……………………………….. 3,000,000.00
Exemplary Damages …………………………..
1,000,000.00
10% Attorney’s Fees ………………………….
138,999.68
TOTAL P5,528,996.55
Unused Airline Tickets (3 yrs.)
(To be converted in Peso upon payment)
$2,450.00 x 3.0 [yrs.]..………………
$7,350.00
SO ORDERED.6
Filipinas Synthetic Fiber Corporation (Filsyn), Far
Eastern Textile Mills, Inc. (FETMI), Sta. Rosa Textiles,
Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu
appealed to the NLRC. The NLRC rendered its decision
on 29 December 1998, thus:
WHEREFORE, the Decision dated 3 April 1998 is
hereby REVERSED and SET ASIDE and a new one is
entered ORDERING respondent Peggy Mills, Inc. to
pay complainant his retirement pay equivalent to 22.5
days for every year of service for his twelve (12) years
of service from 1980 to 1992 based on a salary rate of
P50,495.00 a month.
All other claims are DISMISSED for lack of merit.
SO ORDERED.7
John F. McLeod (McLeod) filed a motion for
reconsideration which the NLRC denied in its
Resolution of 30 June 1999.8 McLeod thus filed a
petition for certiorari before the Court of Appeals
assailing the decision and resolution of the NLRC.9
The Ruling of the Court of Appeals
On 15 June 2000, the Court of Appeals rendered
judgment as follows:
WHEREFORE, the decision dated December 29, 1998
of the NLRC is hereby AFFIRMED with the
MODIFICATION that respondent Patricio Lim is
jointly and solidarily liable with Peggy Mills, Inc., to
pay the following amounts to petitioner John F.
McLeod:
1. retirement pay equivalent to 22.5 days for
every year of service for his twelve (12) years
of service from 1980 to 1992 based on a salary
rate of P50,495, a month;
2. moral damages in the amount of one hundred
thousand (P100,000.00) Pesos;
3. exemplary damages in the amount of fifty
thousand (P50,000.00) Pesos; and
4. attorney’s fees equivalent to 10% of the total
award.
No costs is awarded.
SO ORDERED.10
The Court of Appeals rejected McLeod’s theory that all
respondent corporations are the same corporate entity
which should be held solidarily liable for the payment
of his monetary claims.
The Court of Appeals ruled that the fact that (1) all
respondent corporations have the same address; (2) all
were represented by the same counsel, Atty. Isidro S.
Escano; (3) Atty. Escano holds office at respondent
corporations’ address; and (4) all respondent
corporations have common officers and key personnel,
would not justify the application of the doctrine of
piercing the veil of corporate fiction.
The Court of Appeals held that there should be clear
and convincing evidence that SRTI, FETMI, and Filsyn
were being used as alter ego, adjunct or business
conduit for the sole benefit of Peggy Mills, Inc. (PMI),
otherwise, said corporations should be treated as
distinct and separate from each other.
The Court of Appeals pointed out that the Articles of
Incorporation of PMI show that it has six incorporators,
namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr.,
Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang.
On the other hand, the Articles of Incorporation of
Filsyn show that it has 10 incorporators, namely, Jesus
Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh,
Ramon A. Yulo, Honorio Poblador, Jr., Cipriano
Azada, Manuel Tomacruz, Ismael Maningas, and
Benigno Zialcita, Jr.
The Court of Appeals pointed out that PMI and Filsyn
have only two interlocking incorporators and directors,
namely, Patricio and Carlos Palanca, Jr.
Reiterating the ruling of this Court in Laguio v.
NLRC,11 the Court of Appeals held that mere
substantial identity of the incorporators of two
corporations does not necessarily imply fraud, nor
warrant the piercing of the veil of corporate fiction.
The Court of Appeals also pointed out that when SRTI
and PMI executed the Dation in Payment with Lease, it
was clear that SRTI did not assume the liabilities PMI
incurred before the execution of the contract.
The Court of Appeals held that McLeod failed to
substantiate his claim that all respondent corporations
should be treated as one corporate
entity. The Court of Appeals thus upheld the NLRC’s
finding that no employer-employee relationship existed
between McLeod and respondent corporations except
PMI.

The Court of Appeals ruled that Eric Hu, as an officer
of PMI, should be exonerated from any liability, there
being no proof of malice or bad faith on his part. The
Court of Appeals, however, ruled that McLeod was
entitled to recover from PMI and Patricio, the
company’s Chairman and President.
The Court of Appeals pointed out that Patricio
deliberately and maliciously evaded PMI’s financial
obligation to McLeod. The Court of Appeals stated that,
on several occasions, despite his approval, Patricio
refused and ignored to pay McLeod’s retirement
benefits. The Court of Appeals stated that the delay
lasted for one year prompting McLeod to initiate legal
action. The Court of Appeals stated that although PMI
offered to pay McLeod his retirement benefits, this
offer for P300,000 was still below the "floor limits"
provided by law. The Court of Appeals held that an
employee could demand payment of retirement benefits
as a matter of right.
The Court of Appeals stated that considering that PMI
was no longer in operation, its "officer should be held
liable for acting on behalf of the corporation."
The Court of Appeals also ruled that since PMI did not
have a retirement program providing for retirement
benefits of its employees, Article 287 of the Labor Code
must be followed. The Court of Appeals thus upheld the
NLRC’s finding that McLeod was entitled to retirement
pay equivalent to 22.5 days for every year of service
from 1980 to 1992 based on a salary rate of P50,495 a
month.
The Court of Appeals held that McLeod was not
entitled to payment of vacation, sick leave and holiday
pay because as Vice President and Plant Manager,
McLeod is a managerial employee who, under Article
82 of the Labor Code, is not entitled to these benefits.
The Court of Appeals stated that for McLeod to be
entitled to payment of service incentive leave and
holidays, there must be an agreement to that effect
between him and his employer.
Moreover, the Court of Appeals rejected McLeod’s
argument that since PMI paid for his two round-trip
tickets Manila-London in 1983 and 1986, he was also
"entitled to unused airline tickets." The Court of
Appeals stated that the fact that PMI granted McLeod
"free transport to and from Manila and London for the
year 1983 and 1986 does not ipso facto characterize it
as regular that would establish a prevailing company
policy."
The Court of Appeals also denied McLeod’s claims for
underpayment of salaries and his 13th month pay for
the year 1994. The Court of Appeals upheld the
NLRC’s ruling that it could be deduced from McLeod’s
own narration of facts that he agreed to the reduction of
his compensation from P60,000 to P50,495 in August
1990 to November 1993.
The Court of Appeals found the award of moral
damages for P50,000 in order because of the "stubborn
refusal" of PMI and Patricio to respect McLeod’s valid
claims.
The Court of Appeals also ruled that attorney’s fees
equivalent to 10% of the total award should be given to
McLeod under Article 2208, paragraph 2 of the Civil
Code.12
Hence, this petition.
The Issues
McLeod submits the following issues for our
consideration:
1. Whether the challenged Decision and
Resolution of the 14th Division of the Court of
Appeals promulgated on 15 June 2000 and 27
December 2000, respectively, in CA-G.R. SP
No. 55130 are in accord with law and
jurisprudence;
2. Whether an employer-employee relationship
exists between the private respondents and the
petitioner for purposes of determining employer
liability to the petitioner;
3. Whether the private respondents may avoid
their financial obligations to the petitioner by
invoking the veil of corporate fiction;
4. Whether petitioner is entitled to the relief he
seeks against the private respondents;
5. Whether the ruling of [this] Court in Special
Police and Watchman Association (PLUM)
Federation v. National Labor Relations
Commission cited by the Office of the Solicitor
General is applicable to the case of petitioner;
and
6. Whether the appeal taken by the private
respondents from the Decision of the labor
arbiter meets the mandatory requirements
recited in the Labor Code of the Philippines, as
amended.13
The Court’s Ruling
The petition must fail.
McLeod asserts that the Court of Appeals should not
have upheld the NLRC’s findings that he was a
managerial employee of PMI from 20 June 1980 to 31
December 1992, and then a consultant of SRTI up to 30
November 1993. McLeod asserts that if only for this
"brazen assumption," the Court of Appeals should not
have sustained the NLRC’s ruling that his cause of
action was only against PMI.
These assertions do not deserve serious consideration.

Records disclose that McLeod was an employee only of
PMI.14 PMI hired McLeod as its acting Vice President
and General Manager on 20 June 1980.15 PMI
confirmed McLeod’s appointment as Vice
President/Plant Manager in the Special Meeting of its
Board of Directors on 10 February 1981.16 McLeod
himself testified during the hearing before the Labor
Arbiter that his "regular employment" was with PMI.17
When PMI’s rank-and-file employees staged a strike on
19 August 1989 to July 1992, PMI incurred serious
business losses.18 This prompted PMI to stop
permanently plant operations and to send a notice of
closure to the Department of Labor and Employment on
21 July 1992.19
PMI informed its employees, including McLeod, of the
closure.20 PMI paid its employees, including
managerial employees, except McLeod, their unpaid
wages, sick leave, vacation leave, prorated 13th month
pay, and separation pay. Under the compromise
agreement between PMI and its employees, the
employer-employee relationship between them ended
on 25 November 1992.21
Records also disclose that PMI extended McLeod’s
service up to 31 December 1992 "to wind up some
affairs" of the company.22 McLeod testified on cross-
examination that he received his last salary from PMI
in December 1992.23
It is thus clear that McLeod was a managerial employee
of PMI from 20 June 1980 to 31 December 1992.
However, McLeod claims that after FETMI purchased
PMI in January 1993, he "continued to work at the same
plant with the same responsibilities" until 30 November
1993. McLeod claims that FETMI merely renamed
PMI as SRTI. McLeod asserts that it was for this reason
that when he reached the retirement age in 1993, he
asked all the respondents for the payment of his
benefits.24
These assertions deserve scant consideration.
What took place between PMI and SRTI was dation in
payment with lease. Pertinent portions of the contract
that PMI and SRTI executed on 15 June 1992 read:
WHEREAS, PMI is indebted to the Development Bank
of the Philippines ("DBP") and as security for such
debts (the "Obligations") has mortgaged its real
properties covered by TCT Nos. T-38647, T-37136,
and T-37135, together with all machineries and
improvements found thereat, a complete listing of
which is hereto attached as Annex "A" (the "Assets");
WHEREAS, by virtue of an inter-governmental agency
arrangement, DBP transferred the Obligations,
including the Assets, to the Asset Privatization Trust
("APT") and the latter has received payment for the
Obligations from PMI, under APT’s Direct Debt Buy-
Out ("DDBO") program thereby causing APT to
completely discharge and cancel the mortgage in the
Assets and to release the titles of the Assets back to
PMI;
WHEREAS, PMI obtained cash advances from SRTC
in the total amount of TWO HUNDRED TEN
MILLION PESOS (P210,000,000.00) (the
"Advances") to enable PMI to consummate the DDBO
with APT, with SRTC subrogating APT as PMI’s
creditor thereby;
WHEREAS, in payment to SRTC for PMI’s liability,
PMI has agreed to transfer all its rights, title and
interests in the Assets by way of a dation in payment to
SRTC, provided that simultaneous with the dation in
payment, SRTC shall grant unto PMI the right to lease
the Assets under terms and conditions stated hereunder;
xxxx
NOW THEREFORE, for and in consideration of the
foregoing premises, and of the terms and conditions
hereinafter set forth, the parties hereby agree as
follows:
1. CESSION. In consideration of the amount of TWO
HUNDRED TEN MILLION PESOS
(P210,000,000.00), PMI hereby cedes, conveys and
transfers to SRTC all of its rights, title and interest in
and to the Assets by way of a dation in payment.25
(Emphasis supplied)
As a rule, a corporation that purchases the assets of
another will not be liable for the debts of the selling
corporation, provided the former acted in good faith
and paid adequate consideration for such assets, except
when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to
a consolidation or merger of the corporations, (3) where
the purchasing corporation is merely a continuation of
the selling corporation, and (4) where the selling
corporation fraudulently enters into the transaction to
escape liability for those debts.26
None of the foregoing exceptions is present in this case.
Here, PMI transferred its assets to SRTI to settle its
obligation to SRTI in the sum of P210,000,000. We are
not convinced that PMI fraudulently transferred these
assets to escape its liability for any of its debts. PMI had
already paid its employees, except McLeod, their
money claims.
There was also no merger or consolidation of PMI and
SRTI.
Consolidation is the union of two or more existing
corporations to form a new corporation called the
consolidated corporation. It is a combination by
agreement between two or more corporations by which
their rights, franchises, and property are united and

become those of a single, new corporation, composed
generally, although not necessarily, of the stockholders
of the original corporations.
Merger, on the other hand, is a union whereby one
corporation absorbs one or more existing corporations,
and the absorbing corporation survives and continues
the combined business.
The parties to a merger or consolidation are called
constituent corporations. In consolidation, all the
constituents are dissolved and absorbed by the new
consolidated enterprise. In merger, all constituents,
except the surviving corporation, are dissolved. In both
cases, however, there is no liquidation of the assets of
the dissolved corporations, and the surviving or
consolidated corporation acquires all their properties,
rights and franchises and their stockholders usually
become its stockholders.
The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved
corporations, regardless of whether the creditors have
consented or not to such merger or consolidation.27
In the present case, there is no showing that the subject
dation in payment involved any corporate merger or
consolidation. Neither is there any showing of those
indicative factors that SRTI is a mere instrumentality of
PMI.
Moreover, SRTI did not expressly or impliedly agree to
assume any of PMI’s debts. Pertinent portions of the
subject Deed of Dation in Payment with Lease provide,
thus:
2. WARRANTIES AND REPRESENTATIONS. PMI
hereby warrants and represents the following:
xxxx
(e) PMI shall warrant that it will hold SRTC or its
assigns, free and harmless from any liability for claims
of PMI’s creditors, laborers, and workers and for Textile is enough during that period of time of the
physical injury or injury to property arising from PMI’s development of Peggy Mills to reorganize a staff. I was
custody, possession, care, repairs, maintenance, use or under the basic impression that they might still retain
operation of the Assets except ordinary wear and tear;28 my status as Vice President and Plant Manager of the
(Emphasis supplied) company.
Also, McLeod did not present any evidence to show the ATTY. ESCANO:
alleged renaming of "Peggy Mills, Inc." to "Sta. Rosa But the answer is still, there is no employment contract
Textiles, Inc." in your possession appointing you in any capacity by
Hence, it is not correct for McLeod to treat PMI and Far Eastern?
SRTI as the same entity. WITNESS:
Respondent corporations assert that SRTI hired
There was no written contract, sir.
McLeod as consultant after PMI stopped operations.29
xxxx
On the other hand, McLeod asserts that he was
respondent corporations’ employee from 1980 to 30 ATTY. ESCANO:
November 1993.30 However, McLeod failed to present
So, there is proof that you were in fact really employed
any proof of employer-employee relationship between
by Peggy Mills?
him and Filsyn, SRTI, or FETMI. McLeod testified,
thus: WITNESS:
ATTY. ESCANO: Yes, sir.
Do you have any employment contract with Far Eastern ATTY. ESCANO:
Textile?
Of course, my interest now is to whether or not there is
WITNESS: a similar document to present that you were employed
It is my belief up the present time. by the other respondents like Filsyn Corporation?
ATTY. AVECILLA: WITNESS:
May I request that the witness be allowed to go through I have no document, sir.
his Annexes, Your Honor. ATTY. ESCANO:
ATTY. ESCANO: What about Far Eastern Textile Mills?
Yes, but I want a precise answer to that question. If he WITNESS:
has an employment contract with Far Eastern Textile?
I have no document, sir.
WITNESS:
ATTY. ESCANO:
Can I answer it this way, sir? There is not a valid
contract but I was under the impression taking into And Sta. Rosa Textile Mills?
consideration that the closeness that I had at Far Eastern WITNESS:

31
There is no document, sir.
xxxx
ATTY. ESCANO:
Q Yes. Let me be more specific, Mr. McLeod. Do you
have a contract of employment from Far Eastern
Textiles, Inc.?
A No, sir.
Q What about Sta. Rosa Textile Mills, do you have an
employment contract from this company?
A No, sir.
xxxx
Q And what about respondent Eric Hu. Have you had
any contract of employment from Mr. Eric Hu?
A Not a direct contract but I was taken in and I told to
take over this from Mr. Eric Hu. Automatically, it
confirms that Mr. Eric Hu, in other words, was under
the control of Mr. Patricio Lim at that period of time.
Q No documents to show, Mr. McLeod?
A No. No documents, sir.32
McLeod could have presented evidence to support his
allegation of employer-employee relationship between
him and any of Filsyn, SRTI, and FETMI, but he did
not. Appointment letters or employment contracts,
payrolls, organization charts, SSS registration,
personnel list, as well as testimony of co-employees,
may serve as evidence of employee status.33
It is a basic rule in evidence that parties must prove their
affirmative allegations. While technical rules are not
strictly followed in the NLRC, this does not mean that
the rules on proving allegations are entirely ignored.
Bare allegations are not enough. They must be
supported by substantial evidence at the very least.34
However, McLeod claims that "for purposes of
determining employer liability, all private respondents
are one and the same employer" because: (1) they have
the same address; (2) they are all engaged in the same
business; and (3) they have interlocking directors and
officers.35
This assertion is untenable.
A corporation is an artificial being invested by law with
a personality separate and distinct from that of its
stockholders and from that of other corporations to
which it may be connected.36
While a corporation may exist for any lawful purpose,
the law will regard it as an association of persons or, in
case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or
illegality. This is the doctrine of piercing the veil of
corporate fiction. The doctrine applies only when such
corporate fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime,37 or when
it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.38
To disregard the separate juridical personality of a
corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.39
Here, we do not find any of the evils sought to be
prevented by the doctrine of piercing the corporate veil.
Respondent corporations may be engaged in the same
business as that of PMI, but this fact alone is not enough
reason to pierce the veil of corporate fiction.40
In Indophil Textile Mill Workers Union v. Calica,41 the
Court ruled, thus:
In the case at bar, petitioner seeks to pierce the veil of
corporate entity of Acrylic, alleging that the creation of
the corporation is a devise to evade the application of
the CBA between petitioner Union and private
respondent Company. While we do not discount the
possibility of the similarities of the businesses of
private respondent and Acrylic, neither are we inclined
to apply the doctrine invoked by petitioner in granting
the relief sought. The fact that the businesses of private
respondent and Acrylic are related, that some of the
employees of the private respondent are the same
persons manning and providing for auxiliary services to
the units of Acrylic, and that the physical plants, offices
and facilities are situated in the same compound, it is
our considered opinion that these facts are not sufficient
to justify the piercing of the corporate veil of Acrylic.42
(Emphasis supplied)
Also, the fact that SRTI and PMI shared the same
address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas,
Makati City,43 can be explained by the two companies’
stipulation in their Deed of Dation in Payment with
Lease that "simultaneous with the dation in payment,
SRTC shall grant unto PMI the right to lease the Assets
under terms and conditions stated hereunder."44
As for the addresses of Filsyn and FETMI, Filsyn held
office at 12th Floor, BA-Lepanto Bldg., Paseo de
Roxas, Makati City,45 while FETMI held office at 18F,
Tun Nan Commercial Building, 333 Tun Hwa South
Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did
not have the same address as that of PMI.
That respondent corporations have interlocking
incorporators, directors, and officers is of no moment.
The only interlocking incorporators of PMI and Filsyn
were Patricio and Carlos Palanca, Jr.47 While Patricio
was Director and Board Chairman of Filsyn, SRTI, and
PMI,48 he was never an officer of FETMI.

Eric Hu, on the other hand, was Director of Filsyn and
SRTI.49 He was never an officer of PMI.
Marialen C. Corpuz, Filsyn’s Finance Officer,50
testified on cross-examination that (1) among all of
Filsyn’s officers, only she was the one involved in the
management of PMI; (2) only she and Patricio were the
common officers between Filsyn and PMI; and (3)
Filsyn and PMI are "two separate companies."51
Apolinario L. Posio, PMI’s Chief Accountant, testified
that "SRTI is a different corporation from PMI."52
At any rate, the existence of interlocking incorporators,
directors, and officers is not enough justification to
pierce the veil of corporate fiction, in the absence of
fraud or other public policy considerations.53
In Del Rosario v. NLRC,54 the Court ruled that
substantial identity of the incorporators of corporations
does not necessarily imply fraud.
In light of the foregoing, and there being no proof of
employer-employee relationship between McLeod and
respondent corporations and Eric Hu, McLeod’s cause
of action is only against his former employer, PMI.
On Patricio’s personal liability, it is settled that in the
absence of malice, bad faith, or specific provision of
law, a stockholder or an officer of a corporation cannot
be made personally liable for corporate liabilities.55
To reiterate, a corporation is a juridical entity with legal
personality separate and distinct from those acting for
and in its behalf and, in general, from the people
comprising it. The rule is that obligations incurred by
the corporation, acting through its directors, officers,
and employees, are its sole liabilities.56
Personal liability of corporate directors, trustees or
officers attaches only when (1) they assent to a patently
unlawful act of the corporation, or when they are guilty
of bad faith or gross negligence in directing its affairs,
or when there is a conflict of interest resulting in
damages to the corporation, its stockholders or other
persons; (2) they consent to the issuance of watered
down stocks or when, having knowledge of such
issuance, do not forthwith file with the corporate
secretary their written objection; (3) they agree to hold
themselves personally and solidarily liable with the
corporation; or (4) they are made by specific provision
of law personally answerable for their corporate
action.57
Considering that McLeod failed to prove any of the
foregoing exceptions in the present case, McLeod
cannot hold Patricio solidarily liable with PMI.
The records are bereft of any evidence that Patricio
acted with malice or bad faith. Bad faith is a question
of fact and is evidentiary. Bad faith does not connote
bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious
wrongdoing. It means breach of a known duty through
some ill motive or interest. It partakes of the nature of
fraud.58
In the present case, there is nothing substantial on
record to show that Patricio acted in bad faith in
terminating McLeod’s services to warrant Patricio’s
personal liability. PMI had no other choice but to stop
plant operations. The work stoppage therefore was by
necessity. The company could no longer continue with
its plant operations because of the serious business
losses that it had suffered. The mere fact that Patricio
was president and director of PMI is not a ground to
conclude that he should be held solidarily liable with
PMI for McLeod’s money claims.
The ruling in A.C. Ransom Labor Union-CCLU v.
NLRC,59 which the Court of Appeals cited, does not
apply to this case. We quote pertinent portions of the
ruling, thus:
(a) Article 265 of the Labor Code, in part, expressly
provides:
"Any worker whose employment has been terminated
as a consequence of an unlawful lockout shall be
entitled to reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article
265 of this Code shall be punished by a fine of not
exceeding five hundred pesos and/or imprisonment for
not less than one (1) day nor more than six (6) months."
(b) How can the foregoing provisions be implemented
when the employer is a corporation? The answer is
found in Article 212 (c) of the Labor Code which
provides:
"(c) ‘Employer’ includes any person acting in the
interest of an employer, directly or indirectly. The term
shall not include any labor organization or any of its
officers or agents except when acting as employer.".
The foregoing was culled from Section 2 of RA 602,
the Minimum Wage Law. Since RANSOM is an
artificial person, it must have an officer who can be
presumed to be the employer, being the "person acting
in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the
employer.
The responsible officer of an employer corporation can
be held personally, not to say even criminally, liable for
non-payment of back wages. That is the policy of the
law.
xxxx
(c) If the policy of the law were otherwise, the
corporation employer can have devious ways for
evading payment of back wages. In the instant case, it
would appear that RANSOM, in 1969, foreseeing
the possibility or probability of payment of back

wages to the 22 strikers, organized ROSARIO to
replace RANSOM, with the latter to be eventually
phased out if the 22 strikers win their case.
RANSOM actually ceased operations on May 1, 1973,
after the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against
RANSOM.60 (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its
President, organized ROSARIO to evade payment of
backwages to the 22 strikers. This situation, or anything
similar showing malice or bad faith on the part of
Patricio, does not obtain in the present case. In Santos
v. NLRC,61 the Court held, thus:
It is true, there were various cases when corporate
officers were themselves held by the Court to be
personally accountable for the payment of wages and
money claims to its employees. In A.C. Ransom Labor
Union-CCLU vs. NLRC, for instance, the Court ruled
that under the Minimum Wage Law, the responsible
officer of an employer corporation could be held
personally liable for nonpayment of backwages for "(i)f
the policy of the law were otherwise, the corporation
employer (would) have devious ways for evading
payment of backwages." In the absence of a clear
identification of the officer directly responsible for
failure to pay the backwages, the Court considered the
President of the corporation as such officer. The case
was cited in Chua vs. NLRC in holding personally
liable the vice-president of the company, being the
highest and most ranking official of the corporation
next to the President who was dismissed for the latter’s
claim for unpaid wages.
A review of the above exceptional cases would readily
disclose the attendance of facts and circumstances that
could rightly sanction personal liability on the part of
the company officer. In A.C. Ransom, the corporate
entity was a family corporation and execution against it
could not be implemented because of the disposition
posthaste of its leviable assets evidently in order to
evade its just and due obligations. The doctrine of
"piercing the veil of corporate fiction" was thus clearly
appropriate. Chua likewise involved another family
corporation, and this time the conflict was between two
brothers occupying the highest ranking positions in the
company. There were incontrovertible facts which
pointed to extreme personal animosity that resulted,
evidently in bad faith, in the easing out from the
company of one of the brothers by the other.
The basic rule is still that which can be deduced from
the Court’s pronouncement in Sunio vs. National
Labor Relations Commission; thus:
We come now to the personal liability of petitioner,
Sunio, who was made jointly and severally responsible
with petitioner company and CIPI for the payment of
the backwages of private respondents. This is reversible
error. The Assistant Regional Director’s Decision
failed to disclose the reason why he was made
personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half (½)
interest of said corporation, and his alleged arbitrary
dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his
capacity as General Manager of petitioner corporation.
There appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services
of private respondents. His act, therefore, was within
the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a
personality separate and distinct from those of the
persons composing it as well as from that of any other
legal entity to which it may be related. Mere ownership
by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate
corporate personality. Petitioner Sunio, therefore,
should not have been made personally answerable for
the payment of private respondents’ back salaries.62
(Emphasis supplied)
Thus, the rule is still that the doctrine of piercing the
corporate veil applies only when the corporate fiction is
used to defeat public convenience, justify wrong,
protect fraud, or defend crime. In the absence of malice,
bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot
be made personally liable for corporate liabilities.
Neither Article 212(c) nor Article 273 (now 272) of the
Labor Code expressly makes any corporate officer
personally liable for the debts of the corporation. As
this Court ruled in H.L. Carlos Construction, Inc. v.
Marina Properties Corporation:63
We concur with the CA that these two respondents are
not liable. Section 31 of the Corporation Code (Batas
Pambansa Blg. 68) provides:
"Section 31. Liability of directors, trustees or officers.
- Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad
faith ... shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders and other persons."
The personal liability of corporate officers validly
attaches only when (a) they assent to a patently
unlawful act of the corporation; or (b) they are guilty of
bad faith or gross negligence in directing its affairs; or
(c) they incur conflict of interest, resulting in damages
to the corporation, its stockholders or other persons.
The records are bereft of any evidence that Typoco
acted in bad faith with gross or inexcusable negligence,
or that he acted outside the scope of his authority as
company president. The unilateral termination of the

Contract during the existence of the TRO was indeed
contemptible – for which MPC should have merely
been cited for contempt of court at the most – and a
preliminary injunction would have then stopped work
by the second contractor. Besides, there is no showing
that the unilateral termination of the Contract was null
and void.64
McLeod is not entitled to payment of vacation leave
and sick leave as well as to holiday pay. Article 82, Title
I, Book Three of the Labor Code, on Working
Conditions and Rest Periods, provides:
Coverage. ─ The provisions of this title shall apply to
employees in all establishments and undertakings
whether for profit or not, but not to government
employees, managerial employees, field personnel,
members of the family of the employer who are
dependent on him for support, domestic helpers,
persons in the personal service of another, and workers
who are paid by results as determined by the Secretary
of Labor in appropriate regulations.
As used herein, "managerial employees" refer to those
whose primary duty consists of the management of the
establishment in which they are employed or of a
department or subdivision thereof, and to other officers
or members of the managerial staff. (Emphasis
supplied)
As Vice President/Plant Manager, McLeod is a
managerial employee who is excluded from the
coverage of Title I, Book Three of the Labor Code.
McLeod is entitled to payment of vacation leave and
sick leave only if he and PMI had agreed on it. The
payment of vacation leave and sick leave depends on
the policy of the employer or the agreement between
the employer and employee.65 In the present case, there
is no showing that McLeod and PMI had an agreement
concerning payment of these benefits.
McLeod’s assertion of underpayment of his 13th month
pay in December 1993 is unavailing.66 As already
stated, PMI stopped plant operations in 1992. McLeod
himself testified that he received his last salary from
PMI in December 1992. After the termination of the
employer-employee relationship between McLeod and
PMI, SRTI hired McLeod as consultant and not as
employee. Since McLeod was no longer an employee,
he was not entitled to the 13th month pay.67 Besides,
there is no evidence on record that McLeod indeed
received his alleged "reduced 13th month pay of
P44,183.63" in December 1993.68
Also unavailing is McLeod’s claim that he was entitled
to the "unpaid monetary equivalent of unused plane
tickets for the period covering 1989 to 1992 in the
amount of P279,300.00."69 PMI has no company policy
granting its officers and employees expenses for trips
abroad.70 That at one time PMI reimbursed McLeod for
his and his wife’s plane tickets in a vacation to
London71 could not be deemed as an established
practice considering that it happened only once. To be
considered a "regular practice," the giving of the
benefits should have been done over a long period, and
must be shown to have been consistent and deliberate.72
In American Wire and Cable Daily Rated Employees
Union v. American Wire and Cable Co., Inc.,73 the
Court held that for a bonus to be enforceable, the
employer must have promised it, and the parties must
have expressly agreed upon it, or it must have had a
fixed amount and had been a long and regular practice
on the part of the employer.
In the present case, there is no showing that PMI ever
promised McLeod that it would continue to grant him
the benefit in question. Neither is there any proof that
PMI and McLeod had expressly agreed upon the giving
of that benefit.
McLeod’s reliance on Annex M74 can hardly carry the
day for him. Annex M, which is McLeod’s letter
addressed to "Philip Lim, VP Administration," merely
contains McLeod’s proposals for the grant of some
benefits to supervisory and confidential employees.
Contrary to McLeod’s allegation, Patricio did not sign
the letter. Hence, the letter does not embody any
agreement between McLeod and the management that
would entitle McLeod to his money claims.
Neither can McLeod’s assertions find support in Annex
U.75 Annex U is the Agreement which McLeod and
Universal Textile Mills, Inc. executed in 1959. The
Agreement merely contains the renewal of the service
agreement which the parties signed in 1956.
McLeod cannot successfully pretend that his monthly
salary of P60,000 was reduced without his consent.
McLeod testified that in 1990, Philip Lim explained to
him why his salary would have to be reduced. McLeod
said that Philip told him that "they were short in
finances; that it would be repaid."76 Were McLeod not
amenable to that reduction in salary, he could have
immediately resigned from his work in PMI.
McLeod knew that PMI was then suffering from serious
business losses. In fact, McLeod testified that PMI was
not able to operate from August 1989 to 1992 because
of the strike. Even before 1989, as Vice President of
PMI, McLeod was aware that the company had
incurred "huge loans from DBP."77 As it happened,
McLeod continued to work with PMI. We find it
pertinent to quote some portions of Apolinario Posio’s
testimony, to wit:
Q You also stated that before the period of the strike as
shown by annex "K" of the reply filed by the
complainant which was I think a voucher, the salary of
Mr. McLeod was roughly P60,000.00 a month?
A Yes, sir.

Q And as shown by their annex "L" to their reply, that
this was reduced to roughly P50,000.00 a month?
A Yes, sir.
Q You stated that this was indeed upon the instruction
by the Vice-President of Peggy Mills at that time and
that was Mr. Philip Lim, would you not?
A Yes, sir.
Q Of your own personal knowledge, can you say if this
was, in fact, by agreement between Mr. Philip Lim or
any other officers of Peggy Mills and Mr. McLeod?
A If I recall it correctly, I assume it was an agreement,
verbal agreement with, between Mr. Philip Lim and Mr.
McLeod, because the voucher that we prepared was
actually acknowledged by Mr. McLeod, the reduced
amount was acknowledged by Mr. McLeod thru the
voucher that we prepared.
Q In other words, Mr. Witness, you mean to tell us that
Mr. McLeod continuously received the reduced amount
of P50,000.00 by signing the voucher and receiving the
amount in question?
A Yes, sir.
Q As far as you remember, Mr. Posio, was there any
complaint by Mr. McLeod because of this reduced
amount of his salary at that time?
A I don’t have any personal knowledge of any
complaint, sir.
Q At least, that is in so far as you were concerned, he
said nothing when he signed the voucher in question?
A Yes, sir.
Q Now, you also stated that the reason for what appears
to be an agreement between Peggy Mills and Mr.
McLeod in so far as the reduction of his salary from
P60,000.00 to P50,000.00 a month was because he
would have a reduced number of working days in view
of the strike at Peggy Mills, is that right?
A Yes, sir.
Q And that this was so because on account of the strike,
there was no work to be done in the company?
A Yes, sir.78
xxxx
Q Now, you also stated if you remember during the first
time that you testified that in the beginning, the monthly
salary of the complainant was P60,000.00, is that
correct?
A Yes, sir.
Q And because of the long period of the strike, when
there was no work to be done, by agreement with the
complainant, his monthly salary was adjusted to only
P50,495 because he would not have to report for work
on Saturday. Do you remember having made that
explanation?
A Yes, sir.
Q You also stated that the complainant continuously
received his monthly salary in the adjusted amount of
P50,495.00 monthly signing the necessary vouchers or
pay slips for that without complaining, is that not right,
Mr. Posio?
A Yes, sir.79
Since the last salary that McLeod received from PMI
was P50,495, that amount should be the basis in
computing his retirement benefits. McLeod must be
credited only with his service to PMI as it had a
juridical personality separate and distinct from that of
the other respondent corporations.
Since PMI has no retirement plan,80 we apply Section
5, Rule II of the Rules Implementing the New
Retirement Law which provides:
5.1 In the absence of an applicable agreement or
retirement plan, an employee who retires pursuant to
the Act shall be entitled to retirement pay equivalent to
at least one-half (1/2) month salary for every year of
service, a fraction of at least six (6) months being
considered as one whole year.
5.2 Components of One-half (1/2) Month Salary. ─ For
the purpose of determining the minimum retirement
pay due an employee under this Rule, the term "one-
half month salary" shall include all of the following:
(a) Fifteen (15) days salary of the employee based on
his latest salary rate. x x x
With McLeod having worked with PMI for 12 years,
from 1980 to 1992, he is entitled to a retirement pay
equivalent to ½ month salary for every year of service
based on his latest salary rate of P50,495 a month.
There is no basis for the award of moral damages.
Moral damages are recoverable only if the defendant
has acted fraudulently or in bad faith, or is guilty of
gross negligence amounting to bad faith, or in wanton
disregard of his contractual obligations. The breach
must be wanton, reckless, malicious, or in bad faith,
oppressive or abusive.81 From the records of the case,
the Court finds no ultimate facts to support a conclusion
of bad faith on the part of PMI.
Records disclose that PMI had long offered to pay
McLeod his money claims. In their Comment,
respondents assert that they offered to pay McLeod the
sum of P840,000, as "separation benefits, and not
P300,000, if only to buy peace and to forestall any
complaint" that McLeod may initiate before the NLRC.
McLeod admitted at the hearing before the Labor
Arbiter that PMI has made this offer ─

ATTY. ESCANO:
x x x According to your own statement in your Position
Paper and I am referring to page 8, your unpaid
retirement benefit for fourteen (14) years of service at
P60,000.00 per year is P840,000.00, is that correct?
WITNESS:
That is correct, sir.
ATTY. ESCANO:
And this amount is correct P840,000.00, according to
your Position Paper?
WITNESS:
That is correct, sir.
ATTY. ESCANO:
The question I want to ask is, are you aware that this
amount was offered to you sometime last year through
your own lawyer, my good friend, Atty. Avecilla, who
is right here with us?
WITNESS:
I was aware, sir.
ATTY. ESCANO:
So this was offered to you, is that correct?
WITNESS:
I was told that a fixed sum of P840,000.00 was offered.
ATTY. ESCANO:
And , of course, the reason, if I may assume, that you
declined this offer was that, according to you, there are
other claims which you would like to raise against the
Respondents which, by your impression, they were not
willing to pay in addition to this particular amount?
WITNESS:
Yes, sir. Q You mentioned that you were offered for the
settlement of your claims in 1994 for P840,000.00, is
ATTY. ESCANO:
that right, Mr. Witness?
The question now is, if the same amount is offered to
A During that period in time, while the petition in this
you by way of retirement which is exactly what you
case was ongoing, we already filed a case at that period
stated in your own Position Paper, would you accept it
of time, sir. There was a discussion. To the best of my
or not?
knowledge, they are willing to settle for P840,000.00
WITNESS: and based on what the Attorney told me, I refused to
accept because I believe that my position was not in
Not on the concept without all the basic benefits due
me, I will refuse.82 anyway due to a compromise situation to the benefits I
am entitled to.83
xxxx
Hence, the awards for exemplary damages and
ATTY. ROXAS: attorney’s fees are not proper in the present case.84
Q You mentioned in the cross-examination of Atty. That respondent corporations, in their appeal to the
Escano that you were offered the separation pay in NLRC, did not serve a copy of their memorandum of
1994, is that correct, Mr. Witness? appeal upon PMI is of no moment. Section 3(a), Rule
WITNESS: VI of the NLRC New Rules of Procedure provides:
A I was offered a settlement of P300,000.00 for Requisites for Perfection of Appeal. ─ (a) The appeal
complete settlement and that was I think in January or shall be filed within the reglementary period as
February 1994, sir. provided in Section 1 of this Rule; shall be under oath
with proof of payment of the required appeal fee and
ATTY. ESCANO: the posting of a cash or surety bond as provided in
No. What was mentioned was the amount of Section 5 of this Rule; shall be accompanied by a
P840,000.00. memorandum of appeal x x x and proof of service on
the other party of such appeal. (Emphasis supplied)
WITNESS:
The "other party" mentioned in the Rule obviously
What did you say, Atty. Escano?
refers to the adverse party, in this case, McLeod.
ATTY. ESCANO: Besides, Section 3, Rule VI of the Rules which requires,
The amount that I mentioned was P840,000.00 among others, proof of service of the memorandum of
appeal on the other party, is merely a rundown of the
corresponding to the . . . . . . .
contents of the required memorandum of appeal to be
WITNESS: submitted by the appellant. These are not jurisdictional
May I ask that the question be clarified, your Honor? requirements.85
WHEREFORE, we DENY the petition and AFFIRM
ATTY. ROXAS:
the Decision of the Court of Appeals in CA-G.R. SP
No. 55130, with the following MODIFICATIONS: (a)
 Makati Stock Exchange wherein
the retirement pay of John F. McLeod should be one becomes a member upon the
computed at ½ month salary for every year of service execution of an undertaking by
for 12 years based on his salary rate of P50,495 a at least 2 members of its Board
month; (b) Patricio L. Lim is absolved from personal of Directors who own 95% of
liability; and (c) the awards for moral and exemplary the stocks to answer solidarily
damages and attorney’s fees are deleted. No for the corporation liabilities of
pronouncement as to costs. the member company. Leocadio
SO ORDERED. de Asis and Francisco de Asis
who owned 95% of the
G.R. No. L-61549 May 27, 1985 outstanding capital stock of the
FRANCISCO DE ASIS & CO., INC., FRANCISCO Francisco de Asis & Co., Inc.
DE ASIS and LEOCADIO DE ASIS, petitioners, executed a joint and several
vs. undertaking on July 25, 1967
THE COURT OF APPEALS, and MERCEDES wherein they jointly and
PRIETO DELGADO, respondents. severally warrant the equitable
payment of all valid and
Cruz, Durian, Agabin, Atienza & Alday for petitioners. legitimate corporate liabilities of
Efren C. Carag for private respondent. Francisco de Asis & Co., Inc. in
connection with its membership
in the Makati Stock Exchange
RELOVA, J: (Exhibits A, A-1, and A-2).
In this petition for review on certiorari, petitioners seek Sometime in June, 1970 the
to reverse and/or modify the decision, dated July 30, defendant company thru its
1981, of respondent Court of Appeals affirming the president Francisco de Asis
decision of the trial court, as well as the resolution, approached Mrs. Mercedes P.
dated August 20, 1982, denying the motion for Delgado for assistance to secure
reconsideration. a loan in the amount of
P200,000.00 from the Resource
The facts of the case as aptly synthesized and adopted
& Finance Corporation. Since
in toto by the respondent appellate court are as follows:
Francisco de Asis was a good
Defendant Francisco de Asis &
friend and his father Leocadio de
Co., Inc. was organized
Asis was solvent and answerable
sometime in 1967 with
in a joint and solidarily
Francisco de Asis as its president
undertaking of the company, she
and Leocadio de Asis as one of
agreed to raise the amount of
the members of the Board of
P200,000.00 as requested. She
Directors, As a stock brokerage
was able to secure P100,000.00
company, it did business in the
from the Resource and Finance
Corporation for which she
executed a promissory note
(Exhibit F) and the amount of
P100,000.00 from her brother
Benito Prieto, Jr. With this
amount, she deposited it in the
Bank of Asia, Makati Branch in
favor of Francisco de Asis &
Co., Inc. under current account
of 2-001, in accordance with the
instructions of its President
Francisco de Asis (Exhibit B).
Thereafter, on or about August,
1973 Francisco de Asis
informed her that he had
P100,000.00 to be made as
partial payment of their loan and
suggested that she invest it by
buying shares of Philex Mining.
To this suggestion, she agreed.
Unfortunately, this supposed
partial payment which was to be
invested in shares of Philex was
not carried out because
Francisco de Asis & Co., Inc.
was suspended by the Makati
Stock Exchange from trading,
As a result, there was a rush of
claims against the company
resulting in its collapse. She
Called up Mr. Asis to settle the
loan and she was assured of
settlement as Mr. Leocadio de
Asis is solvent and answerable
for the debts of the company.
Mr. de Asis even sent her a cable
assuring her that the loan would
be settled (Exhibits C and C-1).

This loan she extended to
Francisco de Asis & Co., Inc.
remained unpaid. On the other
hand, she had been paying on her
own the loan with the Resource
& Finance Corp. as well as with
her brother Benito Prieto, Jr. She
is married but separated from her
husband.
On the part of the defendants
only Leocadio de Asis testified.
His testimony substantially
established that he is a lawyer
and had fully understood the
effects and circumstances of
executing the joint and several
undertaking, Exhibit A, which
was made in accomodation to his
son Francisco de Asis. He was a
nominal stockholder of the
Francisco de Asis & Co., Inc. of
which 97% of the subscribed
capital belong to his son
Francisco while the remaining
3% was subscribed by him This
joint and several undertaking,
Exhibit A, was to answer for
obligation in favor of the Makati
Stock Exchange in connection
with the operation of said
exchange and not in favor of any
other party (Exhibit I). He was
compelled to execute this joint
and several undertaking which
in his opinion is null and void
especially considering that a
nominal stock member like
himself wig be held liable
because no license will be issued
unless this condition is first
satisfied. He was an original
Director of the defendant
corporation and at one time
chairman of the board for a short
period. He ceased to be an
officer of this corporation
sometime in 1970. He had no
direct participation in the
management of the corporation
to attend the board meetings.
The corporation had never pass
any resolution authorizing
Francisco de Asis to secure a
loan of P200,000.00 from
Mercedes P. Delgado. As a
matter of fact, he had no
knowledge of this transaction
except when the instant suit was
filed. (pp. 34-37, Record on
Appeal). (pages 30-32, Rollo).
Petitioners raised the same assignments of errors
presented and passed upon by the appellate court that
the latter erred (1) in declaring that the obligation sued
upon was corporate loan of Francisco de Asis and Co.,
Inc. and not a personal loan of Francisco de Asis with
the private respondent; and (2) in holding petitioner
Leocadio de Asis liable, jointly and severally, with
petitioners Francisco de Asis and Francisco de Asis &
Co., Inc. under the "Joint and Several Undertakings."
WE do not agree.
The records are negative of any evidence which would
show that the corporate nature of the transaction alleged
in paragraphs 4 and 8 of the complaint which read:
4. Sometime in June of 1970,
defendant, Francisco de Asis
approached plaintiff, who was a
good friend, and informed her
that he was in need of
P200,000.00 because the stock
brokerage firm bearing his
name, defendant Francisco de
Asis and Co., Inc. was
encountering cash flow
problems;
8. On July 2, 1970, plaintiff
deposited the P200,000.00 to the
bank account of defendant
corporation at the Bank of Asia,
Makati Branch (pages 32-33,
Rollo).
have been denied and proved to be false. Thus, We are
in affirmance of the findings of respondent appellate
court that—
The necessity and urgency for
the loan of P200,000.00 was not
to meet the personal need of
Francisco de Asis as there is no
showing that he was in financial
difficulties but to resolve the
cash flow problems of Francisco
de Asis and Co., Inc. for which
plaintiff-appellee deposited the
amount of P200,000.00 on July
2, 1970 in the current account of
defendant corporation at the
Makati Branch of the Bank of
Asia. Neither would the absence
of the usual documents, i.e.,
promissory notes and/or real
estate or chattel mortgages,
negate the existence of the loan.
Considering the relationship

between the parties, being very
good friends, plaintiff-appellee
dispensed with the customary
documentation in her desire to
bail out a friend from the
difficulties that his corporation
is facing, 97% of the capital
stock of which he owned. But
the loan of P200,000.00 is not
totally without any document.
The deposit slip (Exhibit "B") of
the Bank of Asia showing the
deposit of P200,000.00 on July
2, 1970, in Current Account No.
2-0017 of defendant corporation
indicates the receipt of said
amount. And the record is bereft
of any evidence disclosing that
said funds were used other than
for corporate purposes.
If the transaction contemplated
by the parties herein is that of a
personal loan to Francisco de
Asis, then plaintiff could have
simply written out a check in the
latter's name or deposited the
amount of the loan in his
personal account. (page 33,
Rollo).
The claim of the corporation that it had not authorized
Francisco de Asis to obtain loan for the company from
the private respondent is belied by the fact that upon
deposit of the sum of P200,000.00 in its current
account, it had retained and disbursed the said amount.
And, assuming that it had not really authorized
Francisco de Asis to borrow money from private
respondent, the company is still obliged to return the
same under Article 2154 of the Civil Code which
provides:
If something is received when
there is no right to demand it,
and it was unduly delivered
through mistake, the obligation
to return it arises.
Relative to the argument that Francisco and Leocadio
de Asis' liability under their "Joint and Several
Undertaking" is limited to the obligation of the
corporation in connection with its membership at the
Makati Stock Exchange, their liability is spelled out by
Exhibit "A" as follows:
NOW, THEREFORE, for and in
consideration of the foregoing
premises, the Owners hereby
jointly and severally warrant the
equitable payment of all valid
and legitimate corporate
liabilities of the Francisco de
Asis & Co., Inc. in connection
with its membership at the
Makati Stock Exchange Exhibit
"A" (page 33, Rollo).
The execution of the foregoing instrument is a
requirement for membership in the Makati Stock
Exchange. Subdivision 2, Section 1 of Article XIII of
the Constitution of the Makati Stock Exchange clearly
states:
that stockholders owning at least
95% of the outstanding capital
stock of the applicant
corporation shall execute a
public instrument making
themselves jointly and severally
liable without limitation for all
the transactions and dealings of
said corporation and a copy of
said document shall be filed with
the Commission provided,
however, that if the 95%
outstanding capital stock is
owned by only one person
another stockholder shall be
required to execute with him the
said public instrument or
guaranty. (page 34, Rollo),
(Emphasis supplied).
And, as pointed out by respondent appellate court,
"Leocadio and Francisco de Asis knowingly and
voluntarily executed and signed the Joint and Several
Undertaking, Exhibit "A" ". More so, in the case of
Leocadio de Asis who is a lawyer and, therefore, knew
the legal import and far-reaching consequences of the
document he signed.
ACCORDINGLY, for lack of merit, the petition is
hereby DISMISSED.
SO ORDERED.
RUBEN MARTINEZ,* substituted by his heirs,
MENA CONSTANTINO MARTINEZ,
WILFRIDO C. MARTINEZ, EMMA M.
NAVA, and EDNA M. SAKHRANI,
petitioners, vs. COURT OF APPEALS and
BPI INTERNATIONAL FINANCE,
respondents.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of
the Decision[1] of the Court of Appeals, in CA-G.R. CV
No. 43985, modifying the Decision[2] of the Regional
Trial Court of Kalookan City, Branch 122, in Civil Case
No. C-10811.

The antecedents are as follows:
Respondent BPI International Finance[3] is a
foreign corporation not doing business in the
Philippines, with office address at the Bank of America
Tower, 12 Harcourt Road, Central Hongkong. It was a
deposit-taking company organized and existing under
and by virtue of the laws of Hongkong, and was also
engaged in investment banking operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign
corporation, established in Hongkong, with a paid-up
capital of HK$10,000. The registered shareholders of
the CLL in Hongkong were the Overseas Nominee, Ltd.
and Shares Nominee, Ltd., which were mainly nominee
shareholders. In Hongkong, the nominee shareholder of
CLL was Baker & McKenzie Nominees, Ltd., a leading
solicitor firm. However, beneficially, the company was
equally owned by Messrs. Ramon Siy, Ricardo Lopa,
Wilfrido C. Martinez, and Miguel J. Lacson.[4] The
registered office address of CLL in Hongkong was
22/F, Princes Building, also the office address of Price
Waterhouse & Co., a large accounting firm in
Hongkong.
The bulk of the business of the CLL was the
importation of molasses from the Philippines,
principally from the Mar Tierra Corporation, and the
resale thereof in the international market.[5] However,
Mar Tierra Corporation also sold molasses to its
customers.[6] Wilfrido C. Martinez was the president of
Mar Tierra Corporation, while its executive vice-
president was Blamar Gonzales. The business
operations of both the CLL and Mar Tierra Corporation
were run by Wilfrido Martinez and Gonzales.
About 42% of the capital stock of Mar Tierra
Corporation was owned by RJL Martinez Fishing
Corporation (RJL), the leading tuna fishing outfit in the
Philippines. Petitioner Ruben Martinez was the
president of RJL and a member of the board of directors
thereof. The majority stockholders of RJL were Ruben
Martinez and his brothers, Jose and Luis Martinez.
Sixty-eight (68) percent of the total assets of Ruben
Martinez were in the RJL.
In 1979, respondent BPI International Finance
(then AIFL) granted CLL a letter of credit in the amount
of US$3,000,000. Wilfrido Martinez signed the letter
agreement with the respondent for the CLL. The
respondent and the CLL had made the following
arrangements:
Cintas Largas, Ltd. will purchase
molasses from the Philippines, mainly from
Mar Tierra Corporation, and then sell the
molasses to foreign countries. Both the
purchase of the molasses from the Philippines
and the subsequent sale thereof to foreign
customers were effected by means of Letters
of Credit. A Letter of Credit would be opened
by Cintas Largas, Ltd. in favour of Mar Tierra
Corporation or any other seller in the
Philippines. Upon the sale of the molasses to
foreign buyers, a Letter of Credit would then
be opened by such buyers, in favour of Cintas
Largas, Ltd. The Letters of Credit were
effected through the Letter of Credit Facility
of Cintas Largas, Ltd. in plaintiff. The profits
of Cintas Largas, Ltd. from these transactions
were then deposited in either the deposit
account of Cintas Largas, Ltd. with plaintiff or
the Money Market Placement Account Nos.
063 and 084, depending upon the instructions
of Wilfrido C. Martinez and Blamar C.
Gonzales, principally.[7]
On January 24, 1979, the CLL opened a money
market placement with the respondent bearing MMP
No. 063, with an initial placement of US$390,000.[8]
The CLL also opened and maintained a foreign
currency account and a deposit account with the
respondent. The authorized signatory in both accounts
of CLL was Wilfrido C. Martinez. Some instructions
also came from Gonzales, to be confirmed by Wilfrido
Martinez.[9] On March 21, 1980, petitioner Ruben
Martinez and/or his son Wilfrido C. Martinez and/or
Miguel J. Lacson affixed their signatures on the two
signature cards furnished by the respondent which
became MMP No. 063 and MMP No. 084. On the face
of the cards, the signatories became joint account
holders of the said money market placements.[10]
On March 25, 1980, the CLL opened a money
market placement account with the respondent bearing
MMP No. 084 with an initial placement of
US$68,768.60, transferred from MMP No. 063.[11] At
times, funds in MMP Nos. 063 and 084 were
transferred to the CLLs deposit account, and vice versa.
On May 19, 1980, the CLL, through Wilfrido
Martinez, and the respondent, through Senen L. Matoto
and Michael Sung, Senior Manager of the Money
Management Division of the respondent, executed a
letter-agreement in which the existing back-to-back
credit facility granted to the CLL way back in 1979 was
extended up to July 1980, and increased to
US$5,000,000. The credit facility was to be secured as
follows:
SECURITY: (i) Back-to-Back L/C to be
secured by an L/C
issued, by a bank
acceptable to
AFHK, in favor of
Cintas Largas.
(ii) AFHK L/C issued prior
to receipt of
Backing L/C to be
secured by a 10%
margin by way of a
 On October 10, 1980, Blamar Gonzales, acting for ============
hold out on cash Mar Tierra Corporation, sent to the respondent a telex
CINTAS LARGAS
deposit with AFHK confirming his telephone conversation with Michael
with interest at Sung/Bing Matoto requesting the respondent to transfer VALUE DATE MATURITY DATE DATE
LIBOR. The US$340,000 to Account No. FCD SA 18402-7, AMOUNT MATURITY VALUE
Backing L/C, registered in the name of Mar Tierra Corporation, 15/9/80 1 DAY CALL 10-7/8 USD 46,131.26
however, shall be Philippine Banking Corporation, Union Cement
opened not later Building, Port Area, Manila, as payee, with the 25/9/80 1 DAY CALL 11-1/4 USD500,000.00
than 120 days after following specific instructions: (a) there should be no (RATE ADJ: TO 12-1/4 VALUE 7/10/80)
the issuance of mention of Wilfrido Martinez or Mar Tierra
AFHKs L/C. Corporation; (b) the telex instruction should be signed 26/9/80 31/10/80 12-1/4 USD420,831.45
only by Wilfrido Martinez and sent only through the USD 425,843.44
(iii) JSS of Messrs. Ramon
Siy, Wilfrido C. telex machine of Mar Tierra Corporation; and, (c) the 2. ACCORDING TO AIDC, O/S OF PESO
Martinez, Ricardo final confirmation of the transfer should be made by LOAN IS 10,930,000.00, AND THE
Lopa and Miguel J. telephone call.[18] Gonzales requested the respondent, HOLDOUT REQUIRED IS 120 PCT
Lacson for both of in the same telex, to confirm its total available account
COMPUTATION: PESO 10,930,000.00
the above cases. so that instructions on the transfer of the funds to FCD
SA 18402-7 could be formalized.[19] 7.89 (EXCHANGE RATE)
DOCUMENTATION: Standard AFHK
On October 13, 1980, Sung sent a telex to Gonzales 1.20 (120 PCT)
L/C documentation.[12]
informing the latter of the balances of the MMP Nos. --------------------
The facility was designed to finance the purchases 063 and 084 and in the CLL account deposit, with the
of molasses made by the CLL from the Philippines for corresponding maturity dates thereof, thus: 1,662,357.00
re-export.[13] =============
1. DETAIL OF PLACEMENT IN VARIOUS
In compliance with the letter-agreement, Wilfrido A/C. 3. ACCORDINGLY, THE FUND
C. Martinez, Miguel J. Lacson, Ricardo Lopa, and AVAILABLE IS APPROX.
Ramon Siy executed a continuing suretyship agreement MMP 063
USD340,000.00. PLS REVERT.[20]
in which they bound and obliged themselves, jointly VALUE DATE MATURITY DATE DATE
and severally, with the CLL to pay the latters obligation AMOUNT MATURITY VALUE Sung informed Gonzales that the account available
under the said credit facility.[14] was approximately US$340,000, considering the CLL
25/9/80 28/11/80 12-1/4 USD306,043.48 USD deposit account and the money market placements.[21]
As of September 26, 1980, the balance of the 312,708.43 On October 14, 1980, the respondent received a telex
deposit account of the CLL with the respondent was from Wilfrido C. Martinez requesting that the transfer
MMP 084
US$1,025,052.06.[15] On the other hand, the balance of of US$340,000 from the deposit account of the CLL or
the money placement in MMP No. 063, as of 25/09/80 28/11/80 12-1/4 USD751,883.88 USD
any deposit available be effected by telegraphic transfer
September 25, 1980 was US$312,708.43,[16] while the 768,258.24
as soon as possible to their account, payee FCD SA
balance of the money market placement in MMP No. ------------------------- 18402-7, Philippine Banking Corporation, Port Area,
084 as of September 8, 1980 stood at Manila.[22] On October 21, 1980, Wilfrido Martinez
US$768,258.24.[17] USD1080,966.67
wrote the respondent confirming his request for the

transfer of US$340,000 to their account, FCD SA
18402-7, with the Philippine Banking Corporation,
through Wells Fargo Bank of New York, Philippine
Banking Corporation Account No. FCDU SA No. 003-
019205.[23]
The respondent complied with the request of the
CLL, through Wilfrido Martinez and Gonzales, and
remitted US$340,000 as instructed.[24] However,
instead of deducting the amount from the funds in the
CLL foreign currency or deposit accounts and/or MMP
Nos. 063 and 084, the respondent merely posted the
US$340,000 as an account receivable of the CLL since,
at that time, the money market placements had not yet
matured.[25] When the money market placements
matured, however, the respondent did not collect the
US$340,000 therefrom. Instead, the respondent
allowed the CLL and/or Wilfrido C. Martinez to
withdraw, up to July 3, 1981, the bulk of the CLL
deposit account and MMP Nos. 084 and 063;[26] hence,
it failed to secure reimbursement for the US$340,000
from the said deposit account and/or money market
placements.
In the meantime, problems ensued in the
reconciliation of the transactions involving the funds of
the CLL, including the MMP Nos. 063 and 084 with the
respondent, as well as the receivables of Mar Tierra
Corporation. There was also a need to audit the said
funds. Sometime in July 1982, conferences were held
between the executive committee of Mar Tierra
Corporation and some of its officers, including Miguel
J. Lacson, where the means to reduce the administrative
expenses and accountants fees, and the possibility of
placing the CLL on an inactive status were
discussed.[27] The respondent pressured the CLL,
Wilfrido Martinez, and Gonzales to pay the
US$340,000 it remitted to Account No. FCD SA
18402-7.[28] Eventually, Wilfrido C. Martinez and
Blamar Gonzales engaged the services of the auditing
firm, the Jacinto, Belano, Castro & Co., to review the
flow of the CLLs funds and the receivables of Mar
Tierra Corporation.
On August 16, 1982, the CLL, through its certified
public accountant, wrote the respondent requesting the
latter to furnish its accountant with a copy of the
financial report prepared by its auditors.[29] An audit
was, thereafter, conducted by the Jacinto, Belano,
Castro & Co., certified public accountants of the CLL
and Mar Tierra Corporation. Based on their report, the
auditors found that the CLL owed the respondent
US$340,000.[30]
In the meantime, the respondent demanded from
the CLL, Wilfrido Martinez, Lacson, Gonzales, and
petitioner Ruben Martinez, the payment of the
US$340,000 remitted by it to FCD SA 18402-7, per
instructions of Gonzales and Wilfrido Martinez. No
remittance was made to the respondent. Petitioner
Ruben Martinez denied knowledge of any such
remittance, as well as any liability for the amount
thereof.
On June 17, 1983, the respondent filed a complaint
against the CLL, Wilfrido Martinez, Lacson, Gonzales,
and petitioner Ruben Martinez, with the RTC of
Kaloocan City for the collection of the principal amount
of US$340,000, with a plea for a writ of preliminary
attachment. Two alternative causes of action against the
defendants were alleged therein, viz:
FIRST ALTERNATIVE CAUSE OF
ACTION
2.1 The allegations contained in the
foregoing paragraphs are repleaded herein by
reference.
2.2 The remittance by plaintiff of the sum
of US$340,000.00 as previously explained in
the foregoing paragraphs was made upon the
express instructions of defendants
GONZALES and WILFRIDO C.
MARTINEZ acting for and in behalf of the
defendant CINTAS, defendants GONZALES
and WILFRIDO C. MARTINEZ being the
duly authorized representatives of defendant
CINTAS to transact any and all of its business
with plaintiff.
2.3 The remittance of US$340,000.00
was made under an agreement for plaintiff to
advance the said amount and for defendants
GONZALES, WILFRIDO C. MARTINEZ
and CINTAS to repay plaintiff all such monies
so advanced to said defendants or to their
order.
2.4 In making said remittance, plaintiff
acted as the agent of the foregoing defendants
in meeting the latters liability to the recipient/s
of the amount so remitted.
2.5 The remittance of US$340,000.00
which remains unsettled to date is a just,
binding and lawful obligation of the
defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing
or paper company with nominee shareholders
in Hongkong. The real and beneficial
shareholders of the foregoing defendants are
the defendants LACSON and WILFRIDO C.
MARTINEZ.
2.7 Defendant CINTAS is being used by
the foregoing defendants as an alter ego or
business conduit for their sole benefit and/or
to defeat public convenience.
2.8 Defendant CINTAS, being a mere
alter ego or business conduit for the foregoing

defendants, has no corporate personality
distinct and separate from that of its beneficial
shareholders and, likewise, has no substantial
assets in its own name.
2.9 The remittance of US$340,000.00 as
referred to previously, although made upon
the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS,
was in fact a remittance made for the benefit
of the beneficial shareholders of defendant
CINTAS.
2.10 Any and all obligations of defendant
CINTAS are the obligations of its beneficial
shareholders since the former is being used by
the latter as an alter ego or business conduit
for their sole benefit and/or to defeat public
convenience.
SECOND ALTERNATIVE CAUSE OF
ACTION
3.1 The allegations contained in the
foregoing paragraphs are incorporated herein
by reference.
3.2 Defendants RUBEN MARTINEZ,
WILFRIDO C. MARTINEZ and LACSON
are joint account holders of Money Market
Placement Account Nos. 063 and 084
(hereinafter referred to as MMP 063 and 084
for brevity) opened and maintained by said
defendants with the plaintiff.
3.3 Said money market placement
accounts, although nominally opened and
maintained by said defendants, were in reality
for the account and benefit of all the
defendants.
3.4 Defendant CINTAS likewise opened
and maintained a deposit account with
plaintiff.
3.5 Defendants W.C. Martinez and
Gonzales upon giving instructions to plaintiff
to remit the amount of US$340,000.00 as
previously discussed also instructed plaintiff
to reimburse itself from available funds in
MMP Account Nos. 063 and 084 and the
defendant CINTAS deposit account.
3.6 Due to excusable mistake, plaintiff
was unable to obtain reimbursement for the
remittance it made from MMP Account Nos.
063, 084 and from the deposit account of
defendant CINTAS.
3.7 As a consequence of said mistake,
plaintiff delivered to the foregoing defendants
and/or to third parties upon orders of the
defendants substantially all the funds in MMP
Account Nos. 063, 084 and the deposit
account of defendant CINTAS.
3.8 The amount of US$340,000.00
delivered by plaintiff to the foregoing
defendants constituted an overpayment and/or
erroneous payment as defendants had no right
to demand the same; further, said amount
having been unduly delivered by mistake, the
foregoing defendants were obliged to return it.
3.9 Since the foregoing defendants had no
legal right to the overpayment or erroneous
payment of US$340,000.00 they, therefore,
hold said money in trust for the plaintiff.
3.10 Despite numerous demands to the
defendants WILFRIDO C. MARTINEZ,
RUBEN MARTINEZ, LACSON and
CINTAS for restitution of the funds
erroneously paid or overpaid to said
defendants, they have failed and continue to
fail to make any restitution.[31]
The respondent prayed therein that, after due
proceedings, judgment be rendered in its favor, viz:
ON THE
FIRST ALTERNATIVE CAUSE OF
ACTION
4.1 Ordering defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS,
jointly and severally, liable to pay plaintiff the
amount of US$340,000.00 with interests
thereon from February 20, 1982 until fully
paid.
4.2 Declaring that defendant CINTAS is a
mere alter ego or business conduit of
defendants LACSON and WILFRIDO C.
MARTINEZ; hence, the foregoing defendants
are, jointly and severally, liable to pay plaintiff
the amount of US$340,000.00 with interests
thereon.
4.3 Ordering the foregoing defendants to
be, jointly and severally, liable for the amount
of P100,000.00 as and for attorneys fees; and
4.4 Ordering the foregoing defendants to
be, jointly and severally, liable to plaintiff for
actual damages in an amount to be proved at
the trial. Or -
ON THE
SECOND ALTERNATIVE CAUSE OF
ACTION
5.1 Declaring that plaintiff made an
erroneous payment in the amount of
US$340,000.00 to defendants LACSON,

WILFRIDO C. MARTINEZ, RUBEN
MARTINEZ and CINTAS.
5.2 Declaring the foregoing defendants to
be, jointly and severally, liable to reimburse
plaintiff the amount of US$340,000.00 with
interest thereon from February 20, 1982 until
fully paid.
5.3 Ordering defendants to be, jointly and
severally, liable for the amount of
P100,000.00 as and for attorneys fees; and
5.4 Ordering defendants to be, jointly and
severally, liable to plaintiff for actual damages
in an amount to be proved at the trial.
5.5 A writ of preliminary attachment be
issued against the properties of the defendants
WILFRIDO C. MARTINEZ, RUBEN
MARTINEZ, LACSON and CINTAS as a
security for the satisfaction of any judgment
that may be recovered.
Plaintiff further prays for such other relief
as may be deemed just and equitable in the
premises.[32]
In his answer to the complaint, petitioner Ruben
Martinez interposed the following special and
affirmative defenses:
BY WAY OF SPECIAL AND
AFFIRMATIVE DEFENSES, answering
defendant respectfully states:
2. Defendant is not the holder, owner,
depositor, trustee and has no interest
whatsoever in the account in Philippine
Banking Corporation (FCD SA 18402-7)
where the plaintiff remitted the amount sought
to be recovered. Hence, he did not benefit
directly or indirectly from the said remittance;
3. Defendant did not participate in any
manner whatsoever in the remittance of funds
from the plaintiff to the alleged FCD Account
in the Philippine Banking Corporation;
4. Defendant has not received nor
benefited from the alleged remittance,
payment, overpayment or erroneous payment
allegedly made by plaintiff; hence, insofar as
he is concerned, there is nothing to return to or
to hold in trust for the plaintiff;
5. Plaintiffs alleged remittance of the
amount by mere telex or telephone instruction
was highly irregular and questionable
considering that the undertaking was that no
remittance or transfer could be done without
the prior signature of the authorized
signatories;
6. The alleged telex instructions to the
plaintiff was for it to confirm the amounts that
are free and available which it did;
7. Plaintiff is guilty of estoppel or laches
by making it appear that the funds so remitted
are free and available and by not acting within
reasonable time to correct the alleged mistake;
8. The alleged remittance, overpayment
and erroneous payment was manipulated by
plaintiffs own employees, officers or
representatives without connivance or
collusion on the part of the answering
defendant; hence, plaintiff has only itself to
blame for the same; likewise, its recourse is
not against answering defendant;
9. Plaintiffs Complaint is defective in that
it has failed to state the facts constituting the
mistake regarding its failure to obtain
reimbursement from MMP 063 and 084;
10. Plaintiff is guilty of gross negligence
and it only has itself to blame for its alleged
loss;
11. Sometime on or about 1980,
defendant was made to sign blank forms
concerning opening of money market
placements and perhaps, this is how he
became a joint account holder of MMP 063
and 084; defendant at that time did not realize
the import or significance of his act;
afterwards, defendant did not do any act or
omission by which he could be implicated in
this case;
12. Assuming that defendant is a joint
account holder of said MMP 063 and 084,
plaintiff has failed to plead defendants
obligations, if any, by being said joint account
holder; likewise, the Complaint fails to attach
the corresponding documents showing
defendants being a joint account holder.[33]
The CLL was declared in default for its failure to
file an answer to the complaint.
After trial, the RTC rendered its decision, the
dispositive portion of which reads as follows:
PREMISES CONSIDERED, judgment is
hereby rendered as follows:
1. Ordering all the defendants, jointly and
severally, to pay plaintiff the amount of
US$340,000.00 or its equivalent in Philippine
currency measured at the Central Bank
prevailing rate of exchange in October 1980
and with legal interest thereon computed from
the filing of plaintiffs complaint on June 17,
1983 until fully paid;
2. Declaring that defendant Cintas Largas
Ltd. is a mere business conduit and alter ego

of the individual defendants, thereby holding
the individual defendants, jointly and
severally, liable to pay plaintiff the aforesaid
amount of US$340,000.00 or its equivalent in
Philippine Currency measured at the Central
Bank prevailing rate of exchange in October
1980, with interest thereon as above-stated;
3. Ordering all defendants to, jointly and
severally, pay unto plaintiff the amount of
P50,000.00 as and for attorneys fees, plus
costs.
All counterclaims and cross-claims are
dismissed for lack of merit.
SO ORDERED.[34]
The trial court ruled that the CLL was a mere paper
company with nominee shareholders in Hongkong. It
ruled that the principle of piercing the veil of corporate
entity was applicable in this case, and held the
defendants liable, jointly and severally, for the claim of
the respondent, on its finding that the defendants
merely used the CLL as their business conduit. The trial
court declared that the majority shareholder of Mar
Tierra Corporation was the RJL, controlled by
petitioner Ruben Martinez and his brothers, Jose and
Luis Martinez, as majority shareholders thereof.
Moreover, petitioner Ruben Martinez was a joint
account holder of MMP Nos. 063 and 084. The trial
court, likewise, found that the auditors of Mar Tierra
Corporation and the CLL confirmed that the defendants
owed US$340,000. The trial court concluded that the
respondent had established its causes of action against
Wilfrido Martinez, Lacson, Gonzales, and petitioner
Ruben Martinez; hence, held all of them liable for the
claim of the respondent.
The decision was appealed to the CA. On June 27, COUNTER-CLAIM OF PETITIONER
1997, the CA rendered its decision, the dispositive RUBEN MARTINEZ CONSIDERING THE
portion of which reads: EVIDENCE ON RECORD THAT PROVES
THE SAME.[38]
WHEREFORE, the decision of the
Court a quo dated December [19], 1991 is The paramount issue posed for resolution is
hereby MODIFIED, by exonerating appellant whether or not the petitioner is obliged to reimburse to
Blamar Gonzales from any liability to appellee the respondent the principal amount of US$340,000.
and the complaint against him is The petitioner asserts that the trial and appellate
DISMISSED. The decision appealed from is courts erred when they held him liable for the
AFFIRMED in all other respect. reimbursement of US$340,000 to the respondent. He
SO ORDERED.[35] contends that he is not in actuality a stockholder of Mar
Tierra Corporation, nor a stockholder of the CLL. He
The appellate court exonerated Gonzales of any
was not involved in any way in the operations of the
liability, reasoning that he was not a stockholder of the
said corporations. He added that while he may have
CLL nor of Mar Tierra Corporation, but was a mere
signed the signature cards of MMP Nos. 063 and 084 in
employee of the latter corporation.[36] Petitioner Ruben
blank, he never had any involvement in the
Martinez sought a reconsideration of the decision of the
management and disposition of the said accounts, nor
CA, to no avail.[37]
of any deposits in or withdrawals from either or both
Dissatisfied with the decision and resolution of the accounts. He was not aware of any transactions
appellate court, the petitioner, filed the petition at bar, between the respondent, Wilfrido Martinez, and
on the following grounds: Gonzales, with reference to the remittance of the
US$340,000 to FCD SA 18402-7; nor did he oblige
I
himself to pay the said amount to the respondent.
RESPONDENT COURT OF APPEALS According to the petitioner, there is no evidence that he
ERRED IN FINDING THAT HEREIN had benefited from any of the following: (a) the
PETITIONER RUBEN MARTINEZ IS remittance by the respondent of the US$340,000 to
LIABLE TO RESPONDENT BPI Account No. FCD SA 18402-7 owned by Mar Tierra
INTERNATIONAL FINANCE FOR Corporation; (b) the money market placements in MMP
REIMBURSEMENT OF THE Nos. 063 and 084, or, (c) from any deposits in or
US$340,000.00 REMITTED BY SAID withdrawals from the said account and money market
RESPONDENT BPI INTERNATIONAL placements.
FINANCE TO FCD SA ACCOUNT NO.
18402-7 AT THE PHILIPPINE BANKING On the other hand, the appellate court found the
CORPORATION, PORT AREA BRANCH. petitioner and his co-defendants, jointly and severally,
liable to the respondent for the payment of the
II US$340,000 based on the following findings of the trial
RESPONDENT COURT OF APPEALS court:
ERRED IN NOT GRANTING THE

The Court finds that defendant Cintas
Largas (Ltd.) with capitalization of
$10,000.00 divided into 1,000 shares at
HK$10 per share, is a mere paper company
with nominee shareholders in Hongkong,
namely: Overseas Nominees Ltd. and Shares
Nominees Ltd., with defendants Wilfrido and
Miguel J. Lacson as the sole directors (Exh.
A). Since the said shareholders are mere
nominee companies, it would appear that the
said defendants Wilfrido and Miguel J. Lacson
who are the sole directors are the real and
beneficial shareholders (t.s.n., 9-1-87, p. 5).
Further, defendant Cintas Largas Ltd. has no
real office in Hongkong as it is merely being
accommodated by Price Waterhouse, a large
accounting office in Hongkong (t.s.n., 9-1-87,
pp. 7-8).
Defendant Cintas Largas Ltd., being a
mere alter ego or business conduit for the
individual defendants with no corporate
personality distinct and separate from that of
its beneficial shareholders and with no
substantial assets in its own name, it is safe to
conclude that the remittance
US$340,000.00 was, in fact, a remittance
made for the benefit of the individual
defendants. Plaintiff was supposed to deduct
the US$340,000.00 remitted to the foreign
currency deposit account from Cintas Largas
(Ltd.) funds or from money market placement
account Nos. 063 and 084 as well as Cintas
Largas Ltd. deposit account (Exh. FF-24).
Defendant Cintas Largas Ltd. was
established only for financing (t.s.n., 12-19-
88, pp. 25-26) and the active owners of Cintas
are defendants Miguel Lacson and Wilfrido C.
Martinez (t.s.n., 12-19-88, p. 22). Mar Tierra
Corporation of which defendant Wilfrido
Martinez is the President and one of its owners
and defendant Blamar Gonzales as the Vice
President, sells molasses to defendant Cintas
Largas Ltd. Defendant Miguel J. Lacson is a
business partner in purchasing molasses for
Mar Tierra Corporation. Mar Tierra
Corporation was selling molasses to Cintas
Largas Ltd. which were purchased by Miguel
Lacson and Wilfrido C. Martinez (t.s.n., 12-
19-88, pp. 23-24). The majority owner of Mar
Tierra Corporation is RJL Martinez Fishing
Corporation which is owned by brothers
Ruben Martinez, Jose Martinez and Luis
Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-
20-88, pp. 11-12). The FCD SA-18402-7
account at Philippine Banking Corporation,
Port Area Branch, where the US$340,000.00
was remitted by the plaintiff is the account of
Mar Tierra Corporation, and with the
interlapping connection of the defendants to
each other, these could be the reason why the
funds of Cintas Largas Ltd. were being co-
mingled and controlled by defendants more
particularly defendants Blamar Gonzales and
Wilfrido C. Martinez (Exhs. D, E, F, G, H, I,
of
J, L, M, N, O, P, R, S, and T).
On the basis of the evidence, the Court
finds and so holds that the cause of action of
the plaintiff against the defendants has been
established.[39]
We do not agree with the trial court and appellate
court.
We note that the question of whether or not a
corporation is merely an alter ego is purely one of
fact.[40] So is the question of whether or not a
corporation is a paper company or a sham or subterfuge
or whether the respondent adduced the requisite
quantum of evidence warranting the piercing of the veil
of corporate entity of the CLL.[41] The Court is not a
trier of facts. Hence, the factual findings of the trial
court, as affirmed by the appellate court, are generally
conclusive upon this Court.[42] However, the rule is
subject to the following exceptions: (a) where the
conclusion is a finding grounded entirely on
speculation, surmise and conjectures; (b) where the
information made is manifestly mistaken; (c) where
there is grave abuse of discretion; (d) where the
judgment is based on a misapplication of facts, and the
findings of facts of the trial court and the appellate court
are contradicted by the evidence on record; and (e)
when certain material facts and circumstances had been
overlooked by the trial court which, if taken into
account, would alter the result of the case.
We have reviewed the records and find that some
substantial factual findings of the trial court and the
appellate court and, consequently, their conclusions
based on the said findings, are not supported by the
evidence on record.
The general rule is that a corporation is clothed
with a personality separate and distinct from the
persons composing it. Such corporation may not be
held liable for the obligation of the persons composing
it; and neither can its stockholders be held liable for
such obligation.[43] A corporation has a separate
personality distinct from its stockholders and from
other corporation to which it may be connected.[44] This
separate and distinct personality of a corporation is a
fiction created by law for convenience and to prevent
injustice.[45]
Nevertheless, being a mere fiction of law, peculiar
situations or valid grounds can exist to warrant, albeit
sparingly, the disregard of its independent being and the
piercing of the corporate veil.[46] Thus, the veil of

separate corporate personality may be lifted when such
personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime; or used as a
shield to confuse the legitimate issues; or when the
corporation is merely an adjunct, a business conduit or
an alter ego of another corporation or where the
corporation is so organized and controlled and its
affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another
corporation;[47] or when the corporation is used as a
cloak or cover for fraud or illegality, or to work
injustice, or where necessary to achieve equity or for
the protection of the creditors.[48] In such cases where
valid grounds exist for piercing the veil of corporate
entity, the corporation will be considered as a mere
association of persons.[49] The liability will directly
attach to them.[50]
However, mere ownership by a single stockholder
or by another corporation of all or nearly all of the
capital stocks of a corporation is not by itself a
sufficient ground to disregard the separate corporate
personality. The substantial identity of the
incorporators of two or more corporations does not
warrantly imply that there was fraud so as to justify the
piercing of the writ of corporate fiction.[51] To disregard
the said separate juridical personality of a corporation,
the wrongdoing must be proven clearly and
convincingly.[52]
The test in determining the application of the
instrumentality or alter ego doctrine is as follows:
1. Control, not mere majority or complete
stock control, but complete domination, not
only of finances but of policy and business
practice in respect to the transaction attacked
so that the corporate entity as to this
transaction had at the time no separate mind,
will or existence of its own;
2. Such control must have been used by Tierra Corporation and paid for the same through the
the defendant to commit fraud or wrong, to credit facility granted by the respondent to the CLL.
perpetuate the violation of a statutory or other The CLL, thereafter, made remittances to Mar Tierra
positive legal duty, or dishonest and unjust act Corporation from its deposit account and MMP Nos.
in contravention of plaintiffs legal rights; and 063 and 084 with the respondent. The close business
relationship of the two corporations does not warrant a
3. The aforesaid control and breach of
finding that Mar Tierra Corporation was but a conduit
duty must proximately cause the injury or
of the CLL.
unjust loss complained of.
Likewise, the respondent failed to adduce
The absence of any one of these elements
preponderant evidence to prove that the Mar Tierra
prevents piercing the corporate veil. In
Corporation and the RJL were so organized and
applying the instrumentality or alter ego
controlled, its affairs so conducted as to make the latter
doctrine, the courts are concerned with reality
corporation merely an instrumentality, agency, conduit
and not form, with how the corporation
or adjunct of the former or of Wilfrido Martinez,
operated and the individual defendants
Gonzales, and Lacson for that matter, or that such
relationship to that operation.[53]
corporations were organized to defraud their creditors,
In this case, the respondent failed to adduce the including the respondent. The mere fact, therefore, that
quantum of evidence necessary to prove any valid the businesses of two or more corporations are
ground for the piercing of the veil of corporate entity of interrelated is not a justification for disregarding their
Mar Tierra Corporation, or of RJL for that matter, and separate personalities, absent sufficient showing that
render the petitioner liable for the respondents claim, the corporate entity was purposely used as a shield to
jointly and severally, with Wilfrido Martinez and defraud creditors and third persons of their rights.[54]
Lacson. The mere fact that the majority stockholder of
Also, the mere fact that part of the proceeds of the
Mar Tierra Corporation is the RJL, and that the
sale of molasses made by Mar Tierra Corporation to the
petitioner, along with Jose and Luis Martinez, owned
CLL may have been used by the latter as deposits in its
about 42% of the capital stock of RJL, do not constitute
deposit account with the respondent or in the money
sufficient evidence that the latter corporation, and/or
market placements in MMP Nos. 063 and 084, or that
the petitioner and his brothers, had complete
the funds of Mar Tierra Corporation and the CLL with
domination of Mar Tierra Corporation. It does not
the respondent were mingled, and their disposition
automatically follow that the said corporation was used
controlled by Wilfrido Martinez, does not constitute
by the petitioner for the purpose of committing fraud or
preponderant evidence that the petitioner, Wilfrido
wrong, or to perpetrate an injustice on the respondent.
Martinez and Lacson used the Mar Tierra Corporation
There is no evidence on record that the petitioner had
and the RJL to defraud the respondent. The respondent
any involvement in the purchases of molasses by
treated the CLL and Mar Tierra Corporation as separate
Wilfrido Martinez, Gonzales and Lacson, and the
entities and considered them as one and the same entity
subsequent sale thereof to the CLL, through Mar Tierra
only when Wilfrido C. Martinez and/or Blamar
Corporation. On the contrary, the evidence on record
Gonzales failed to pay the US$340,000 remitted by the
shows that the CLL purchased molasses from Mar
respondent to FCD SA 18402-7. This being the case,

there is no factual and legal basis to hold the petitioner
liable to the respondent for the said amount.
Contrary to the ruling of the trial court and the
appellate court, the auditors of the CLL and the Mar
Tierra Corporation, in their report, did not find the
petitioner liable for the respondents claim in their
report. The auditors, in fact, found the CLL alone liable
for the said amount.[55] Even a cursory reading of the
report will show that the name of the petitioner was not
mentioned therein.
The respondent failed to adduce evidence that the
petitioner had any involvement in the transactions
between the CLL, through Wilfrido Martinez and
Gonzales, and the respondent, with reference to the
remittance of the US$340,000 to FCD SA 18402-7. In
fact, the said transaction was so confidential that
Gonzales even suggested to the respondent that the
name of Wilfrido Martinez or Mar Tierra Corporation
be not made of record, and to authorize only Wilfrido
Martinez to sign the telex instruction:
OCT. 10, 1980
TO: AYALA FINANCE
ATTN: MICHAEL SUNG/BING MATOTO
FR: B. GONZALES
RE: TRANSFER OF FUNDS
THIS IS TO CONFRM OUR TELEPHONE
CONVERSATION THAT WE WLD LIKE
TO SUGGEST THE FF PROCEDURES FOR
FUND TRANSFER.
1. TLX INSTRUCTION THAT FUNDS BE
TRANSFERRED TO OUR FCD ACCT BY
TELEGRAPHIC TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C
IS FCD SA 18402-7 OF PHILBANKING
CORPORATION, PORT AREA BRANCH,
UNION CEMENT BLDG, BONIFACIO
DRIVE, PORT AREA, METRO MANILA,
PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND
NO MENTION OF W.C. MARTINEZ OR
MAR TIERRA CORP. TLX INSTRUCTION
SHLD BE SIGNED BY W.C. MARTINEZ
AND WILL BE SENT ONLY THRU TLX
MACHINE OF MAR TIERRA CORP.
4. FINAL CONFIRMATION OF THE
TRANSFER BY TELEPHONE CALL.
PLS CONFRM TODAY TOTAL AMT.
THAT IS FREE AND AVAILABLE SO WE
CAN FORMALIZE INSTRUCTION OF
TRANSFER IF THE ABOVE PROCEDURE
IS APPROVED BY YOU. PLS CONFRM
ALSO LIST OF CORRESPONDENT BANK
IN HK.
IN CASE OF WELLS FARGO HK, WE
WLD LIKE TO SUGGEST THE FF
PROCEDURE:
1. WELLS FARGO HK WIL SEND A TLX
TO MANILA INSTRUCTING PHIL
BANKING CORP TO CREDIT FCD SA
18402-7.
2. REIMBURSEMENT INSTRUCTION, AT
THE SAME TIME WELLS FARGO HK WIL
REQUEST WELLS FARGO NEW YORK
TO CREDIT FCDU NO. 003-019205 FOR
THE ACCT OF PHIL BANKING CORP.[56]
Even the respondent admitted, in its complaint, that
the CLL, Gonzales, and Wilfrido Martinez, bound and
obliged themselves to repay the US$340,000, viz:
2.2 The remittance by plaintiff of the sum
of US$340,000.00 as previously explained in
the foregoing paragraphs was made upon the
express instructions of defendants
GONZALES and WILFRIDO C.
MARTINEZ acting for and in behalf of the
defendant CINTAS, defendants GONZALES
and WILFRIDO C. MARTINEZ being the
duly authorized representatives of defendant
CINTAS to transact any and all of its business
with plaintiff.
2.3 The remittance of US$340,000.00
was made under an agreement for plaintiff to
advance the said amount and for defendants
GONZALES, WILFRIDO C. MARTINEZ
and CINTAS to repay plaintiff all such monies
so advanced to said defendants or to their
order.
2.4 In making said remittance, plaintiff
acted as the agent of the foregoing defendants
in meeting the latters liability to the recipient/s
of the amount so remitted.
2.5 The remittance of US$340,000.00
which remains unsettled to date is a just,
binding and lawful obligation of the
defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing
or paper company with nominee shareholders
in Hongkong. The real and beneficial
shareholders of the foregoing defendants are
the defendants LACSON, and WILFRIDO C.
MARTINEZ.
2.7 Defendant CINTAS is being used by
the foregoing defendants as an alter ego or
 The appellate court affirmed the ruling of the trial Confirmation/Correspondence to be mailed
business conduit for their sole benefit and/or court without making any specific reference to the to: _____Office
to defeat public convenience. aforequoted ruling of the trial court.[60] _
2.8 Defendant CINTAS, being a mere We do not agree. The judicial admissions made by __
alter ego or business conduit for the foregoing Wilfrido Martinez in his answer to the complaint are __
defendants, has no corporate personality not binding on the petitioner.[61] The evidence on record R
distinct and separate from that of its beneficial shows that the petitioner affixed his signatures on the es
shareholders and likewise has no substantial signature cards merely upon the request of his son, id
assets in its own name. Wilfrido Martinez. The signature cards were printed en
2.9 The remittance of US$340,000.00 as forms of the respondent with the names of the ce
referred to previously, although made upon signatories and the supposed account holders __
the instructions of defendants GONZALES, typewritten thereon and, except for the account number, ___
WILFRIDO C. MARTINEZ and CINTAS, were similarly worded, viz: Othe
was in fact a remittance made for the benefit SIGNATURE CARD rs:__
of the beneficial shareholders of defendant ____
Account Name: Mr. Ruben Martinez and/or
CINTAS.[57] ____
Account Number: MMP-063
The admissions made by the respondent in its _
Mr. Wilfrido C. Martinez
complaint are judicial admissions which cannot be ____
contradicted unless there is a showing that it was made and/or Mr. Miguel J. Lacson __________
through palpable mistake or that no such admission was I.D. Card/Passport _________
made.[58] No.:____________________________________ Other
The respondent impleaded the petitioner only in its ____ Instructions:__________________________
second alternative cause of action, on its allegation that Residence Address: ____________________
the latter was a joint account holder of MMP Nos. 063 ________________________________________ ____________________________________
and 084, simply because he signed the signature cards __ _________________________
with Wilfrido Martinez and/or Lacson in blank. The
trial court found the submission of the respondent duly ____________________________________ ____________________________________
established, based on Wilfrido Martinezs answer to the _Tel.___________________ _________________________
complaint, and held the petitioner liable for the said Office Specimen of signature:
amount based on the signature cards in this language: Address:_____________________________
1. Sgd. (Ruben Martinez) 3. Sgd. (Wilfrido
Defendants Ruben Martinez, Wilfrido C. __________________
Martinez)
Martinez and Miguel Lacson are joint account ____________________________________
holders of the money market placement SIGNATURE NAME SIGNATURE
_Tel. ___________________
account Nos. 063 and 084 (par. 17 page 4 NAME
Answer of defendant Wilfrido C. Martinez; Number of signature required to withdraw
2. Sgd. (Ruben Martinez) 4. Sgd. (Miguel J.
par. 2, page 5, Amended Answer of defendant funds:_____________________
Lacson)
Lacson; t.s.n., 4-18-88, p. 7).[59]

SIGNATURE NAME SIGNATURE
NAME[62]
The respondent failed to adduce any evidence,
testimonial or documentary, including the relevant
laws[63] of Hongkong where the placements were made
to hold the petitioner liable for the respondents claims.
Other than the signature cards, the respondent failed to
adduce a shred of evidence to prove (a) the terms and
conditions of the money market placements of the CLL
in MMP Nos. 063 and 084; and, (b) the rights and
obligations of the petitioner, Wilfrido Martinez and
Lacson, over the money market placements. In light of
the evidence on record, the CLL and/or Wilfrido
Martinez never surrendered their ownership over the
funds in favor of the petitioner when the latter co-
signed the signature cards. The CLL and/or Wilfrido
Martinez retained complete control and dominion over
the funds.
By merely affixing his signatures on the signature
cards, the petitioner did not necessarily become a joint
and solidary creditor of the respondent over the said
placements. Neither did the petitioner bind himself to
pay to the respondent the US$340,000 which was
borrowed by the CLL and/or Wilfrido Martinez, and
later remitted to FCD SA 18402-7.
The respondent has no one but itself to blame for
its failure to deduct the US$340,000 from the foreign
currency and deposit accounts and money market
placements of the CLL. The evidence on record shows
that the respondent was supposed to deduct the said
amount from the money market placements of the CLL
in MMP Nos. 063 and 084, but failed to do so. The
respondent remitted the amount from its own funds and,
by its negligence, merely posted the amount in the
account of the CLL. Worse, the respondent allowed the
CLL and Wilfrido Martinez to withdraw the entirety of
the deposits in the said accounts, without first deducting
the US$340,000. By the time the respondent realized its not yet matured. Subsequently, we failed
mistakes, the funds in the said accounts had already to charge the deposit and MMP accounts
been withdrawn solely by the CLL and/or Wilfrido when they matured and Cintas Largas,
Martinez. This was the testimony of Michael Sung, the Ltd. and/or Wilfrido C. Martinez had
witness for the respondent. already withdrawn the bulk of the funds
contained in Money Market Placement
Q: Do you know whether this US$340,000
Account No. 063 and the Cintas Largas,
was really transferred to Foreign
Ltd. Deposit Account thus, we were
Currency Deposit Account No. 18402-7
unable to obtain reimbursement
of the Philippine Banking Corporation in
therefrom.[64]
Manila?
It cannot even be argued that if the petitioner would
A: Yes.
not be adjudged liable for the respondents claim, he
Q: Pursuant to the procedure for fund transfer would thereby be enriching himself at the expense of
as contained in Exhs. B, C, D and E, after the respondent. There is no evidence on record that the
having made such remittance of petitioner withdrew a single centavo from or was
US$340,000.00, what was plaintiff personally benefited by the funds in MMP Nos. 063 and
supposed to do, if any, in order to get 084. The testimonial and documentary evidence of the
reimbursement for such transfer? respondent clearly shows that the CLL and/or Wilfrido
A: Plaintiff was supposed to deduct the Martinez used and disposed of the said funds without
US$340,000.00 remitted to the foreign the knowledge, involvement, and consent of the
currency deposit account from the Cintas petitioner. Furthermore, the documentary evidence of
Largas funds or from Money Market the respondent shows the following:
Placement Account Nos. 063 and 084 as M
well as the Cintas Largas, Ltd. deposit M
account. P
Q: Do you know if plaintiff was able to obtain 06
reimbursement of the US$340,000 3
remitted to the Philippine Banking Statement of Accounts (Deposit)
Corporation in Manila?
Value Funds Funds Remarks
A: No, because instead of deducting the Date In Out
remittance of US$340,000 from the funds
in the money market placement accounts
and/or the Cintas Largas Deposit 28/ 6,664. Interests
Account, we posted the US$340,000 11/ 95 earned
remittance as an account receivable of 80
Cintas Largas, Ltd. since at that time the
money market placement deposits have
 to Grand of
29/ 4,779. "" Solid Cintas
12/ 66 Enterpri Larga
80 ses Co., s
21/ 4,024. "" Ltd. 09/1 1,290.56 Intere
01/ 83 5,713.7 Transfer 2/80 sts
81 4 to A/C earne
21/ 119,478 Purchase Receiva d
01/ .51 HK$632 ble " 200,000.00 Transf
81 ,041.33 (MMP- er to
@5.29 & 063) Cintas
transferr ________ _________ Larga
ed to its ____ ___ s A/R.
statemen
US$443,9 US$443,97 18/1 1,545.42 Intere
t A/C
75.85 5.85[65] 2/80 sts
13/ 2,321. Interests earne
======= ========
02/ 99 earned d
==== ====
81
200,000.00 T/T to
MMP 084
" 100,015 Transfer Chase
.00 to Cintas Statement of Accounts (Deposit) Manh
Largas Value Funds In Funds Out Rema attan
A/C Date rks NY
Receiva for
ble. Credit
17/ 55.07 Interests 28/1 16,374.36 Intere A/C
02/ earned 1/80 sts Allied
81 earne Capita
d l F/O
18/ 1,317. "" Frank
03/ 27 01/1 488.16 "" Chan
81 2/80 B/O
100,000 Purchase 04/1 1,089.06 "" Grand
.00 HK$525 2/80 Solid.
,000.00 " US$250,000 Transf 02/0 4,608.27 Intere
@5.25 .00 er to 3/81 sts
cheque A/C
made
payable
 (MM @5.112,
earne P- Cheque
d 084) made
" 20,470.74 Transf payable
" 30.00 Cable
er to to Grand
Charg
A/C Solid.
es
of 26/ 3,264. Interests
________ __________
Grand 11/ 34 earned
____ ___
Solid 80
US$777,8 US$777,815
09/0 321.91 Intere " 300,000.0 Purchase
15.02 .02[66]
3/81 sts 0 HK$1,53
earne ======= ========= 5,100.00
d ==== === @5.117,
" 60,000.00 Transf CINTAS LARGAS Cheque
er to made
Statement of Accounts (Deposit) payable
A/C
of Value Funds In Funds Out Remarks to Grand
Trinis Date Solid
ia Ltd. 21/ 1,299. Interests
20/0 213.40 Intere 01/ 80 earned
31/ 5,011. Interests 81
3/81 sts 10/ 99 earned
earne 80 " 81,41 Remittan
d 5.00 ce from
17/ 8,067. "" C. Itoh &
" 45,286.26 T/T to 11/ 70
Nitto Co., NY
80
Tradi 02/ 2,445. Interests
ng & " 350,000.0 Transfer 03/ 49 earned
Josho 0 to A/C of 81
Ind. Grand
Solid " 129,529.2 Transfer
Co.,
6 to Grand
Ltd., 09/ 3,062. Interests Solids
Japan. 11/ 23 earned A/C
" 2,028.02 Transf 80 Receiva
er to " 350,000.0 Purchase ble
A/C 0 HK$1,78
Recei 9,200.00
vable
 " 40,000.00 Purchase " 50,000.00 Purchase
02/ 143,0 Transfer HK$214, HK$275,
04/ 00.00 from 480.00 750.00
81 CLs @5.362, @5.515,
Stateme cheque Cheque
nt A/C made made
10/ 456.8 Interests payable payable
04/ 1 earned to Grand to Grand
81 Solid. Solid

" 50,000.00 Purchase " 52,69 Remittan 11/ 2,252. Interests

HK$267, 2.00 ce from 06/ 36 earned
150.00 Dai Ichi 81
@5.343, Kangyo " 66,400.00 T/T to
Cheque Bank Security
made NY. Pacific
payable REF. Natl
to Grand KOMEI Bank LA
Solid. MARU for A/C
13/ US$ Interests 19/ 178,4 Transfer of
04/ 40.89 earned 05/ 65.18 from Twentiet
81 81 CLs A/C h
Receiva Century
21/ 311.6 "" ble Fox Intl
04/ 6 Corp.
81 22/ 46,47 Remittan
05/ 2.00 ce from " 15.00 Cable
" US$ Purchase 81 C. Itoh & Charge
50,000.00 HK$268, Co., NY
850.00 " 31.65 Purchase
Re.
@5.377, HK$175.
Pacific
cheque 00
Geory.
made @5.53
payable 26/ 28.40 Interests for
to Grand 05/ earned payment
Solid. 81 of
Business
28/ 132.0 Interests 04/ 1,242. ""
Registrat
04/ 4 earned 06/ 80
ion Fee.
81 81
 for A/C " US$ Reimbur
25/ 1,192. Interests of 1,250.00 sement
06/ 24 earned Furuno of
81 Electric expenses
" 60,000.00 Purchase Co. Ref.: paid to
HK$331, Mar Price
500.00 Tierra Waterho
@5.525, Takashir use &
cheque o Maru, Co.
made Eatelite 17/ 11.91 Interests
payable Nav. and
09/ earned
to Grand Radar. 81
Solid. " 15.00 Cable " 237.43 Purchase
" 22,656.88 T/T to Charge HK$1,42
Daiwa 06/ 17.60 Interests 1.50 for
Bank, 07/ earned cheque
Los 81 payment
Angeles to Price
07/ 14.83 ""
for A/C Waterho
07/
of OAC use &
81
Equipme Co.
nt Corp. " 16,000.00 T/T to
Dai Ichi 08/ 70,360.00 Remittan
" 45,800.00 T/T to 01/ ce from
Kangyo
Josho 82 C. Itoh &
Bank,
Ind. Co. Co., NY
Shimizu
Ltd.,
Branch 19/ 268.74 Interests
Japan
for A/C 01/ earned
" 15.00 Cable of 82
Charge Takashir " 3,064.81 Transfer
03/ 165.4 Interests o Maru. to CLs
07/ 7 earned " 15.00 Cable Margin
81 Charge A/C
" 11,870.00 T/T to 15/ US$ Interests " 50,000.00 Purchase
Bank of 09/ 482.29 earned HK$295,
Tokyo, 81 100.00,
Kobe cheque
Branch
 SOLIDBANK CORPORATION, petitioner, vs. Chairman of the Board of Directors of the Corporation.
made MINDANAO FERROALLOY Jong-Won Hong, the General Manager of Ssangyong
payable CORPORATION, Spouses JONG-WON Corporation, was the Vice-President of the
to Grand HONG and SOO-OK KIM HONG,* Corporation for Finance, Marketing and
Solid. TERESITA CU, and RICARDO P. Administration. So was Teresita R. Cu. On November
" 5,952.38 Transfer GUEVARA and Spouse,** respondents. 26, 1990, the Board of Directors of the Corporation
to A/C of approved a Resolution authorizing its President and
DECISION
Trinisia Chairman of the Board of Directors or Teresita R. Cu,
PANGANIBAN, J.: acting together with Jong-Won Hong, to secure an
Ltd.
To justify an award for moral and exemplary omnibus line in the aggregate amount of
________ _________ P30,000,000.00 from the Solidbank x x x.
damages under Articles 19 to 21 of the Civil Code (on
_____ ____
human relations), the claimants must establish the other xxxxxxxxx
TO US$1,756 US$1,732,1 partys malice or bad faith by clear and convincing
TA ,387.32 03.25 In the meantime, the Corporation started its operations
evidence.
L: sometime in April, 1991. Its indebtedness ballooned to
The Case P200,453,686.69 compared to its assets of only
- 24,284.07 Outstand P65,476,000.00. On May 21, 1991, the Corporation
Before us is a Petition for Review[1] under Rule 45
ing secured an ordinary time loan from the Solidbank in
of the Rules of Court, assailing the December 21, 2001
deposits the amount of P3,200,000.00. Another ordinary time
Decision[2] and the May 15, 2002 Resolution[3] of the
________ _________ Court of Appeals (CA) in CA-GR CV No. 67482. The loan was granted by the Bank to the Corporation on
_____ ____ CA disposed as follows: May 28, 1991, in the amount of P1,800,000.00 or in
the total amount of P5,000,000.00, due on July 15 and
US$1,756 US$1,756,3 IN THE LIGHT OF ALL THE FOREGOING, the 26, 1991, respectively.
,387.32 87.32[67] appeal is DISMISSED. The Decision appealed from is
AFFIRMED.[4] However, the Corporation and the Bank agreed to
======= ======== consolidate and, at the same time, restructure the two
===== ===== The assailed Resolution, on the other hand, denied (2) loan availments, the same payable on September
Clearly from the foregoing, the withdrawals from petitioners Motion for Reconsideration. 20, 1991. The Corporation executed Promissory Note
the deposit and foreign currency accounts and MMP The Facts No. 96-91-00865-6 in favor of the Bank evidencing its
Nos. 063 and 084 of the CLL, after the respondent loan in the amount of P5,160,000.00, payable on
The CA narrated the antecedents as follows: September 20, 1991. Teresita Cu and Jong-Won Hong
remitted the US$340,000, were for the account of the
CLL and/or Wilfrido Martinez, and not of the The Maria Cristina Chemical Industries (MCCI) and affixed their signatures on the note. To secure the
petitioner. three (3) Korean corporations, namely, the Ssangyong payment of the said loan, the Corporation, through
Corporation, the Pohang Iron and Steel Company and Jong-Won Hong and Teresita Cu, executed a Deed of
IN LIGHT OF ALL THE FOREGOING, the Assignment in favor of the Bank covering its rights,
the Dongil Industries Company, Ltd., decided to forge
petition is GRANTED. The Decision of the Court of title and interest to the following:
a joint venture and establish a corporation, under the
Appeals is REVERSED AND SET ASIDE. The
name of the Mindanao Ferroalloy Corporation The entire proceeds of drafts
complaint of the respondent against the petitioner in
(Corporation for brevity) with principal offices in drawn under Irrevocable Letter of
Civil Case No. C-10811 is DISMISSED. No costs.
Iligan City. Ricardo P. Guevara was the President and Credit No. M-S-041-2002080
SO ORDERED.

opened with The Mitsubishi Bank
Ltd. Tokyo dated June 13, 1991 for
the account of Ssangyong Japan
Corporation, 7F. Matsuoka-Tamura-
Cho Bldg., 22-10, 5-Chome,
Shimbashi, Minato-Ku, Tokyo,
Japan up to the extent of
US$197,679.00
The Corporation likewise executed a Quedan, by way
of additional security, under which the Corporation
bound and obliged to keep and hold, in trust for the
Bank or its Order, Ferrosilicon for US$197,679.00.
Jong-Won Hong and Teresita Cu affixed their
signatures thereon for the Corporation. The
Corporation, also, through Jong-Won Hong and
Teresita Cu, executed a Trust Receipt Agreement, by
way of additional security for said loan, the
Corporation undertaking to hold in trust, for the Bank,
as its property, the following:
1. THE MITSUBISHI BANK
LTD., Tokyo L/C No. M-S-
041-2002080 for account of
Ssangyong Japan Corporation,
Tokyo, Japan for
US$197,679.00 Ferrosilicon to
expire September 20, 1991.
2. SEC QUEDAN NO. 91-476
dated June 26, 1991 covering
the following:
Ferrosilicon for
US$197,679.00
However, shortly after the execution of the said deeds,
the Corporation stopped its operations. The
Corporation failed to pay its loan availments from the
Bank inclusive of accrued interest. On February 11,
1992, the Bank sent a letter to the Corporation
demanding payment of its loan availments inclusive of
interests due. The Corporation failed to comply with
the demand of the Bank. On November 23, 1992, the
Bank sent another letter to the [Corporation]
demanding payment of its account which, by
November 23, 1992, had amounted to P7,283,913.33.
The Corporation again failed to comply with the
demand of the Bank.
On January 6, 1993, the Bank filed a complaint against
the Corporation with the Regional Trial Court of
Makati City, entitled and docketed as Solidbank
Corporation vs. Mindanao Ferroalloy Corporation,
Sps. Jong-Won Hong and the Sps. Teresita R. Cu, Civil
Case No. 93-038 for Sum of Money with a plea for the
issuance of a writ of preliminary attachment. x x x
xxxxxxxxx
Under its Amended Complaint, the Plaintiff alleged
that it impleaded Ricardo Guevara and his wife as
Defendants because, [among others]:
Defendants JONG-WON
HONG and TERESITA CU, are the
Vice-Presidents of defendant
corporation, and also members of the
companys Board of Directors. They
are impleaded as joint and solidary
debtors of [petitioner] bank having
signed the Promissory Note, Quedan,
and Trust Receipt agreements with
[petitioner], in this case.
xxxxxxxxx
[Petitioner] likewise filed a criminal complaint x x x
entitled and docketed as Solidbank Corporation vs.
Ricardo Guevara, Teresita R. Cu and Jong Won Hong
x x x for Violation of P.D. 115. On April 14, 1993, the
investigating Prosecutor issued a Resolution finding
no probable cause for violation of P.D. 115 against the
Respondents as the goods covered by the quedan were
nonexistent:
xxxxxxxxx
In their Answer to the complaint [in the civil case], the
Spouses Jong-Won Hong and Soo-ok Kim Hong
alleged, inter alia, that [petitioner] had no cause of
action against them as:
x x x the clean loan of P5.1 M
obtained was a corporate undertaking
of defendant MINFACO executed
through its duly authorized
representatives, Ms. Teresita R. Cu
and Mr. Jong-Won Hong, both Vice
Presidents then of MINFACO. x x x.
xxxxxxxxx
[On their part, respondents] Teresita Cu and Ricardo
Guevara alleged that [petitioner] had no cause of action
against them because: (a) Ricardo Guevara did not sign
any of the documents in favor of [petitioner]; (b)
Teresita Cu signed the Promissory Note, Deed of
Assignment, Trust Receipt and Quedan in blank and
merely as representative and, hence, for and in behalf
of the Defendant Corporation and, hence, was not
personally liable to [petitioner].
In the interim, the Corporation filed, on June 20, 1994,
a Petition, with the Regional Trial Court of Iligan City,
for Voluntary Insolvency x x x.
xxxxxxxxx
Appended to the Petition was a list of its creditors,
including [petitioner], for the amount of
P8,144,916.05. The Court issued an Order, on July 12,
1994, finding the Petition sufficient in form and
substance x x x.
xxxxxxxxx

In view of said development, the Court issued an
Order, in Civil Case No. 93-038, suspending the
proceedings as against the Defendant Corporation but
ordering the proceedings to proceed as against the
individual defendants x x x.
xxxxxxxxx
On December 10, 1999, the Court rendered a Decision
dismissing the complaint for lack of cause of action of
[petitioner] against the Spouses Jong-Won Hong,
Teresita Cu and the Spouses Ricardo Guevara, x x x.
xxxxxxxxx
In dismissing the complaint against the individual
[respondents], the Court a quo found and declared that
[petitioner] failed to adduce a morsel of evidence to
prove the personal liability of the said [respondents]
for the claims of [petitioner] and that the latter
impleaded the [respondents], in its complaint and
amended complaint, solely to put more pressure on the
Defendant Corporation to pay its obligations to
[petitioner].
[Petitioner] x x x interposed an appeal, from the
Decision of the Court a quo and posed, for x x x
resolution, the issue of whether or not the individual
[respondents], are jointly and severally liable to
[petitioner] for the loan availments of the [respondent]
Corporation, inclusive of accrued interests and
penalties.
In the meantime, on motion of [petitioner], the Court
set aside its Order, dated February 2, 1995, suspending
the proceedings as against the [respondent]
Corporation. [Petitioner] filed a Motion for Summary
Judgment against the [respondent] Corporation. On
February 28, 2000, the Court rendered a Summary
Judgment against the [respondent] Corporation, the
decretal portion of which reads as follows:
WHEREFORE, premises
considered, this Court hereby
resolves to give due course to the
motion for summary judgment filed
by herein [petitioner]. Consequently,
judgment is hereby rendered in favor
of [Petitioner] SOLIDBANK
CORPORATION and against
[Respondent] MINDANAO
FERROALLOY CORPORATION,
ordering the latter to pay the former
the amount of P7,086,686.70,
representing the outstanding balance
of the subject loan as of 24
September 1994, plus stipulated
interest at the rate of 16% per annum
to be computed from the aforesaid
date until fully paid together with an
amount equivalent to 12% of the total
amount due each year from 24
September 1994 until fully paid.
Lastly, said [respondent] is hereby
ordered to pay [petitioner] the
amount of P25,000.00 to [petitioner]
as reasonable attorneys fees as well
as cost of litigation.[5]
In its appeal, petitioner argued that (1) it had
adduced the requisite evidence to prove the solidary
liability of the individual respondents, and (2) it was not
liable for their counterclaims for damages and attorneys
fees.
Ruling of the Court of Appeals
Affirming the RTC, the appellate court ruled that
the individual respondents were not solidarily liable
with the Mindanao Ferroalloy Corporation, because
they had acted merely as officers of the corporation,
which was the real party in interest. Respondent
Guevara was not even a signatory to the Promissory
Note, the Trust Receipt Agreement, the Deed of
Assignment or the Quedan; he was merely authorized
to represent Minfaco to negotiate with and secure the
loans from the bank. On the other hand, the CA noted
that Respondents Cu and Hong had not signed the
above documents as comakers, but as signatories in
their representative capacities as officers of Minfaco.
Likewise, the CA held that the individual
respondents were not liable to petitioner for damages,
simply because (1) they had not received the proceeds
of the irrevocable Letter of Credit, which was the
subject of the Deed of Assignment; and (2) the goods
subject of the Trust Receipt Agreement had been found
to be nonexistent. The appellate court took judicial
notice of the practice of banks and financing institutions
to investigate, examine and assess all properties offered
by borrowers as collaterals, in order to determine the
feasibility and advisability of granting loans. Before
agreeing to the consolidation of Minfacos loans, it
presumed that petitioner had done its homework.
As to the award of damages to the individual
respondents, the CA upheld the trial courts findings that
it was clearly unfair on petitioners part to have
impleaded the wives of Guevara and Hong, because the
women were not privy to any of the transactions
between petitioner and Minfaco. Under Articles 19, 20
and 2229 of the Civil Code, such reckless and wanton
act of pressuring individual respondents to settle the
corporations obligations is a ground to award moral and
exemplary damages, as well as attorneys fees.
Hence this Petition.[6]
Issues
In its Memorandum, petitioner raises the following
issues:

A. Whether or not there is ample evidence on record to
support the joint and solidary liability of individual
respondents with Mindanao Ferroalloy Corporation.
B. In the absence of joint and solidary liability[,] will
the provision of Article 1208 in relation to Article 1207
of the New Civil Code providing for joint liability be
applicable to the case at bar.
C. May bank practices be the proper subject of judicial
notice under Sec. 1 [of] Rule 129 of the Rules of Court.
D. Whether or not there is evidence to sustain the claim
that respondents were impleaded to apply pressure
upon them to pay the obligations in lieu of MINFACO
that is declared insolvent.
E. Whether or not there are sufficient bases for the
award of various kinds of and substantial amounts in
damages including payment for attorneys fees.
F. Whether or not respondents committed fraud and
misrepresentations and acted in bad faith.
G. Whether or not the inclusion of respondents spouses
is proper under certain circumstances and supported by
prevailing jurisprudence.[7]
In sum, there are two main questions: (1) whether
the individual respondents are liable, either jointly or
solidarily, with the Mindanao Ferroalloy Corporation;
and (2) whether the award of damages to the individual
respondents is valid and legal.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Liability of Individual Respondents
Petitioner argues that the individual respondents
were jointly or solidarily liable with Minfaco, either
because their participation in the loan contract and the
loan documents made them comakers; or because they
committed fraud and deception, which justifies the
piercing of the corporate veil.
The first contention hinges on certain factual
determinations made by the trial and the appellate
courts. These tribunals found that, although he had not
signed any document in connection with the subject
transaction, Respondent Guevara was authorized to
represent Minfaco in negotiating for a P30 million loan
from petitioner. As to Cu and Hong, it was determined,
among others, that their signatures on the loan
documents other than the Deed of Assignment were not
prefaced with the word by, and that there were no other
signatures to indicate who had signed for and on behalf
of Minfaco, the principal borrower. In the Promissory
Note, they signed above the printed name of the
corporation -- on the space provided for
Maker/Borrower, not on that provided for Co-maker.
Petitioner has not shown any exceptional
circumstance that sanctions the disregard of these
findings of fact, which are thus deemed final and
conclusive upon this Court and may not be reviewed on
appeal.[8]
No Personal Liability
for Corporate Deeds
Basic is the principle that a corporation is vested
by law with a personality separate and distinct from that
of each person composing[9] or representing it.[10]
Equally fundamental is the general rule that corporate
officers cannot be held personally liable for the
consequences of their acts, for as long as these are for
and on behalf of the corporation, within the scope of
their authority and in good faith.[11] The separate
corporate personality is a shield against the personal
liability of corporate officers, whose acts are properly
attributed to the corporation.[12]
Tramat Mercantile v. Court of Appeals[13] held
thus:
Personal liability of a corporate director, trustee or
officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when
1. He assents (a) to a patently
unlawful act of the corporation, or (b)
for bad faith or gross negligence in
directing its affairs, or (c) for conflict
of interest, resulting in damages to
the corporation, its stockholders or
other persons;
2. He consents to the issuance of
watered stocks or who, having
knowledge thereof, does not
forthwith file with the corporate
secretary his written objection
thereto;
3. He agrees to hold himself
personally and solidarily liable with
the corporation; or
4. He is made, by a specific
provision of law, to personally
answer for his corporate action.
Consistent with the foregoing principles, we
sustain the CAs ruling that Respondent Guevara was
not personally liable for the contracts. First, it is beyond
cavil that he was duly authorized to act on behalf of the
corporation; and that in negotiating the loans with
petitioner, he did so in his official capacity. Second, no
sufficient and specific evidence was presented to show
that he had acted in bad faith or gross negligence in that
negotiation. Third, he did not hold himself personally
and solidarily liable with the corporation. Neither is
there any specific provision of law making him
personally answerable for the subject corporate acts.

On the other hand, Respondents Cu and Hong
signed the Promissory Note without the word by
preceding their signatures, atop the designation
Maker/Borrower and the printed name of the
corporation, as follows:
__(Sgd) Cu/Hong__
(Maker/Borrower)
MINDANAO FERROALLOY
While their signatures appear without
qualification, the inference that they signed in their
individual capacities is negated by the following facts:
1) the name and the address of the corporation appeared
on the space provided for Maker/Borrower; 2)
Respondents Cu and Hong had only one set of
signatures on the instrument, when there should have
been two, if indeed they had intended to be bound
solidarily -- the first as representatives of the
corporation, and the second as themselves in their
individual capacities; 3) they did not sign under the
spaces provided for Co-maker, and neither were their
addresses reflected there; and 4) at the back of the
Promissory Note, they signed above the words
Authorized Representative.
Solidary Liability
Not Lightly Inferred
Moreover, it is axiomatic that solidary liability
cannot be lightly inferred.[14] Under Article 1207 of the
Civil Code, there is a solidary liability only when the
obligation expressly so states, or when the law or the
nature of the obligation requires solidarity. Since
solidary liability is not clearly expressed in the
Promissory Note and is not required by law or the
nature of the obligation in this case, no conclusion of
solidary liability can be made.
Furthermore, nothing supports the alleged joint
liability of the individual petitioners because, as
correctly pointed out by the two lower courts, the
evidence shows that there is only one debtor: the
corporation. In a joint obligation, there must be at least
two debtors, each of whom is liable only for a
proportionate part of the debt; and the creditor is
entitled only to a proportionate part of the credit.[15]
Moreover, it is rather late in the day to raise the
alleged joint liability, as this matter has not been
pleaded before the trial and the appellate courts. Before
the lower courts, petitioner anchored its claim solely on
the alleged joint and several (or solidary) liability of the
individual respondents. Petitioner must be reminded
that an issue cannot be raised for the first time on
appeal, but seasonably in the proceedings before the
trial court.[16]
So too, the Promissory Note in question is a
negotiable instrument. Under Section 19 of the
Negotiable Instruments Law, agents or representatives
may sign for the principal. Their authority may be
established, as in other cases of agency. Section 20 of
the law provides that a person signing for and on behalf
of a [disclosed] principal or in a representative capacity
x x x is not liable on the instrument if he was duly
authorized.
The authority of Respondents Cu and Hong to sign
for and on behalf of the corporation has been amply
established by the Resolution of Minfacos Board of
Directors, stating that Atty. Ricardo P. Guevara
(President and Chairman), or Ms. Teresita R. Cu (Vice
President), acting together with Mr. Jong Won Hong
(Vice President), be as they are hereby authorized for
and in behalf of the Corporation to: 1. Negotiate with
and obtain from (petitioner) the extension of an
omnibus line in the aggregate of P30 million x x x; and
2. Execute and deliver all documentation necessary to
implement all of the foregoing.[17]
Further, the agreement involved here is a contract
of adhesion, which was prepared entirely by one party
and offered to the other on a take it or leave it basis.
Following the general rule, the contract must be read
against petitioner, because it was the party that prepared
it,[18] more so because a bank is held to high standards
of care in the conduct of its business.[19]
In the totality of the circumstances, we hold that
Respondents Cu and Hong clearly signed the Note
merely as representatives of Minfaco.
No Reason to Pierce
the Corporate Veil
Under certain circumstances, courts may treat a
corporation as a mere aggroupment of persons, to
whom liability will directly attach. The distinct and
separate corporate personality may be disregarded,
inter alia, when the corporate identity is used to defeat
public convenience, justify a wrong, protect a fraud, or
defend a crime. Likewise, the corporate veil may be
pierced when the corporation acts as a mere alter ego or
business conduit of a person, or when it is so organized
and controlled and its affairs so conducted as to make it
merely an instrumentality, agency, conduit or adjunct
of another corporation.[20] But to disregard the separate
juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established; it cannot
be presumed.[21]
Petitioner contends that the corporation was used
to protect the fraud foisted upon it by the individual
respondents. It argues that the CA failed to consider the
following badges of fraud and evident bad faith: 1) the
individual respondents misrepresented the corporation
as solvent and financially capable of paying its loan; 2)
they knew that prices of ferrosilicon were declining in

the world market when they secured the loan in June
1991; 3) not a single centavo was paid for the loan; and
4) the corporation suspended its operations shortly after
the loan was granted.[22]
Fraud refers to all kinds of deception -- whether
through insidious machination, manipulation,
concealment or misrepresentation -- that would lead an
ordinarily prudent person into error after taking the
circumstances into account.[23] In contracts, a fraud
known as dolo causante or causal fraud[24] is basically
a deception used by one party prior to or simultaneous
with the contract, in order to secure the consent of the
other.[25] Needless to say, the deceit employed must be
serious. In contradistinction, only some particular or
accident of the obligation is referred to by incidental
fraud or dolo incidente,[26] or that which is not serious
in character and without which the other party would
have entered into the contract anyway.[27]
Fraud must be established by clear and convincing
evidence; mere preponderance of evidence is not
adequate.[28] Bad faith, on the other hand, imports a
dishonest purpose or some moral obliquity and
conscious doing of a wrong, not simply bad judgment
or negligence.[29] It is synonymous with fraud, in that it
involves a design to mislead or deceive another.[30]
Unfortunately, petitioner was unable to establish
clearly and precisely how the alleged fraud was
committed. It failed to establish that it was deceived
into granting the loans because of respondents
misrepresentations and/or insidious actions. Quite the
contrary, circumstances indicate the weakness of its
submission.
First, petitioner does not deny that the P5 million
loan represented the consolidation of two loans,[31]
granted long before the bank required the individual
respondents to execute the Promissory Note, Trust
Receipt Agreement, Quedan or Deed of Assignment.
Hence, no words, acts or machinations arising from any
of those instruments could have been used by them
prior to or simultaneous with the execution of the
contract, or even as some accident or particular of the
obligation.
Second, petitioner bank was in a position to verify
for itself the solvency and trustworthiness of
respondent corporation. In fact, ordinary business
prudence required it to do so before granting the
multimillion loans. It is of common knowledge that, as
a matter of practice, banks conduct exhaustive
investigations of the financial standing of an applicant
debtor, as well as appraisals of collaterals offered as
securities for loans to ensure their prompt and
satisfactory payment. To uphold petitioners cry of fraud
when it failed to verify the existence of the goods
covered by the Trust Receipt Agreement and the
Quedan is to condone its negligence.
Judicial Notice
of Bank Practices
This point brings us to the alleged error of the
appellate court in taking judicial notice of the practice
of banks in conducting background checks on
borrowers and sureties. While a court is not mandated
to take judicial notice of this practice under Section 1
of Rule 129 of the Rules of Court, it nevertheless may
do so under Section 2 of the same Rule. The latter Rule
provides that a court, in its discretion, may take judicial
notice of matters which are of public knowledge, or
ought to be known to judges because of their judicial
functions.
Thus, the Court has taken judicial notice of the
practices of banks and other financial institutions.
Precisely, it has noted that it is their uniform practice,
before approving a loan, to investigate, examine and
assess would-be borrowers credit standing or real
estate[32] offered as security for the loan applied for.
Second Issue:
Award of Damages
The individual respondents were awarded moral
and exemplary damages as well as attorneys fees under
Articles 19 to 21 of the Civil Code, on the basic premise
that the suit was clearly malicious and intended merely
to harass.
Article 19 of the Civil Code expresses the
fundamental principle of law on human conduct that a
person must, in the exercise of his rights and in the
performance of his duties, act with justice, give every
one his due, and observe honesty and good faith. Under
this basic postulate, the exercise of a right, though legal
by itself, must nonetheless be done in accordance with
the proper norm. When the right is exercised arbitrarily,
unjustly or excessively and results in damage to
another, a legal wrong is committed for which the
wrongdoer must be held responsible.[33]
To be liable under the abuse-of-rights principle,
three elements must concur: a) a legal right or duty, b)
its exercise in bad faith, and c) the sole intent of
prejudicing or injuring another.[34] Needless to say,
absence of good faith[35] must be sufficiently
established.
Article 20 makes [e]very person who, contrary to
law, willfully or negligently causes damage to another
liable for damages. Upon the other hand, held liable for
damages under Article 21 is one who willfully causes
loss or injury to another in a manner that is contrary to
morals, good customs or public policy.
For damages to be properly awarded under the
above provisions, it is necessary to demonstrate by
clear and convincing evidence[36] that the action
instituted by petitioner was clearly so unfounded and

untenable as to amount to gross and evident bad
faith.[37] To justify an award of damages for malicious
prosecution, one must prove two elements: malice or
sinister design to vex or humiliate and want of probable
cause.[38]
Petitioner was proven wrong in impleading
Spouses Guevara and Hong. Beyond that fact, however,
respondents have not established that the suit was so
patently malicious as to warrant the award of damages
under the Civil Codes Articles 19 to 21, which are
grounded on malice or bad faith.[39] With the
presumption of law on the side of good faith, and in the
absence of adequate proof of malice, we find that
petitioner impleaded the spouses because it honestly
believed that the conjugal partnerships had benefited
from the proceeds of the loan, as stated in their
Complaint and subsequent pleadings. Its act does not
amount to evident bad faith or malice; hence, an award
for damages is not proper. The adverse result of an act
per se neither makes the act wrongful nor subjects the
actor to the payment of damages, because the law could
not have meant to impose a penalty on the right to
litigate.[40]
For the same reason, attorneys fees cannot be
granted. Article 2208 of the Civil Code states that in the
absence of a stipulation, attorneys fees cannot be
recovered, except in any of the following
circumstances:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled
the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
(3) In criminal cases of malicious prosecution against
the plaintiff;
(4) In case of a clearly unfounded civil action or
proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiffs plainly valid,
just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household
helpers, laborers and skilled workers;
(8) In actions for indemnity under workmens
compensation and employers liability laws;
(9) In a separate civil action to recover civil liability
arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and
equitable that attorneys fees and expenses of litigation
should be recovered.
In the instant case, none of the enumerated grounds
for recovery of attorneys fees are present.
WHEREFORE, this Petition is PARTIALLY
GRANTED. The assailed Decision is AFFIRMED, but
the award of moral and exemplary damages as well as
attorneys fees is DELETED. No costs.
SO ORDERED.
YAMAMOTO VS NISHINO LEATHER
CARPIO MORALES, J.:
In 1983, petitioner, Ryuichi Yamamoto
(Yamamoto), a Japanese national, organized under
Philippine laws Wako Enterprises Manila,
Incorporated (WAKO), a corporation engaged
principally in leather tanning, now known as Nishino
Leather Industries, Inc. (NLII), one of herein
respondents.
In 1987, Yamamoto and the other respondent,
Ikuo Nishino (Nishino), also a Japanese national,
forged a Memorandum of Agreement under which they
agreed to enter into a joint venture wherein Nishino
would acquire such number of shares of stock
equivalent to 70% of the authorized capital stock of
WAKO.
Eventually, Nishino and his brotherxxv
Yoshinobu Nishino (Yoshinobu) acquired more than
70% of the authorized capital stock of WAKO,
reducing Yamamotos investment therein to, by his
claim, 10%,xxv less than 10% according to
Nishino.xxv
The corporate name of WAKO was later
changed to, as reflected earlier, its current name NLII.
Negotiations subsequently ensued in light of a
planned takeover of NLII by Nishino who would buy-
out the shares of stock of Yamamoto. In the course of
the negotiations, Yoshinobu and Nishinos counsel
Atty. Emmanuel G. Doce (Atty. Doce) advised
Yamamoto by letter dated October 30, 1991, the
pertinent portions of which follow:
Hereunder is a simple
memorandum of the subject matters
discussed with me by Mr. Yoshinobu
Nishino yesterday, October 29th, based
on the letter of Mr. Ikuo Nishino from
Japan, and which I am now transmitting
to you.xxv
 x x x xxxv (Emphasis and The trial court, by Decision of June 9, 1995,
underscoring supplied) decided the case in favor of Yamamoto,xxv disposing
xxxx thus:

12. Machinery and WHEREFORE, judgment is

On the basis of such letter, Yamamoto
Equipment:
attempted to recover the machineries and equipment
which were, by Yamamotos admission, part of his
investment in the corporation,xxv but he was frustrated
The following
by respondents, drawing Yamamoto to file on January
machinery/equipment have been
15, 1992 before the Regional Trial Court (RTC) of
contributed by you to the company:
Makati a complaintxxv against them for replevin.
Splitting machine - Branch 45 of the Makati RTC issued a writ of
1 unit replevin after Yamamoto filed a bond. xxv
Samming machine -
1 unit
In their Answer with Counterclaim,xxv
Forklift - respondents claimed that the machineries and
1 unit equipment subject of replevin form part of Yamamotos
Drums - capital contributions in consideration of his equity in
4 units NLII and should thus be treated as corporate property;
and that the above-said letter of Atty. Doce to
Toggling machine - Yamamoto was merely a proposal, conditioned on
2 units [Yamamotos] sell-out to . . . Nishino of his entire
equity,xxv which proposal was yet to be authorized by
the stockholders and Board of Directors of NLII.
Regarding the above machines, you
may take them out with you (for your
own use and sale) if you want, By way of Counterclaim, respondents, alleging
provided, the value of such that they suffered damage due to the seizure via the
machines is deducted from your and implementation of the writ of replevin over the
Wakos capital contributions, which machineries and equipment, prayed for the award to
will be paid to you. them of moral and exemplary damages, attorneys fees
and litigation expenses, and costs of suit.
Kindly let me know of your
comments on all the above, soonest.
hereby rendered: (1) declaring plaintiff
as the rightful owner and possessor of
the machineries in question, and making
the writ of seizure permanent; (2)
ordering defendants to pay plaintiff
attorneys fees and expenses of litigation
in the amount of Fifty Thousand Pesos
(P50,000.00), Philippine Currency; (3)
dismissing defendants counterclaims for
lack of merit; and (4) ordering
defendants to pay the costs of suit.
SO ORDERED.xxv
(Underscoring supplied)
On appeal,xxv the Court of Appeals held in
favor of herein respondents and accordingly reversed
the RTC decision and dismissed the complaint.xxv In so
holding, the appellate court found that the machineries
and equipment claimed by Yamamoto are corporate
property of NLII and may not thus be retrieved without
the authority of the NLII Board of Directors;xxv and that
petitioners argument that Nishino and Yamamoto
cannot hide behind the shield of corporate fiction does
not lie,xxv nor does petitioners invocation of the
doctrine of promissory estoppel.xxv At the same time,
the Court of Appeals found no ground to support
respondents Counterclaim.xxv
 the directors are directors in name only
The Court of Appeals having deniedxxv his and are there to do the bidding of the
Indeed, without a Board Resolution authorizing
Motion for Reconsideration,xxv Yamamoto filed the Nish[i]nos, nothing more. Its minutes
respondent Nishino to act for and in behalf of the
present petition,xxv faulting the Court of Appeals are paper minutes. x x x xxv
corporation, he cannot bind the latter. Under the
Corporation Law, unless otherwise provided, corporate
powers are exercised by the Board of Directors.xxv xxxx
A.
Urging this Court to pierce the veil of corporate The fact that the parties started at
fiction, Yamamoto argues, viz:
x x x IN HOLDING THAT THE VEIL a 70-30 ratio and Yamamotos
OF CORPORATE FICTION SHOULD percentage declined to 10% does not
NOT BE PIERCED IN THE CASE AT mean the 20% went to others. x x x The
During the negotiations, the
BAR. 20% went to no one else but Ikuo
issue as to the ownership of the
himself. x x x Yoshinobu is the
Machiner[ies] never came up. Neither
did the issue on the proper procedure to younger brother of Ikuo and has no
B. be taken to execute the complete take- say at all in the business. Only Ikuo
over of the Company come up since makes the decisions. There were,
Ikuo, Yoshinobu, and Yamamoto were therefore, no other members of the
x x x IN HOLDING THAT THE the owners thereof, the presence of other Board who have not given their
DOCTRINE OF PROMISSORY approval.xxv (Emphasis and
stockholders being only for the purpose
ESTOPPEL DOES NOT APPLY TO underscoring supplied)
of complying with the minimum
THE CASE AT BAR. requirements of the law.

C. What course of action the While the veil of separate corporate personality
Company decides to do or not to do may be pierced when the corporation is merely an
depends not on the other members of the adjunct, a business conduit, or alter ego of a person,xxv
x x x IN HOLDING THAT Board of Directors. It depends on what the mere ownership by a single stockholder of even all
RESPONDENTS ARE NOT LIABLE or nearly all of the capital stocks of a corporation is not
Ikuo and Yoshinobu decide. The
FOR ATTORNEYS FEES.xxv by itself a sufficient ground to disregard the separate
Company is but a mere
instrumentality of Ikuo [and] corporate personality.xxv
Yoshinobu.xxv

The resolution of the petition hinges, in the
main, on whether the advice in the letter of Atty. Doce
that Yamamoto may retrieve the machineries and
equipment, which admittedly were part of his
investment, bound the corporation. The Court holds in
the negative.
xxxx
x x x The Company hardly holds
board meetings. It has an inactive board,
The elements determinative of the applicability
of the doctrine of piercing the veil of corporate fiction
follow:

1. Control, not mere majority or
complete stock control, but complete
domination, not only of finances but of
policy and business practice in respect
to the transaction attacked so that the
corporate entity as to this transaction
had at the time no separate mind, will or
existence of its own;
2. Such control must have been
used by the defendant to commit fraud
or wrong, to perpetuate the violation of
a statutory or other positive legal duty,
or dishonest and unjust act in
contravention of the plaintiffs legal
rights; and
3. The aforesaid control and
breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any one of these
elements prevents piercing the
corporate veil. In applying the
instrumentality or alter ego doctrine,
the courts are concerned with reality
and not form, with how the corporation
operated and the individual defendants
relationship to that operation.xxv
(Italics in the original; emphasis and
underscoring supplied)
In relation to the second element, to disregard the
separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiffs
legal rights must be clearly and convincingly
established; it cannot be presumed.xxv Without a
demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not
apply.xxv
In the case at bar, there is no showing that
Nishino used the separate personality of NLII to
unjustly act or do wrong to Yamamoto in contravention
of his legal rights.
Yamamoto argues, in another vein, that
promissory estoppel lies against respondents, thus:
Under the doctrine of
promissory estoppel, x x x estoppel may
arise from the making of a promise,
even though without consideration, if it
was intended that the promise should be
relied upon and in fact it was relied
upon, and if a refusal to enforce it would
be virtually to sanction the perpetration
of fraud or would result in other
injustice.
x x x Ikuo and Yoshinobu
wanted Yamamoto out of the Company.
For this purpose negotiations were had
between the parties. Having expressly
given Yamamoto, through the Letter
and through a subsequent meeting at the
Manila Peninsula where Ikuo himself
confirmed that Yamamoto may take out
the Machinery from the Company
anytime, respondents should not be
allowed to turn around and do the exact
opposite of what they have represented
they will do.
In paragraph twelve (12) of the
Letter, Yamamoto was expressly
advised that he could take out the
Machinery if he wanted to so, provided
that the value of said machines would be
deducted from his capital contribution x
x x.
xxxx
Respondents cannot now argue
that they did not intend for Yamamoto
to rely upon the Letter. That was the
purpose of the Letter to begin with.
Petitioner[s] in fact, relied upon said
Letter and such reliance was further
strengthened during their meeting at the
Manila Peninsula.
To sanction respondents attempt
to evade their obligation would be to
sanction the perpetration of fraud and
injustice against petitioner.xxv
(Underscoring supplied)
It bears noting, however, that the
aforementioned paragraph 12 of the letter is followed

by a request for Yamamoto to give his comments on all
the above, soonest.xxv
What was thus proffered to Yamamoto was not
a promise, but a mere offer, subject to his acceptance.
Without acceptance, a mere offer produces no
obligation.xxv
Thus, under Article 1181 of the Civil Code, [i]n
conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event
which constitutes the condition. In the case at bar, there
is no showing of compliance with the condition for
allowing Yamamoto to take the machineries and
equipment, namely, his agreement to the deduction of
their value from his capital contribution due him in the
buy-out of his interests in NLII. Yamamotos allegation
that he agreed to the conditionxxv remained just that,
no proof thereof having been presented.
The machineries and equipment, which
comprised Yamamotos investment in NLII,xxv thus
remained part of the capital property of the
corporation.xxv
It is settled that the property of a corporation is
not the property of its stockholders or members.xxv
Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors
which are preferred over the stockholders in the
distribution of corporate assets.xxv The distribution of
corporate assets and property cannot be made to depend
on the whims and caprices of the stockholders, officers,
or directors of the corporation unless the indispensable Sometime in 1991, respondents delivered to
conditions and procedures for the protection of petitioners various quantities of eggs at an agreed
corporate creditors are followed.xxv service fee of 80 centavos per egg, whether successfully
hatched or not. Each delivery was reflected in a Setting
Report indicating the following: the number of eggs
WHEREFORE, the petition is DENIED. delivered; the date of setting or the date the eggs were
delivered and laid out in the incubators; the date of
candling or the date the eggs, through a lighting system,
Costs against petitioner. were inspected and determined if viable or capable of
being hatched into chicks; and the date of hatching,
which is also the date respondents would pick-up the
SO ORDERED. chicks and by-products. Initially, the service fees were
paid upon release of the eggs and by-products to
respondents. But as their business went along,
respondents delays on their payments were tolerated by
For review on certiorari is the Decisionxxv dated April San Juan, who just carried over the balance, as there
30, 2003 of the Court of Appeals in CA-G.R. CV No. may be, into the next delivery, out of keeping goodwill
56082, which had affirmed the Decisionxxv dated July with respondents.
8, 1996 of the Regional Trial Court (RTC) of Malolos,
From January 13 to February 3, 1993,
Bulacan, Branch 9 in Civil Case No. 745-M-93. The
respondents had delivered to San Juan a total of
Court of Appeals, after applying the doctrine of piercing
101,3[50]xxv eggs, detailed as follows:xxv
the veil of corporate fiction, held petitioners ASJ
Corporation (ASJ Corp.) and Antonio San Juan Date Set SR Number No. of eggs
solidarily liable to respondents Efren and Maura delivered Date hatched/Pick-up date
Evangelista for the unjustified retention of the chicks and 1/13/1993 SR 108 32,566
egg by-products covered by Setting Report Nos. 108 to
eggs February 3, 1993
113.xxv
1/20/1993 SR 109 21,485
The pertinent facts, as found by the RTC and the eggs February 10, 1993
Court of Appeals, are as follows:
1/22/1993 SR 110 7,213
Respondents, under the name and style of R.M. eggs February 12, 1993
Sy Chicks, are engaged in the large-scale business of
buying broiler eggs, hatching them, and selling their 1/28/1993 SR 111 14,495
hatchlings (chicks) and egg by-productsxxv in Bulacan eggs February 18, 1993
and Nueva Ecija. For the incubation and hatching of
1/30/1993 SR 112 15,346
these eggs, respondents availed of the hatchery services eggs February 20, 1993
of ASJ Corp., a corporation duly registered in the name
of San Juan and his family. 2/3/1993 SR 113 10,24[5]xxv
eggs February 24, 1993

TOTAL 101,350 eggs
On February 3, 1993, respondent Efren went to
the hatchery to pick up the chicks and by-products
covered by Setting Report No. 108, but San Juan
refused to release the same due to respondents failure
to settle accrued service fees on several setting reports
starting from Setting Report No. 90. Nevertheless, San
Juan accepted from Efren 10,245 eggs covered by
Setting Report No. 113 and P15,000.00xxv in cash as
partial payment for the accrued service fees.
On February 10, 1993, Efren returned to the
hatchery to pick up the chicks and by-products covered
by Setting Report No. 109, but San Juan again refused
to release the same unless respondents fully settle their
accounts. In the afternoon of the same day, respondent
Maura, with her son Anselmo, tendered P15,000.00xxv
to San Juan, and tried to claim the chicks and by-
products. She explained that she was unable to pay their
balance because she was hospitalized for an
undisclosed ailment. San Juan accepted the P15,000.00,
but insisted on the full settlement of respondents
accounts before releasing the chicks and by-products.
Believing firmly that the total value of the eggs
delivered was more than sufficient to cover the
outstanding balance, Maura promised to settle their
accounts only upon proper accounting by San Juan. San
Juan disliked the idea and threatened to impound their
vehicle and detain them at the hatchery compound if
they should come back unprepared to fully settle their
accounts with him.
On February 11, 1993, respondents directed
their errand boy, Allan Blanco, to pick up the chicks
and by-products covered by Setting Report No. 110 and
also to ascertain if San Juan was still willing to settle
amicably their differences. Unfortunately, San Juan
was firm in his refusal and reiterated his threats on
respondents. Fearing San Juans threats, respondents
never went back to the hatchery.
The parties tried to settle amicably their
differences before police authorities, but to no avail.
Thus, respondents filed with the RTC an action for
damages based on petitioners retention of the chicks
and by-products covered by Setting Report Nos. 108 to
113.
On July 8, 1996, the RTC ruled in favor of
respondents and made the following findings: (1) as of
Setting Report No. 107, respondents owed petitioners
P102,336.80;xxv (2) petitioners withheld the release of
the chicks and by-products covered by Setting Report
Nos. 108-113;xxv and (3) the retention of the chicks
and by-products was unjustified and accompanied by
threats and intimidations on respondents.xxv The RTC
disregarded the corporate fiction of ASJ Corp.,xxv and
held it and San Juan solidarily liable to respondents for
P529,644.80 as actual damages, P100,000.00 as moral
damages, P50,000.00 as attorneys fees, plus interests
and costs of suit. The decretal portion of the decision
reads:
WHEREFORE, based on the
evidence on record and the
laws/jurisprudence applicable thereon,
judgment is hereby rendered ordering
the defendants to pay, jointly and
severally, unto the plaintiffs the
amounts of P529,644.80, representing
the value of the hatched chicks and by-
products which the plaintiffs on the
average expected to derive under Setting
Reports Nos. 108 to 113, inclusive, with
legal interest thereon from the date of
this judgment until the same shall have
been fully paid, P100,000.00 as moral
damages and P50,000.00 as attorneys
fees, plus the costs of suit.
SO ORDERED.xxv
Both parties appealed to the Court of Appeals.
Respondents prayed for an additional award of
P76,139.00 as actual damages for the cost of other
unreturned by-products and P1,727,687.52 as
unrealized profits, while petitioners prayed for the
reversal of the trial courts entire decision.
On April 30, 2003, the Court of Appeals denied
both appeals for lack of merit and affirmed the trial
courts decision, with the slight modification of
including an award of exemplary damages of
P10,000.00 in favor of respondents. The Court of
Appeals, applying the doctrine of piercing the veil of
corporate fiction, considered ASJ Corp. and San Juan
as one entity, after finding that there was no bona fide
intention to treat the corporation as separate and distinct
from San Juan and his wife Iluminada. The fallo of the
Court of Appeals decision reads:
WHEREFORE, in view of the
foregoing, the Decision appealed from
is hereby AFFIRMED, with the slight
modification that exemplary damages
in the amount of P10,000.00 are
awarded to plaintiffs.
Costs against defendants.
SO ORDERED.xxv
Hence, the instant petition, assigning the
following errors:
I.
THE HONORABLE COURT OF
APPEALS GRIEVOUSLY ERRED IN
HOLDING, AS DID THE COURT A
QUO, THAT PETITIONERS

WITHHELD/OR FAILED TO
RELEASE THE CHICKS AND BY-
PRODUCTS COVERED BY SETTING
REPORT NOS. 108 AND 109.
II.
THE HONORABLE COURT OF
APPEALS ERRED IN ADMITTING
THE HEARSAY TESTIMONY OF
MAURA EVANGELISTA
SUPPORTIVE OF ITS FINDINGS
THAT PETITIONERS
WITHHELD/OR FAILED TO
RELEASE THE CHICKS AND BY-
PRODUCTS COVERED BY SETTING
REPORT NOS. 108 AND 109.
III.
THE HONORABLE COURT OF
APPEALS, AS DID THE COURT A
QUO, ERRED IN NOT FINDING
THAT RESPONDENTS FAILED TO
RETURN TO THE PLANT TO GET
THE CHICKS AND BY-PRODUCTS
COVERED BY SETTING REPORT
NOS. 110, 111, 112 AND 113.
IV.
THE HONORABLE COURT OF
APPEALS ERRED IN HOLDING, AS
DID THE COURT A QUO, THAT THE
PIERCING OF THE VEIL OF
CORPORATE ENTITY IS
JUSTIFIED, AND CONSEQUENTLY
HOLDING PETITIONERS JOINTLY
AND SEVERALLY LIABLE TO PAY
RESPONDENTS THE SUM OF
P529,644.[80].
V.
THE HONORABLE COURT OF to personally observe and analyze the demeanor of the
APPEALS ERRED IN HOLDING witnesses while testifying, is in a better position to pass
THAT PETITIONERS HAVE judgment on their credibility.xxv More importantly,
VIOLATED THE PRINCIPLES factual findings of the trial court, when amply
ENUNCIATED IN ART. 19 OF THE supported by evidence on record and affirmed by the
NEW CIVIL CODE AND appellate court, are binding upon this Court and will not
CONSEQUENTLY IN AWARDING be disturbed on appeal.xxv While there are exceptional
MORAL DAMAGES, EXEMPLARY circumstancesxxv when these findings may be set
DAMAGES AND ATTORNEYS aside, none of them is present in this case.
FEES.
Based on the records, as well as the parties own
VI. admissions, the following facts were uncontroverted:
(1) As of Setting Report No. 107, respondents were
THE HONORABLE COURT OF
indebted to petitioners for P102,336.80 as accrued
APPEALS ERRED IN NOT
service fees for Setting Report Nos. 90 to 107;xxv (2)
AWARDING PETITIONERS
Petitioners, based on San Juans own admission,xxv did
COUNTERCLAIM.xxv
not release the chicks and by-products covered by
Plainly, the issues submitted for resolution are: Setting Report Nos. 108 and 109 for failure of
First, did the Court of Appeals err when (a) it ruled that respondents to fully settle their previous accounts; and
petitioners withheld or failed to release the chicks and (3) Due to San Juans threats, respondents never
by-products covered by Setting Report Nos. 108 and returned to the hatchery to pick up those covered by
109; (b) it admitted the testimony of Maura; (c) it did Setting Report Nos. 110 to 113.xxv
not find that it was respondents who failed to return to
Furthermore, although no hard and fast rule can
the hatchery to pick up the chicks and by-products
be accurately laid down under which the juridical
covered by Setting Report Nos. 110 to 113; and (d) it
personality of a corporate entity may be disregarded,
pierced the veil of corporate fiction and held ASJ Corp.
the following probative factors of identity justify the
and Antonio San Juan as one entity? Second, was it
application of the doctrine of piercing the veil of
proper to hold petitioners solidarily liable to
corporate fictionxxv in this case: (1) San Juan and his
respondents for the payment of P529,644.80 and other
wife own the bulk of shares of ASJ Corp.; (2) The lot
damages?
where the hatchery plant is located is owned by the San
In our view, there are two sets of issues that the Juan spouses; (3) ASJ Corp. had no other properties or
petitioners have raised. assets, except for the hatchery plant and the lot where it
is located; (4) San Juan is in complete control of the
The first set is factual. Petitioners seek to
establish a set of facts contrary to the factual findings corporation; (5) There is no bona fide intention to treat
ASJ Corp. as a different entity from San Juan; and (6)
of the trial and appellate courts. However, as well
established in our jurisprudence, only errors of law are The corporate fiction of ASJ Corp. was used by San
Juan to insulate himself from the legitimate claims of
reviewable by this Court in a petition for review under
Rule 45.xxv The trial court, having had the opportunity respondents, defeat public convenience, justify wrong,
defend crime, and evade a corporations subsidiary

liability for damages.xxv These findings, being purely
one of fact,xxv should be respected. We need not assess
and evaluate the evidence all over again where the
findings of both courts on these matters coincide.
On the second set of issues, petitioners contend
that the retention was justified and did not constitute an
abuse of rights since it was respondents who failed to
comply with their obligation. Respondents, for their part,
aver that all the elements on abuse of rights were present.
They further state that despite their offer to partially
satisfy the accrued service fees, and the fact that the
value of the chicks and by-products was more than
sufficient to cover their unpaid obligations, petitioners
still chose to withhold the delivery.
The crux of the controversy, in our considered
view, is simple enough. Was petitioners retention of the
chicks and by-products on account of respondents
failure to pay the corresponding service fees
unjustified? While the trial and appellate courts had the
same decisions on the matter, suffice it to say that a
modification is proper. Worth stressing, petitioners act
of withholding the chicks and by-products is entirely
different from petitioners unjustifiable acts of
threatening respondents. The retention had legal basis;
the threats had none.
To begin with, petitioners obligation to deliver
the chicks and by-products corresponds to three dates:
the date of hatching, the delivery/pick-up date and the
date of respondents payment. On several setting
reports, respondents made delays on their payments,
but petitioners tolerated such delay. When respondents
accounts accumulated because of their successive
failure to pay on several setting reports, petitioners
opted to demand the full settlement of respondents
accounts as a condition precedent to the delivery.
However, respondents were unable to fully settle their
accounts.
Respondents offer to partially satisfy their
accounts is not enough to extinguish their obligation.
Under Article 1248xxv of the Civil Code, the creditor
cannot be compelled to accept partial payments from
the debtor, unless there is an express stipulation to that
effect. More so, respondents cannot substitute or apply
as their payment the value of the chicks and by-
products they expect to derive because it is necessary
that all the debts be for the same kind, generally of a
monetary character. Needless to say, there was no valid
application of payment in this case.
Furthermore, it was respondents who violated
the very essence of reciprocity in contracts,
consequently giving rise to petitioners right of
retention. This case is clearly one among the species of
non-performance of a reciprocal obligation. Reciprocal
obligations are those which arise from the same cause,
wherein each party is a debtor and a creditor of the
other, such that the performance of one is conditioned
upon the simultaneous fulfillment of the other.xxv
From the moment one of the parties fulfills his
obligation, delay by the other party begins.xxv
Since respondents are guilty of delay in the
performance of their obligations, they are liable to pay
petitioners actual damages of P183,416.80, computed
as follows: From respondents outstanding balance of
P102,336.80, as of Setting Report No. 107, we add the
corresponding services fees of P81,080.00xxv for
Setting Report Nos. 108 to 113 which had remain
unpaid.
Nonetheless, San Juans subsequent acts of
threatening respondents should not remain among those
treated with impunity. Under Article 19xxv of the Civil
Code, an act constitutes an abuse of right if the
following elements are present: (a) the existence of a
legal right or duty; (b) which is exercised in bad faith;
and (c) for the sole intent of prejudicing or injuring
another.xxv Here, while petitioners had the right to
withhold delivery, the high-handed and oppressive acts
of petitioners, as aptly found by the two courts below,
had no legal leg to stand on. We need not weigh the
corresponding pieces of evidence all over again
because factual findings of the trial court, when adopted
and confirmed by the appellate court, are binding and
conclusive and will not be disturbed on appeal.xxv
Since it was established that respondents
suffered some pecuniary loss anchored on petitioners
abuse of rights, although the exact amount of actual
damages cannot be ascertained, temperate damages are
recoverable. In arriving at a reasonable level of
temperate damages of P408,852.10, which is equivalent
to the value of the chicks and by-products, which
respondents, on the average, are expected to derive, this
Court was guided by the following factors: (a) award of
temperate damages will cover only Setting Report Nos.
109 to 113 since the threats started only on February 10
and 11, 1993, which are the pick-up dates for Setting
Report Nos. 109 and 110; the rates of (b) 41% and (c)
17%, representing the average rates of conversion of
broiler eggs into hatched chicks and egg by-products as
tabulated by the trial court based on available statistical
data which was unrebutted by petitioners; (d) 68,784
eggs,xxv or the total number of broiler eggs under
Setting Report Nos. 109 to 113; and (e) P14.00 and (f)
P1.20, or the then unit market price of the chicks and
by-products, respectively.
Thus, the temperate damages of P408,852.10 is
computed as follows:
[b X (d X e) + c X (d X f)] = Temperate
Damages
41% X (68,784 eggs X P14) =
P394,820.16

17% X (68,784 eggs X P1.20) = P judgment until fully paid.
14,031.94
[P394,820.16 + P14,031.94] = exemplary damages and attorneys
P408,852.10
At bottom, we agree that petitioners conduct
flouts the norms of civil society and justifies the award
of moral and exemplary damages. As enshrined in civil
law jurisprudence: Honeste vivere, non alterum laedere
et jus suum cuique tribuere. To live virtuously, not to
injure others and to give everyone his due.xxv Since
exemplary damages are awarded, attorneys fees are also
proper. Article 2208 of the Civil Code provides that:
In the absence of stipulation,
attorneys fees and expenses of litigation,
other than judicial costs, cannot be
recovered, except:
(1) When exemplary damages
are awarded;
xxxx
WHEREFORE, the petition is PARTLY
GRANTED. The Decision dated April 30, 2003 of the
Court of Appeals in CA-G.R. CV No. 56082 is hereby
MODIFIED as follows:
a. Respondents are ORDERED to
pay petitioners P183,416.80 as
actual damages, with interest of 6%
from the date of filing of the
complaint until fully paid, plus legal
interest of 12% from the finality of
this decision until fully paid.
b. The award of actual damages of
P529,644.80 in favor of respondents
is hereby REDUCED to
P408,852.10, with legal interest of
12% from the date of finality of this P15,000.00 which had become final and executory,
should be executed to its full amount, since in fixing it,
payment already made had been considered.
c. The award of moral damages,
Now we are asked whether the judgment may be
fees of P100,000.00, P10,000.00, executed against Jose M. Aruego, supposed President
P50,000.00, respectively, in favor of of University Publishing Co., Inc., as the real
respondents is hereby AFFIRMED. defendant.
d. All other claims are hereby Fifteen years ago, on September 24, 1949, Mariano A.
DENIED. Albert sued University Publishing Co., Inc. Plaintiff
alleged inter alia that defendant was a corporation duly
No pronouncement as to costs.
organized and existing under the laws of the
SO ORDERED. Philippines; that on July 19, 1948, defendant, through
Jose M. Aruego, its President, entered into a contract
with plaintifif; that defendant had thereby agreed to pay
plaintiff P30,000.00 for the exclusive right to publish
ENTITLEMENT RO CONSTI RIGHTS his revised Commentaries on the Revised Penal Code
and for his share in previous sales of the book's first
A. DUE PROCESS edition; that defendant had undertaken to pay in eight
quarterly installments of P3,750.00 starting July 15,
MARIANO A. ALBERT, plaintiff-appellant, 1948; that per contract failure to pay one installment
vs. would render the rest due; and that defendant had failed
UNIVERSITY PUBLISHING CO., INC., defendant- to pay the second installment.
appellee.
Defendant admitted plaintiff's allegation of defendant's
Uy & Artiaga and Antonio M. Molina for plaintiff- corporate existence; admitted the execution and terms
appellant. of the contract dated July 19, 1948; but alleged that it
Aruego, Mamaril & Associates for defendant- was plaintiff who breached their contract by failing to
appellees. deliver his manuscript. Furthermore, defendant
counterclaimed for damages.1äwphï1.ñët
BENGZON, J.P., J.:
Plaintiff died before trial and Justo R. Albert, his
No less than three times have the parties here appealed
estate's administrator, was substituted for him.
to this Court.
The Court of First Instance of Manila, after trial,
In Albert vs. University Publishing Co., Inc., L-9300,
rendered decision on April 26, 1954, stating in the
April 18, 1958, we found plaintiff entitled to damages
dispositive portion —
(for breach of contract) but reduced the amount from
P23,000.00 to P15,000.00. IN VIEW OF ALL THE FOREGOING,
the Court renders judgment in favor of
Then in Albert vs. University Publishing Co., Inc., L-
the plaintiff and against the defendant
15275, October 24, 1960, we held that the judgment for

the University Publishing Co., Inc.,
ordering the defendant to pay the
administrator Justo R. Albert, the sum of
P23,000.00 with legal [rate] of interest
from the date of the filing of this
complaint until the whole amount shall
have been fully paid. The defendant
shall also pay the costs. The
counterclaim of the defendant is hereby
dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to
P15,000.00, to be executed in full. Thereafter, on July
22, 1961, the court a quo ordered issuance of an
execution writ against University Publishing Co., Inc.
Plaintiff, however, on August 10, 1961, petitioned for a
writ of execution against Jose M. Aruego, as the real
defendant, stating, "plaintiff's counsel and the Sheriff of
Manila discovered that there is no such entity as
University Publishing Co., Inc." Plaintiff annexed to his
petition a certification from the securities and Exchange
Commission dated July 31, 1961, attesting: "The
records of this Commission do not show the registration
of UNIVERSITY PUBLISHING CO., INC., either as a
corporation or partnership." "University Publishing
Co., Inc." countered by filing, through counsel (Jose M.
Aruego's own law firm), a "manifestation" stating that
"Jose M. Aruego is not a party to this case," and that,
therefore, plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why
"University Publishing Co., Inc.," through counsel,
would not want Jose M. Aruego to be considered a
party to the present case: should a separate action be
now instituted against Jose M. Aruego, the plaintiff will
have to reckon with the statute of limitations.
The court a quo denied the petition by order of
September 9, 1961, and from this, plaintiff has
appealed.
The fact of non-registration of University Publishing
Co., Inc. in the Securities and Exchange Commission
has not been disputed. Defendant would only raise the
point that "University Publishing Co., Inc.," and not
Jose M. Aruego, is the party defendant; thereby
assuming that "University Publishing Co., Inc." is an
existing corporation with an independent juridical
personality. Precisely, however, on account of the non-
registration it cannot be considered a corporation, not
even a corporation de facto (Hall vs. Piccio, 86 Phil.
603). It has therefore no personality separate from Jose
M. Aruego; it cannot be sued independently.
The corporation-by-estoppel doctrine has not been
invoked. At any rate, the same is inapplicable here.
Aruego represented a non-existent entity and induced
not only the plaintiff but even the court to believe in
such representation. He signed the contract as
"President" of "University Publishing Co., Inc.," stating
that this was "a corporation duly organized and existing
under the laws of the Philippines," and obviously
misled plaintiff (Mariano A. Albert) into believing the
same. One who has induced another to act upon his
wilful misrepresentation that a corporation was duly
organized and existing under the law, cannot thereafter
set up against his victim the principle of corporation by
estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to
court, answering the complaint and litigating upon the
merits. But as stated, "University Publishing Co., Inc."
has no independent personality; it is just a name. Jose
M. Aruego was, in reality, the one who answered and
litigated, through his own law firm as counsel. He was
in fact, if not, in name, the defendant.
Even with regard to corporations duly organized and
existing under the law, we have in many a case pierced
the veil of corporate fiction to administer the ends of
justice. * And in Salvatiera vs. Garlitos, supra, p. 3073,
we ruled: "A person acting or purporting to act on
behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other
acts performed as such agent." Had Jose M. Aruego
been named as party defendant instead of, or together
with, "University Publishing Co., Inc.," there would be
no room for debate as to his personal liability. Since he
was not so named, the matters of "day in court" and
"due process" have arisen.
In this connection, it must be realized that parties to a
suit are "persons who have a right to control the
proceedings, to make defense, to adduce and cross-
examine witnesses, and to appeal from a decision" (67
C.J.S. 887) — and Aruego was, in reality, the person
who had and exercised these rights. Clearly, then,
Aruego had his day in court as the real defendant; and
due process of law has been substantially observed.
By "due process of law" we mean " "a law which hears
before it condemns; which proceeds upon inquiry, and
renders judgment only after trial. ... ." (4 Wheaton, U.S.
518, 581.)"; or, as this Court has said, " "Due process
of law" contemplates notice and opportunity to be heard
before judgment is rendered, affecting one's person or
property" (Lopez vs. Director of Lands, 47 Phil. 23,
32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it
may not be amiss to mention here also that the "due
process" clause of the Constitution is designed to secure
justice as a living reality; not to sacrifice it by paying
undue homage to formality. For substance must prevail
over form. It may now be trite, but none the less apt, to
quote what long ago we said in Alonso vs. Villamor, 16
Phil. 315, 321-322:
A litigation is not a game of
technicalities in which one, more deeply
schooled and skilled in the subtle art of
movement and position, entraps and

destroys the other. It is, rather, a contest
in which each contending party fully
and fairly lays before the court the facts
in issue and then, brushing side as
wholly trivial and indecisive all
imperfections of form and technicalities
of procedure, asks that Justice be done
upon the merits. Lawsuits, unlike duels,
are not to be won by a rapier's thrust.
Technicality, when it deserts its proper
office as an aid to justice and becomes
its great hindrance and chief enemy,
deserves scant consideration from
courts. There should be no vested rights
in technicalities.
The evidence is patently clear that Jose M. Aruego,
acting as representative of a non-existent principal, was
the real party to the contract sued upon; that he was the
one who reaped the benefits resulting from it, so much
so that partial payments of the consideration were made
by him; that he violated its terms, thereby precipitating
the suit in question; and that in the litigation he was the
real defendant. Perforce, in line with the ends of justice,
responsibility under the judgment falls on him.
We need hardly state that should there be persons who
under the law are liable to Aruego for reimbursement
or contribution with respect to the payment he makes
under the judgment in question, he may, of course,
proceed against them through proper remedial
measures.
PREMISES CONSIDERED, the order appealed
from is hereby set aside and the case remanded
ordering the lower court to hold supplementary
proceedings for the purpose of carrying the
judgment into effect against University
Publishing Co., Inc. and/or Jose M. Aruego. So
ordered.
ENTITLEMENT TO MORAL DAMAGES
ABS-CBN BROADCASTING CORPORATION,
petitioners, vs. HONORABLE COURT OF
APPEALS, REPUBLIC BROADCASTING
CORP., VIVA PRODUCTIONS, INC., and
VICENTE DEL ROSARIO, respondents.
DECISION
DAVIDE, JR., C.J.:
In this petition for review on certiorari, petitioners
ABS-CBN Broadcasting Corp. (hereinafter ABS-CBN)
seeks to reverse and set aside the decisionxxv of 31
October 1996 and the resolutionxxv of 10 March 1997
of the Court of Appeals in CA-G.R. CV No. 44125. The
former affirmed with modification the decisionxxv of 28
April 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 80, in Civil Case No. Q-12309.
The latter denied the motion to reconsider the decision
of 31 October 1996.
The antecedents, as found by the RTC and adopted
by the Court of Appeals, are as follows:
In 1990, ABS-CBN and VIVA executed a Film
Exhibition Agreement (Exh. A) whereby Viva gave
ABS-CBN an exclusive right to exhibit some Viva
films. Sometime in December 1991, in accordance with
paragraph 2.4 [sic] of said agreement stating that-
1.4 ABS-CBN shall have the right of first
refusal to the next twenty-four (24) Viva films
for TV telecast under such terms as may be
agreed upon by the parties hereto, provided,
however, that such right shall be exercised by
ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered
ABS-CBN, through its vice-president Charo Santos-
Concio, a list of three (3) film packages (36 title) from
which ABS-CBN may exercise its right of first refusal
under the afore-said agreement (Exhs. 1 par. 2, 2, 2-A
and 2-B Viva). ABS-CBN, however through Mrs.
Concio, can tick off only ten (10) titles (from the list)
we can purchase (Exh. 3 Viva) and therefore did not
accept said list (TSN, June 8, 1992, pp. 9-10). The titles
ticked off by Mrs. Concio are not the subject of the case
at bar except the film Maging Sino Ka Man.
For further enlightenment, this rejection letter
dated January 06, 1992 (Exh 3 Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I
am writing to you as I would like to express
my difficulty in recommending the purchase
of the three film packages you are offering
ABS-CBN.
From among the three packages I can only
tick off 10 titles we can purchase. Please see
attached. I hope you will understand my
position. Most of the action pictures in the list
do not have big action stars in the cast. They
are not for primetime. In line with this I wish
to mention that I have not scheduled for
telecast several action pictures in our very first
contract because of the cheap production value
of these movies as well as the lack of big
action stars. As a film producer, I am sure you
understand what I am trying to say as Viva
produces only big action pictures.
In fact, I would like to request two (2)
additional runs for these movies as I can only
schedule them in out non-primetime slots. We
have to cover the amount that was paid for
these movies because as you very well know

that non-primetime advertising rates are very
low. These are the unaired titles in the first
contract.
1. Kontra Persa [sic]
2. Raider Platoon
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of
mine.
The other dramatic films have been
offered to us before and have been rejected
because of the ruling of MTRCB to have them
aired at 9:00 p.m. due to their very adult
themes.
As for the 10 titles I have choosen [sic]
from the 3 packages please consider including
all the other Viva movies produced last year, I
have quite an attractive offer to make.
Thanking you and with my warmest
regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario
approached ABS-CBNs Ms. Concio, with a list
consisting of 52 original movie titles (i.e., not yet aired
on television) including the 14 titles subject of the
present case, as well as 104 re-runs (previously aired on
television) from which ABS-CBN may choose another
52 titles, as a total of 156 titles, proposing to sell to
ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which
P30,000,000.00 will be in cash and P30,000,000.00
worth of television spots (Exh. 4 to 4-C Viva; 9 Viva).
On April 2, 1992, defendant Del Rosario and ABS-
CBNs general manager, Eugenio Lopez III, met at the
Tamarind Grill Restaurant in Quezon City to discuss
the package proposal of VIVA. What transpired in that
lunch meeting is the subject of conflicting versions. Mr.
Lopez testified that he and Mr. Del Rosario allegedly
agreed that ABS-CBN was granted exclusive film
rights to fourteen (14) films for a total consideration of
P36 million; that he allegedly put this agreement as to
the price and number of films in a napkin and signed it
and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-
26, 77-78, June 8, 1992). On the other hand. Del
Rosario denied having made any agreement with Lopez
regarding the 14 Viva films; denied the existence of a
napkin in which Lopez wrote something; and insisted
that what he and Lopez discussed at the lunch meeting
was Vivas film package offer of 104 films (52 originals
and 52 re-runs) for a total price of P60 million. Mr.
Lopez promising [sic]to make a counter proposal which
came in the form of a proposal contract Annex C of the
complaint (Exh. 1 Viva; Exh C ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Vivas offer to sell
the 104 films, after the rejection of the same package
by ABS-CBN.
On April 07, 1992, defendant Del Rosario received
through his secretary , a handwritten note from Ms.
Concio, (Exh. 5 Viva), which reads: Heres the draft of
the contract. I hope you find everything in order, to
which was attached a draft exhibition agreement (Exh.
C ABS-CBN; Exh. 9 Viva p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent
by defendant Del Rosario and one film was added by
Ms. Concio, for a consideration of P35 million. Exhibit
C provides that ABS-CBN is granted film rights to 53
films and contains a right of first refusal to 1992 Viva
Films. The said counter proposal was however rejected
by Vivas Board of Directors [in the] evening of the
same day, April 7, 1992, as Viva would not sell
anything less than the package of 104 films for P60
million pesos (Exh. 9 Viva), and such rejection was
relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN
and following several negotiations and meetings
defendant Del Rosario and Vivas President Teresita
Cruz, in consideration of P60 million, signed a letter of
agreement dated April 24, 1992, granting RBS the
exclusive right to air 104 Viva-produced and/or
acquired films (Exh. 7-A - RBS; Exh. 4 RBS) including
the fourteen (14) films subject of the present case.xxv
On 27 May 1992, ABS-CBN filed before the RTC
a complaint for specific performance with a prayer for
a writ of preliminary injunction and/or temporary
restraining order against private respondents Republic
Broadcasting Corporationxxv (hereafter RBS), Viva
Production (hereafter VIVA), and Vicente del Rosario.
The complaint was docketed as Civil Case No. Q-92-
12309.
On 28 May 1992, the RTC issued a temporary
restraining orderxxv enjoining private respondents from
proceeding with the airing, broadcasting, and televising
of the fourteen VIVA films subject of the controversy,
starting with the film Maging Sino Ka Man, which was
scheduled to be shown on private respondent RBS
channel 7 at seven oclock in the evening of said date.
On 17 June 1992, after appropriate proceedings,
the RTC issued an orderxxv directing the issuance of a
writ of preliminary injunction upon ABS-CBNs posting

of a P35 million bond. ABS-CBN moved for the
reduction of the bond,xxv while private respondents
moved for reconsideration of the order and offered to
put up a counterbond.xxv
In the meantime, private respondents filed separate
answer with counterclaim.xxv RBS also set up a cross-
claim against VIVA.
On 3 August 1992, the RTC issued an order xxv
dissolving the writ of preliminary injunction upon the
posting by RBS of a P30 million counterbond to answer
for whatever damages ABS-CBN might suffer by virtue
of such dissolution. However, it reduced petitioners
injunction bond to P15 million as a condition precedent
for the reinstatement of the writ of preliminary
injunction should private respondents be unable to post
a counterbond.
At the pre-trialxxv on 6 August 1992, the parties
upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime,
RBS prayed for and was granted reasonable time within
which to put up a P30 million counterbond in the event
that no settlement would be reached.
As the parties failed to enter into an amicable
settlement, RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of
15 October 1992.xxv
On 19 October 1992, ABS-CBN filed a motion for
reconsiderationxxv of the 3 August and 15 October 1992
Orders, which RBS opposed.xxv
On 29 October, the RTC conducted a pre-trial.xxv
Pending resolution of its motion for
reconsideration, ABS-CBN filed with the Court of
Appeals a petitionxxv challenging the RTCs Order of 3
August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin
the RTC from enforcing said orders. The case was
docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued
a temporary restraining orderxxv to enjoin the airing,
broadcasting, and televising of any or all of the films
involved in the controversy.
On 18 December 1992, the Court of Appeals
promulgated a decisionxxv dismissing the petition in
CA-G.R. SP No. 29300 for being premature. ABS-
CBN challenged the dismissal in a petition for review
filed with this Court on 19 January 1993, which was
docketed s G.R. No. 108363.
In the meantime the RTC received the evidence for
the parties in Civil Case No. Q-92-12309. Thereafter,
on 28 April 1993, it rendered a decisionxxv in favor of
RBS and VIVA and against ABS-CBN disposing as
follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing, judgment is rendered
in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay
defendant RBS the following:
a) P107,727.00 the amount of
premium paid by RBS to the surety
which issued defendants RBSs
bond to lift the injunction;
b) P191,843.00 for the amount of print
advertisement for Maging Sino Ka
Man in various newspapers;
c) Attorneys fees in the amount of P1
million;
d) P5 million as and by way of moral
damages;
e) P5 million as and by way of
exemplary damages;
(3) For the defendant VIVA, plaintiff ABS-
CBN is ordered to pay P212,000.00 by way
of reasonable attorneys fees.
(4) The cross-claim of defendant RBS against
defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of
minds on the price and terms of the offer. The alleged
agreement between Lopez III and Del Rosario was
subject to the approval of the VIVA Board of Directors,
and said agreement was disapproved during the
meeting of the Board on 7 April 1992. Hence, there was
no basis for ABS-CBNs demand that VIVA signed the
1992 Film Exhibition Agreement. Furthermore, the
right of first refusal under the 1990 Film Exhibition
Agreement had previously been exercised per Ms.
Concios letter to Del Rosario ticking off ten titles
acceptable to them, which would have made the 1992
agreement an entirely new contract.
On 21 June 1993, this Court deniedxxv ABS-CBNs
petition for review in G.R. No. 108363, as no reversible
error was committed by the Court of Appeals in its
challenged decision and the case had become moot and
academic in view of the dismissal of the main action by
the court a quo in its decision of 28 April 1993.
Aggrieved by the RTCs decision, ABS-CBN
appealed to the Court of Appeals claiming that there
was a perfected contract between ABS-CBN and VIVA
granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del
Rosario also appealed seeking moral and exemplary
damages and additional attorneys fees.
In its decision of 31 October 1996, the Court of
Appeals agreed with the RTC that the contract between
ABS-CBN and VIVA had not been perfected, absent

the approval by the VIVA Board of Directors of
whatever Del Rosario, its agent, might have agreed with
Lopez III. The appellate court did not even believe
ABS-CBNs evidence that Lopez III actually wrote
down such an agreement on a napkin, as the same was
never produced in court. It likewise rejected ABS-
CBNs insistence on its right of first refusal and
ratiocinated as follows:
As regards the matter of right of first refusal, it may
be true that a Film Exhibition Agreement was entered
into between Appellant ABS-CBN and appellant VIVA
under Exhibit A in 1990 and that parag. 1.4 thereof
provides:
1.4 ABS-CBN shall have the right of first
refusal to the next twenty-four (24) VIVA
films for TV telecast under such terms as may
be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by
ABS-CBN within a period of fifteen (15) days
from the actual offer in writing (Records, p.
14).
[H]owever, it is very clear that said right of first refusal
in favor of ABS-CBN shall still be subjected to such
terms as may be agreed upon by the parties thereto, and
that the said right shall be exercised by ABS-CBN
within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit A on the
right of first refusal did not fix the price of the film right
to the twenty-four (24) films, nor did it specify the
terms thereof. The same are still left to be agreed upon
by the parties.
In the instant case, ABS-CBNs letter of rejection
Exhibit 3 (Records, p. 89) stated that it can only tick off
ten (10) films, and the draft contract Exhibit C accepted
only fourteen (14) films, while parag. 1.4 of Exhibit A
speaks of the next twenty-four (24) films.
The offer of VIVA was sometime in December denied VIVA and Del Rosarios appeal because it was
1991, (Exhibits 2, 2-A, 2-B; Records, pp. 86-88; RBS and not VIVA which was actually prejudiced
Decision, p. 11, Records, p. 1150), when the first list of when the complaint was filed by ABS-CBN.
VIVA films was sent by Mr. Del Rosario to ABS-CBN. Its motion for reconsideration having been denied,
The Vice President of ABS-CBN, Mrs. Charo Santos- ABS-CBN filed the petition in this case, contending
Concio, sent a letter dated January 6, 1992 (Exhibit 3, that the Court of Appeals gravely erred in
Records, p. 89) where ABS-CBN exercised its right of
refusal by rejecting the offer of VIVA. As aptly I
observed by the trial court, with the said letter of Mrs. RULING THAT THERE WAS NO
Concio of January 6, 1992, ABS-CBN had lost its right PERFECTED CONTRACT BETWEEN
of first refusal. And even if We reckon the fifteen (15) PETITIONER AND PRIVATE
day period from February 27, 1992 (Exhibit 4 to 4-C) RESPONDENT VIVA
when another list was sent to ABS-CBN after the letter NOTWITHSTANDING
of Mrs. Concio, still the fifteen (15) day period within PREPONFERANCE OF EVIDENCE
which ABS-CBN shall exercise its right of first refusal ADDUCED BY PETITIONER TO THE
has already expired.xxv CONTRARY.
Accordingly, respondent court sustained the award II
factual damages consisting in the cost of print
advertisements and the premium payments for the IN AWARDING ACTUAL AND
COMPENSATORY DAMAGES IN
counterbond, there being adequate proof of the
pecuniary loss which RBS has suffered as a result of the FAVOR OF PRIVATE RESPONDENT
RBS.
filing of the complaint by ABS-CBN. As to the award
of moral damages, the Court of Appeals found III
reasonable basis therefor, holding that RBSs reputation
was debased by the filing of the complaint in Civil Case IN AWARDING MORAL AND
No. Q-92-12309 and by the non-showing of the film EXEMPLARY DAMAGES IN FAVOR
Maging Sino Ka Man. Respondent court also held that OF PRIVATE RESPONDENT RBS.
exemplary damages were correctly imposed by way of IV
example or correction for the public good in view of the
IN AWARDING ATORNEYS FEES OF
filing of the complaint despite petitioners knowledge
RBS.
that the contract with VIVA had not been perfected. It
also upheld the award of attorneys fees, reasoning that ABS-CBN claims that it had yet to fully exercise
with ABS-CBNs act of instituting Civil Case No. Q-92- its right of first refusal over twenty-four titles under the
12309, RBS was unnecessarily forced to litigate. The 1990 Film Exhibition Agreement, as it had chosen only
appellate court, however, reduced the awards of moral ten titles from the first list. It insists that we give
damages to P 2 million, exemplary damages to P2 credence to Lopezs testimony that he and Del Rosario
million, and attorneys fees to P500,000.00. met at the Tamarind Grill Restaurant, discussed the
terms and conditions of the second list (the 1992 Film
On the other hand, respondent Court of Appeals

Exhibition Agreement) and upon agreement thereon,
wrote the same on a paper napkin. It also asserts that
the contract has already been effective, as the elements
thereof, namely, consent, object, and consideration
were established. It then concludes that the Court of
Appeals pronouncements were not supported by law
and jurisprudence, as per our decision of 1 December
1995 in Limketkai Sons Milling, Inc. v. Court of
Appeals,xxv which cited Toyota Shaw, Inc. v. Court of
Appeals;xxv Ang Yu Asuncion v. Court of Appeals,xxv
and Villonco Realty Company v. Bormaheco, Inc.xxv
Anent the actual damages awarded to RBS, ABS-
CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in
order to negate the injunction issued by the trial court
after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the
counterbond was an option available to RBS, but it can
hardly be argued that ABS-CBN compelled RBS to
incur such expense. Besides, RBS had another available
option, i.e., move for the dissolution of the injunction;
or if it was determined to put up a counterbond, it could
have presented a cash bond. Furthermore under Article
2203 of the Civil Code, the party suffering loss injury
is also required to exercise the diligence of a good
father of a family to minimize the damages resulting
from the act or omission. As regards the cost of print
advertisements, RBS had not convincingly established
that this was a loss attributable to the non-showing of
Maging Sino Ka Man; on the contrary, it was brought
out during trial that with or without the case or
injunction, RBS would have spent such an amount to
generate interest in the film.
ABS-CBN further contends that there was no other
clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and
RBS did not in any way originate from business
transaction between them. The claims for such damages
did not arise from any contractual dealings or from
specific acts committed by ABS-CBN against RBS that
may be characterized as wanton, fraudulent, or
reckless; they arose by virtue only of the filing of the
complaint. An award of moral and exemplary damages
is not warranted where the record is bereft of any proof
that a party acted maliciously or in bad faith in filing an
action.xxv In any case, free resort to courts for redress of
wrongs is a matter of public policy. The law recognizes
the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for
damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws
on the matter, the case would lose ground.xxv One who,
makes use of his own legal right does no injury.xxv If
damage results from filing of the complaint, it is
damnum absque injuria.xxv Besides, moral damages are
generally not awarded in favor of a juridical person,
unless it enjoys a good reputation that was debased by
the offending party resulting in social humiliation.xxv
As regards the award of attorneys fees, ABS-CBN
maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial courts
award, the Court of Appeals acted in clear disregard of
the doctrine laid down in Buan v. Camaganacanxxv that
the text of the decision should state the reason why
attorneys fees are being awarded; otherwise, the award
should be disallowed. Besides, no bad faith has been
imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that where
no sufficient showing of bad faith would be reflected in
a partys persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorneys
fees shall not be recovered as cost.xxv
On the other hand, RBS asserts that there was no
perfected contract between ABS-CBN and VIVA
absent meeting of minds between them regarding the
object and consideration of the alleged contract. It
affirms that ABS-CBNs claim of a right of first refusal
was correctly rejected by the trial court. RBS insists the
premium it had paid for the counterbond constituted a
pecuniary loss upon which it may recover. It was
obliged to put up the counterbond due to the injunction
procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against
RBS and, therefore not entitled to the writ of injunction,
RBS could recover from ABS-CBN the premium paid
on the counterbond. Contrary to the claim of ABS-
CBN, the cash bond would prove to be more expensive,
as the loss would be equivalent to the cost of money
RBS would forego in case the P30 million came from
its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost
of advertisements for the cancelled showing of the film
Maging Sino Ka Man because the print advertisements
were out to announce the showing on a particular day
and hour on Channel 7, i.e., in its entirety at one time,
not as series to be shown on a periodic basis. Hence, the
print advertisements were good and relevant for the
particular date of showing, and since the film could not
be shown on that particular date and hour because of
the injunction, the expenses for the advertisements had
gone to waste.
As regards moral and exemplary damages, RBS
asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and
prejudicing RBS. Pursuant then to Articles 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino,xxv damages may be
awarded in cases of abuse of rights even if the done is
not illicit, and there is abuse of rights where a plaintiff
institutes an action purely for the purpose of harassing
or prejudicing the defendant.
In support of its stand that a juridical entity can
recover moral and exemplary damages, private

xxv
respondent RBS cited People v. Manero, where it
was stated that such entity may recover moral and
exemplary damages if it has a good reputation that is
debased resulting in social humiliation. It then
ratiocinates; thus:
There can be no doubt that RBS reputation has
been debased by ABS-CBNs acts in this case. When
RBS was not able to fulfill its commitment to the
viewing public to show the film Maging Sino Ka Man
on the scheduled dates and times (and on two occasions
that RBS advertised), it suffered serious embarrassment
and social humiliation. When the showing was
cancelled, irate viewers called up RBS offices and
subjected RBS to verbal abuse (Announce kayo ng
announce, hindi ninyo naman ilalabas, nanloloko yata
kayo) (Exh. 3-RBS, par.3). This alone was not
something RBS brought upon itself. It was exactly what
ABS-CBN had planted to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons justify the
amount of the award.
The first is that the humiliation suffered by RBS, is
national in extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that of
ABS-CBN, consists of those who own and watch
television. It is not an exaggeration to state, and it is a
matter of judicial notice that almost every other person
in the country watches television. The humiliation
suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the
film, Maging Sino Ka Man on May 28 and November
3, 1992 but did not see it owing to the cancellation.
Added to this are the advertisers who had placed
commercial spots for the telecast and to whom RBS had
a commitment in consideration of the placement to
show the film in the dates and times specified.
The second is that it is a competitor that caused
RBS suffer the humiliation. The humiliation and injury
are far greater in degree when caused by an entity
whose ultimate business objective is to lure customers
(viewers in this case) away from the competition.xxv
For their part, VIVA and Vicente del Rosario
contend that the findings of fact of the trial court and
the Court of Appeals do not support ABS-CBNs claim
that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for
review under Rule 45, as only questions of law can be
raised, not questions of fact. On the issue of damages
and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1)
whether there was a perfected contract between VIVA
and ABS-CBN, and (2) whether RBS is entitled to
damages and attorneys fees. It may be noted that that
award of attorneys fees of P212,000 in favor of VIVA
is not assigned as another error.
I
The first issue should be resolved against ABS-
CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something
or render some service to anotherxxv for a consideration.
There is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object
certain which is the subject of the contract; and (3)
cause of the obligation, which is established.xxv A
contract undergoes three stages:
(a) preparation, conception, or generation,
which is the period of negotiation and
bargaining, ending at the moment of
agreement of the parties;
(b) perfection or birth of the contract, which is
the moment when the parties come to
agree on the terms of the contract; and
(c) consummation or death, which is the
fulfillment or performance of the terms
agreed upon in the contract.xxv
Contracts that are consensual in nature are
perfected upon mere meeting of the minds. Once there
is concurrence between the offer and the acceptance
upon the subject matter, consideration, and terms of
payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that
involves a new proposal, constitutes a counter-offer and
is a rejection of the original offer. Consequently, when
something is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient
to generate consent because any modification or
variation from the terms of the offer annuls the offer.xxv
When Mr. Del Rosario of Viva met Mr. Lopez of
ABS-CBN at the Tamarind Grill on 2 April 1992 to
discuss the package of films, said package of 104 VIVA
films was VIVAs offer to ABS-CBN to enter into a new
Film Exhibition Agreement. But ABS-CBN, sent
through Ms. Concio, counter-proposal in the form a
draft contract proposing exhibition of 53 films for a
consideration of P35 million. This counter-proposal
could be nothing less than the counter-offer of Mr.
Lopez during his conference with Del Rosario at
Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVAs offer, for it was met by a counter-
offer which substantially varied the terms of the offer.
ABS-CBNs reliance in Limketkai Sons Milling,
Inc. v. Court of Appealsxxv and Villonco Realty
Company v. Bormaheco, Inc.,xxv is misplaced. In these
cases, it was held that an acceptance may contain a
request for certain changes in the terms of the offer and
yet be a binding acceptance as long as it is clear that the

meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request
is granted or not. This ruling was, however, reversed in
the resolution of 29 March 1996,xxv which ruled that the
acceptance of an offer must be unqualified and
absolute, i.e., it must be identical in all respects with
that of the offer so as to produce consent or meetings of
the minds.
On the other hand, in Villonco, cited in Limketkai,
the alleged changes in the revised counter-offer were
not material but merely clarificatory of what had
previously been agreed upon. It cited the statement in
Stuart v. Franklin Life Insurance Co.xxv that a vendors
change in a phrase of the offer to purchase, which
change does not essentially change the terms of the
offer, does not amount to a rejection of the offer and the
tender of a counter-offer.xxv However, when any of the
elements of the contract is modified upon acceptance,
such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified
acceptance of VIVAs offer hence, they underwent
period of bargaining. ABS-CBN then formalized its
counter-proposals or counter-offer in a draft contract.
VIVA through its Board of Directors, rejected such
counter-offer. Even if it be conceded arguendo that Del
Rosario had accepted the counter-offer, the acceptance
did not bind VIVA, as there was no proof whatsoever
that Del Rosario had the specific authority to do so.
Under the Corporation Code,xxv unless otherwise
provided by said Code, corporate powers, such as the
power to enter into contracts, are exercised by the
Board of Directors. However, the Board may delegate
such powers to either an executive committee or
officials or contracted managers. The delegation,
except for the executive committee, must be for specific
purposes.xxv Delegation to officers makes the latter
agents of the corporation; accordingly, the general rules
of agency as to the binding effects of their acts would
apply.xxv For such officers to be deemed fully clothed
by the corporation to exercise a power of the Board, the
latter must specially authorize them to do so. that Del
Rosario did not have the authority to accept ABS-CBNs
counter-offer was best evidenced by his submission of
the draft contract to VIVAs Board of Directors for the
latters approval. In any event, there was between Del
Rosario and Lopez III no meeting of minds. The
following findings of the trial court are instructive:
A number of considerations militate against ABS-
CBNs claim that a contract was perfected at that lunch
meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed
upon at the Tamarind Grill referred to the price and the
number of films, which he wrote on a napkin. However,
Exhibit C contains numerous provisions which were
not discussed at the Tamarind Grill, if Lopez testimony
was to be believed nor could they have been physically
written on a napkin. There was even doubt as to
whether it was a paper napkin or cloth napkin. In short
what were written in Exhibit C were not discussed, and
therefore could not have been agreed upon, by the
parties. How then could this court compel the parties to
sign Exhibit C when the provisions thereof were not
previously agreed upon?
SECOND, Mr. Lopez claimed that what was
agreed upon as the subject matter of the contract was 14
films. The complaint in fact prays for delivery of 14
films. But Exhibit C mentions 53 films as its subject
matter. Which is which? If Exhibit C reflected the true
intent of the parties, then ABS-CBNs claim for 14 films
in its complaint is false or if what it alleged in the
complaint is true, then Exhibit C did not reflect what
was agreed upon by the parties. This underscores the
fact that there was no meeting of the minds as to the
subject matter of the contract, so as to preclude
perfection thereof. For settled is the rule that there can
be no contract where there is no object certain which is
its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of
his affidavit testimony (Exh. D) States:
We were able to reach an agreement.
VIVA gave us the exclusive license to show
these fourteen (14) films, and we agreed to pay
Viva the amount of P16,050,000.00 as well as
grant Viva commercial slots worth
P19,950,000.00. We had already earmarked
this P16,050,000.00.
which gives a total consideration of P36 million
(P19,951,000.00 plus P16,050,000.00 equals
P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q What was written in this napkin?
A The total price, the breakdown the known Viva
movies, the 7 blockbuster movies and the other
7 Viva movies because the price was broken
down accordingly. The none [sic] Viva and the
seven other Viva movies and the sharing
between the cash portion and the concerned spot
portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This
weakens ABS-CBNs claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN
stated that she transmitted Exhibit C to Mr. Del Rosario
with a handwritten note, describing said Exhibit C as a
draft. (Exh. 5 Viva; tsn pp. 23-24, June 08, 1992). The
said draft has a well defined meaning.
Since Exhibit C is only a draft, or a tentative,
provisional or preparatory writing prepared for
discussion, the terms and conditions thereof could not
have been previously agreed upon by ABS-CBN and

Viva. Exhibit C could not therefore legally bind Viva,
not having agreed thereto. In fact, Ms. Concio admitted
that the terms and conditions embodied in Exhibit C
were prepared by ABS-CBNs lawyers and there was no
discussion on said terms and conditions.
As the parties had not yet discussed the proposed
terms and conditions in Exhibit C, and there was no
evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding
contract. The fact that Viva refused to sign Exhibit C
reveals only two [sic] well that it did not agree on its
terms and conditions, and this court has no authority to
compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he
and Mr. Del Rosario agreed upon at the Tamarind Grill
was only provisional, in the sense that it was subject to
approval by the Board of Directors of Viva. He
testified:
Q Now, Mr. Witness, and after that Tamarinf
meeting the second meeting wherein you
claimed that you have the meeting of the minds
between you and Mr. Vic del Rosario, what
happened?
A Vic Del Rosario was supposed to call us up and
tell us specifically the result of the discussion
with the Board of Directors.
Q And you are referring to the so-called
agreement which you wrote in [sic] a piece of
paper?
A Yes, sir.
Q So, he was going to forward that to the board of
Directors for approval?
A Yes, sir (Tsn, pp. 42-43, June 8, 1992)
Q Did Mr. Del Rosario tell you that he will submit
it to his Board for approval?
A Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no authority to
bind Viva to a contract with ABS-CBN until and unless
its Board of Directors approved it. The complaint, in
fact, alleges that Mr. Del Rosario is the Executive
Producer of defendant Viva which is a corporation.
(par. 2, complaint). As a mere agent of Viva, Del
Rosario could not bind Viva unless what he did is
ratified by its Directors. (Vicente vs.Geraldez, 52
SCRA 210; Arnold vs. Willets and Paterson, 44 Phil.
634). As a mere agent, recognized as such by plaintiff,
Del Rosario could not be held liable jointly and
severally with Viva and his inclusion as party defendant
has no legal basis. (Salonga vs. Warner Barnes
[sic],COLTA, 88 Phil. 125; Salmon vs. Tan, 36 Phil.
556).
The testimony of Mr. Lopez and the allegations in
the complaint are clear admissions that what was
supposed to have been agreed upon at the Tamarind
Grill between Mr. Lopez and Del Rosario was not a
binding agreement. It is as it should be because
corporate power to enter into a contract is lodged in the
Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board,
whatever agreement Lopez and Del Rosario arrived at
could not ripen into a valid binding upon Viva (Yao Ka
Sin Trading vs. Court of Appeals, 209 SCRA 763). The
evidence adduced shows that the Board of Directors of
Viva rejected Exhibit C and insisted that the film
package for 104 films be maintained (Exh. 7-1 Cica).xxv
The contention that ABS-CBN had yet to fully
exercise its right of first refusal over twenty-four films
under the 1990 Film Exhibition Agreement and that the
meeting between Lopez and Del Rosario was a
continuation of said previous contract is untenable. As
observed by the trial court, ABS-CBNs right of first
refusal had already been exercised when Ms. Concio
wrote to Viva ticking off ten films. Thus:
[T]he subsequent negotiation with ABS-CBN two
(2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself
admitted on cross-examination to having used or
exercised the right of first refusal. She stated that
the list was not acceptable and was indeed not
accepted by ABS-CBN, (Tsn, June 8, 1992, pp. 8-
10). Even Mr. Lopez himself admitted that the
right of first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June
8, 1992, pp. 71-75). Del Rosario himself knew and
understand [sic] that ABS-CBN has lost its right of
first refusal when his list of 36 titles were rejected
(Tsn, June 9, 1992, pp. 10-11).xxv
II
However, we find for ABS-CBN on the issue of
damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is
the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is
entitled to compensation for actual damages only for
such pecuniary loss suffered by him as he has duly
proved.xxv The indemnification shall comprehend not
only the value of the loss suffered, but also that of the
profits that the obligee failed to obtain.xxv In contracts
and quasi-contracts the damages which may be
awarded are dependent on whether the obligor acted
with good faith or otherwise. In case of good faith, the
damages recoverable are those which are the natural
and probable consequences of the breach of the
obligation and which the parties have foreseen or could
have reasonably foreseen at the time of the constitution
of the obligation. If the obligor acted with fraud, bad
faith, malice, or wanton attitude, he shall be responsible
for all damages which may be reasonably attributed to

xxv
the non-performance of the obligation. In crimes and
quasi-delicts, the defendants shall be liable for all
damages which are the natural and probable
consequences of the act or omission complained of,
whether or not such damages have been foreseen or
could have reasonably been foreseen by the
defendant.xxv
Actual damages may likewise be recovered for loss
or impairment of earning capacity in cases of temporary
or permanent personal injury, or for injury to the
plaintiffs business standing or commercial credit.xxv
The claim of RBS for actual damages did not arise
from contract, quasi-contract, delict, or quasi-delict. It
arose from the fact of filing of the complaint despite
ABS-CBNs alleged knowledge of lack of cause of
action. Thus paragraph 12 of RBSs Answer with
Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing
fully well that it has no cause of action
against RBS. As a result thereof, RBS
suffered actual damages in the amount of
P6,621,195.32.xxv
Needless to state the award of actual damages cannot
be comprehended under the above law on actual
damages. RBS could only probably take refuge under
Articles 19, 20, and 21 of the Civil Code, which read as
follows:
ART. 19. Every person must, in the exercise of hid
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and
good faith.
ART. 20. Every person who, contrary to law,
wilfully or negligently causes damage to another shall
indemnify the latter for the same.
ART. 21. Any person who wilfully causes loss or
injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the
latter for the damage.
It may further be observed that in cases where a
writ of preliminary injunction is issued, the damages
which the defendant may suffer by reason of the writ
are recoverable from the injunctive bond.xxv In this
case, ABS-CBN had not yet filed the required bond; as
a matter of fact, it asked for reduction of the bond and
even went to the Court of Appeals to challenge the
order on the matter. Clearly then, it was not necessary
for RBS to file a counterbond. Hence, ABS-CBN
cannot be held responsible for the premium RBS paid
for the counterbond.
Neither could ABS-CBN be liable for the print
advertisements for Maging Sino Ka Man for lack of
sufficient legal basis. The RTC issued a temporary
restraining order and later, a writ of preliminary
injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof.
Notably, the RTC did not dissolve the injunction on the
ground of lack of legal and factual basis, but because of
the plea of RBS that it be allowed to put up a
counterbond.
As regards attorneys fees, the law is clear that in
the absence of stipulation, attorneys fees may be
recovered as actual or compensatory damages under
any of the circumstances provided for in Article 2208
of the Civil Code.xxv
The general rule is that attorneys fees cannot be
recovered as part of damages because of the policy that
no premium should be placed on the right to litigate.xxv
They are not to be awarded every time a party wins a
suit. The power of the court t award attorneys fees
under Article 2208 demands factual, legal, and
equitable justification.xxv Even when a claimant is
compelled to litigate with third persons or to incur
expenses to protect his rights, still attorneys fees may
not be awarded where no sufficient showing of bad
faith could be reflected in a partys persistence in a case
other than an erroneous conviction of the righteousness
of his cause.xxv
As to moral damages the law is Section 1, Chapter
3, Title XVIII, Book IV of the Civil Code. Article 2217
thereof defines what are included in moral damages,
while Article 2219 enumerates the cases where they
may be recovered. Article 2220 provides that moral
damages may be recovered in breaches of contract
where the defendant acted fraudulently or in bad faith.
RBSs claim for moral damages could possibly fall only
under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34 and 35.
Moral damages are in the category of an award
designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the
wrongdoer.xxv The award is not meant to enrich the
complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or
amusements that will serve to obviate the moral
suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate to
the suffering inflicted.xxv Trial courts must then guard
against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity
to avoid suspicion that it was due to passion, prejudice,
or corruption or the part of the trial court.xxv
The award of moral damages cannot be granted in
favor of a corporation because, being an artificial
person and having existence only in legal
contemplation, it has no feelings, no emotions, no
senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be

xxv
experienced only by one having a nervous system.
The statement in People v. Maneroxxv and Mambulao
Lumber Co. v. PNBxxv that a corporation may recover
moral damages if it has a good reputation that is
debased, resulting in social humiliation is an obiter
dictum. On this score alone the award for damages must
be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5
Chapter 3, Title XVIII, Book IV of the Civil Code.
These are imposed by way of example or correction for
the public good, in addition to moral, temperate,
liquidated, or compensatory damages.xxv They are
recoverable in criminal cases as part of the civil liability
when the crime was committed with one or more
aggravating circumstances;xxv in quasi-delicts, if the
defendant acted with gross negligence;xxv and in
contracts and quasi-contracts, if the defendant acted in
a wanton, fraudulent, reckless, oppressive, or
malevolent manner.xxv
It may be reiterated that the claim of RBS against
ABS-CBN is not based on contract, quasi-contract,
delict, or quasi-delict. Hence, the claims for moral and
exemplary damages can only be based on Articles 19,
20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are
the following: (1) the existence of a legal right or duty,
(2) which is exercised in bad faith, and (3) for the sole
intent of prejudicing or injuring another. Article 20
speaks of the general sanction for all provisions of law
which do not especially provide for their own sanction;
while Article 21 deals with acts contra bonus mores,
and has the following elements: (1) there is an act which
is legal, (2) but which is contrary to morals, good
custom, public order, or public policy, and (3) and it is
done with intent to injure.xxv
Verily then, malice or bad faith is at the core of
Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act
for a dishonest purpose or moral obliquity.xxv Such
WHEREFORE, the decision
must be substantiated by evidence.xxv of the Regional Trial Court is
There is no adequate proof that ABS-CBN was hereby AFFIRMED in toto.xxv
inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had
undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule
that the adverse result of an action does not per se make
the action wrongful and subject the actor to damages, The challenged Resolution denied
for the law could not have meant impose a penalty on reconsideration.
the right to litigate. If damages result from a persons
exercise of a right, it is damnum absque injuria.xxv
WHEREFORE, the instant petition is
GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV No. 44125 is hereby The Facts
REVERSED except as to unappealed award of
attorneys fees in favor of VIVA Productions, Inc.
Respondent Southern Rolling Mills Co., Inc.
No pronouncement as to costs.
was organized in 1959 for the purpose of engaging in a
SO ORDERED. steel processing business. It was later renamed Visayan
COSTAL PACIFIC TRDING, INC. VS SOUTHERN Integrated Steel Corporation (VISCO).xxv
ROLLING MILLS
The Case On December 11, 1961, VISCO obtained a loan
from the Development Bank of the Philippines (DBP)
in the amount of P836,000. This loan was secured by a
duly recorded Real Estate Mortgage over VISCOs three
(3) parcels of land, including all the machineries and
equipment found there.xxv
Before us is a Petition for Reviewxxv under Rule 45 of
the Rules of Court, assailing the September 27, 1994
Decisionxxv and the January 5, 1995 Resolutionxxv of the On August 15, 1963, VISCO entered into a Loan
Court of Appeals (CA) in CA-GR CV No. 39385. The Agreementxxv with respondent banks (later referred to
challenged Decision disposed as follows: as Consortiumxxv) for the amount of US$5,776,186.71
or P21,745,707.36 (at the then prevailing exchange
rate) to finance its importation of various raw materials.
To secure the full and faithful performance of its

obligation, VISCO executed on August 3, 1965, a
second mortgagexxv over the same land, machineries
and equipment in favor of respondent banks. This
second mortgage remained unrecorded.xxv
VISCO eventually defaulted in the performance
of its obligation to respondent banks. This prompted the
Consortium to file on January 26, 1966, Civil Case No.
1841, which was a Petition for Foreclosure of Mortgage
with Petition for Receivership.xxv This case was
eventually dismissed for failure to prosecute.xxv
Afterwards, negotiations were conducted between
VISCO and respondent banks for the conversion of the
unpaid loan into equity in the corporation.xxv Vicente
Garcia, vice-president of VISCO and of Far East Bank
and Trust Company (FEBTC),xxv testified that
sometime in 1966, the creditor banks were given
management of and control over VISCO.xxv In time,xxv
in order to reorganize it, its principal creditors agreed
to group themselves into a creditors consortium.xxv As
a result of the reorganized corporate structure of
VISCO, respondent banks acquired more than 90
percent of its equity. Notwithstanding this conversion,
it remained indebted to the Consortium in the amount
of P16,123,918.02.xxv
Meanwhile from 1964 to 1965, VISCO also
entered into a processing agreement with Petitioner
Coastal Pacific Trading, Inc. (Coastal). Pursuant to that
agreement, petitioner delivered 3,000 metric tons of hot
rolled steel coils to VISCO for processing into block
iron sheets. Contrary to their agreement, the latter was
able to process and deliver to petitioner only 1,600
metric tons of those sheets. Hence, a total of 1,400
metric tons of hot rolled steel coils remained
unaccounted for.xxv The fact that petitioner was among
the major creditors of VISCO was recognized by the
latters vice-president, Vicente Garcia.xxv Indeed, on
October 9, 1970, it forwarded to petitioner a proposal
for a Compromise Agreement.xxv Subsequent
developments indicate, however, that the parties did not
arrive at a compromise.
Two years later, on October 20, 1972, Garcia
wrote Arturo P. Samonte, representative of FEBTCxxv
and director of VISCO,xxv a letter that reads as follows:
In the light of recent development on
IISMI and Elirol which were taken over
by the government, I suggest that we
take certain precautionary measures to
protect the interests of the Consortium
of Banks. One such step may be to
insure the safety of the unexpended
funds of VISCO from any contingencies
in the future. As of now VISCOs
account with the Far East Bank is in the
name of BOARD OF TRUSTEES
VISCO CONSORTIUM OF BANKS. It
may be better to eliminate the term
VISCO and just call the account
BOARD OF TRUSTEES
CONSORTIUM OF BANKS.xxv
According to a notation on this letter, an FEBTC
assistant cashier named Silverio duly complied with the
above request.xxv Indeed, events would later reveal that
the bank held a deposit account in the name of the
Board of Trustees-Consortium of Banks.xxv
On September 20, 1974, respondent banks held a
luncheon meetingxxv in the FEBTC Boardroom to
discuss how they would address the insistent demands
of the DBP for VISCO to settle its obligations. Jose B.
Fernandez, Jr., VISCOs then chairman and concurrent
FEBTC President,xxv expressed his apprehension that
either the DBP or the government would soon pursue
extra-judicial foreclosure against VISCO.
In this regard, Fernandez informed the members
of the Consortium that he had received letter-offers
from two corporations that were interested in
purchasing VISCOs generator sets.xxv After
deliberating on the matter, the members decided to
approve the sale of these two generator sets to Filmag
(Phil.), Inc. It was also agreed that the proceeds of the
sale would be used to pay VISCOs indebtedness to
DBP and to secure the release of the first mortgage.xxv
The Consortium agreed with Filmag on the following
payment procedure:
The payment procedure will be as
follows: Filmag pays to VISCO; VISCO
pays the Consortium; and then the
Consortium pays the DBP with the
arrangement that the Consortium
subrogates to the rights of the DBP as
first mortgagee to the VISCO plant. The
Consortium further agreed to call a
meeting of the VISCO board of
directors for the purpose of considering

and formally approving the proposed
sale of the 2 generators to Filmag.xxv
Accordingly, on October 4, 1974, the VISCO
board of directors had a meeting in the FEBTC
Boardroom.xxv The board was asked to decide how
VISCO would settle its debt to DBP: whether by asking
the Consortium to put up the necessary amount or by
accepting Filmags offer to purchase VISCOs generator
sets.xxv The latter option was unanimously chosenxxv in
a Resolution worded as follows:
RESOLVED, That the offer of Filmag
(Philippines) Inc. in their letters of
December 14, 1973 and March 19, 1974
to purchase two (2) units of generator
sets, including standard accessories, of
VISCO is hereby accepted under the
following terms and conditions:
xxx xxx
xxx
2. The price for the two (2) generator
sets is PESOS: ONE MILLION FIVE
HUNDRED FIFTY THOUSAND FIVE
HUNDRED SEVENTY TWO ONLY
(P1,550,572) x x x and shall be payable
upon signing of a letter-agreement and
which shall be later formalized into a
Deed of Sale. The amount, however,
shall be held by the depositary bank of
VISCO, Far East Bank and Trust
Company, in escrow and shall be at
VISCOs disposal upon the signing of
Filmag of the receipt/s of delivery of the
said two (2) generator sets.
xxx xxx
xxx
FURTHER RESOLVED, That the sales
proceeds of PESOS: ONE MILLION
FIVE HUNDRED FIFTY THOUSAND
FIVE HUNDRED SEVENTY TWO
ONLY (P1,550,572) shall be utilized to
pay the liability of VISCO with the
Development Bank of the
xxv
Philippines.
The sale of the generator sets to Filmag took
place and, according to the testimony of Garcia, the
proceeds were deposited with FEBTC in a special
account held in trust for the Consortium.xxv
A year after, on May 22, 1975, petitioner filed
with the Pasig Regional Trial Court (RTC) a
Complaintxxv for Recovery of Property and Damages
with Preliminary Injunction and Attachment.xxv
Petitioners allegation was that VISCO had fraudulently
misapplied or converted the finished steel sheets
entrusted to it.xxv On June 3, 1975, Judge Pedro A.
Revilla issued a Writ of Preliminary Attachment over
its properties that were not exempt from execution.xxv
In compliance with the Writ, Sheriff Andres R.
Bonifacio attempted to garnish the account of VISCO
in FEBTC,xxv which denied holding that account.
Instead, the bank admitted that what it had was a
deposit account in the name of the Board of Trustees-
Consortium of Banks, particularly Account No. 2479-
1.xxv FEBTC reported to Sheriff Bonifacio that it had
instructed its accounting department to hold the
account, subject to the prior liens or rights in favor of
[FEBTC] and other entities.xxv
While petitioners case was pending, VISCOs
vice-president (Garcia) and director (Arturo Samonte)
requested from FEBTC a cash advance of
P1,342,656.88 for the full settlement of VISCOs
account with DBP.xxv On June 29, 1976, FEBTC
complied by issuing Check No. FE239249 for
P1,342,656.88, payable to [DBP] for [the] account of
VISCO.xxv On even date, DBP executed a Deed of
Assignment of Mortgage Rights Interest and
Participationxxv in favor of Respondent Consortium of
Banks. The deed stated that, in consideration of the
payment made, all of DBPs rights under the mortgage
agreement with VISCO were being transferred and
conveyed to the Consortium.xxv Thus did the latter
obtain DBPs recorded primary lien over the real and
chattel properties of VISCO.
On September 23, 1980, the Consortium filed a
Petition for Extra-Judicial Foreclosure with the Office
of the Provincial Sheriff of Bohol.xxv The Notice of
Extrajudicial Foreclosure of Mortgage, published in the
Bohol Newsweek on October 10, 1980, announced that
the auction sale was scheduled for November 11,
1980.xxv
On November 3, 1980, Southern Industrial
Projects, Inc. (SIP), which was a judgment creditorxxv

of VISCO, filed Civil Case No. 3383. It was a
Complaintxxv for Declaration of Nullity of the Mortgage
and Injunction to Restrain the Consortium from
Proceeding with the Auction Sale. SIP argued that DBP
had actually been paid by VISCO with the proceeds
from the sale of the generator sets. Hence, the mortgage
in favor of that bank had been extinguished by the
payment and could not have been assigned to the
Consortium.xxv A temporary restraining order against
the latter was thus successfully obtained; the provincial
sheriff could not proceed with the auction sale of the
mortgaged assets.xxv But SIPs victory was short-lived.
On March 2, 1984, Civil Case No. 3383 was decided in
favor of the Consortium.xxv Judge Andrew S.
Namocatcat ruled thus:
The evidence of the plaintiff is
only anchored on the fact that the deed
of assignment executed by the DBP in
favor of the defendant banks is an act
which would defraud creditors. It is the
thinking of the court that the payment
of defendant banks to DBP of VISCOs
loan and the execution of the DBP of
the deed of assignment of credit and
rights to the defendant banks is in
accordance with Article 1302 and 1303
of the New Civil Code, and said
transaction is not to defraud creditors
because the defendant banks are also
creditors of VISCO.xxv
On June 14, 1985, this Decision was affirmed by
the Intermediate Appellate Court in CA-GR No. 03719.
xxv
The auction sale of VISCOs mortgaged
properties took place on March 19, 1985 and the
Consortium emerged as the highest
bidder.xxv The Certificate of Salexxv in its favor was
registered on May 22, 1985.xxv
On June 27, 1985, VISCO executed through
Vicente Garcia, a Deed of Assignment of Right of
Redemptionxxv in favor of the National Steel
Corporation (NSC), in consideration of P100,000. xxv
On the same day, the Consortium sold the foreclosed
real and personal properties of VISCO to the NSC.xxv
On August 16, 1985, petitioner filed against
respondents Civil Case No. 3929, which was a
Complaint for Annulment or Rescission of Sale,
Damages with Preliminary Injunction.xxv Coastal
alleged that, despite the Writ of Attachment issued in
its favor in the still pending Civil Case No. 21272, the
Consortium had sold the properties to NSC. Further,
despite the attachment of the properties, the
Consortium was allegedly able to sell and place them
beyond the reach of VISCOs other creditors.xxv Thus
imputing bad faith to respondent banks actions,
petitioner said that the sale was intended to defraud
VISCOs other creditors.
Petitioner further contended that the assignment
in favor of the Consortium was fraudulent, because
DBP had been paid with the proceeds from the sale of
the generator sets owned by VISCO, and not with the
Consortiums own funds.xxv Petitioner offered as proof
the minutes of the meetingxxv in which the transaction
was decided. Respondent Consortium countered that
the minutes would in fact readily disclose that the
intention of its members was to apply the proceeds to a
partial payment to DBP.xxv Respondent insisted that it
used its own funds to pay the bank.xxv
On August 20, 1985, a temporary restraining order
(TRO)xxv was issued by Judge Mercedes Gozo-Dadole
against VISCO, enjoining it from proceeding with the
removal or disposal of its properties; the execution
and/or consummation of the foreclosure sale; and the
sale of the foreclosed properties to NSC. On September
6, 1985, the trial court issued an Order requiring the
Consortium to post a bond of P25 million in favor of
Coastal for damages that petitioner may suffer from the
lifting of the TRO. The bond filed was then approved
by the RTC in its Order of September 13, 1985.xxv
On December 15, 1986, Civil Case No. 21272
was finally decided by Judge Nicolas P. Lapena, Jr., in
favor of Coastal.xxv VISCO was ordered to pay
petitioner the sum of P851,316.19 with interest at the
legal rate, plus attorneys fees of P50,000.00 and
costs.xxv Coastal filed a Motion for Execution,xxv but the
judgment has remained unsatisfied to date.
On January 5, 1992, a Decisionxxv on Civil Case
No. 3929 was rendered as follows:
WHEREFORE, this Court hereby renders
judgment in favor of the defendants and
against the plaintiff Coastal Pacific
 Rolling Mills, Co., Inc.,
Trading, Inc. BY WAY OF THE MAIN Far East Bank & Trust
4. Dismissing the
COMPLAINT, to wit: Company, Philippine Amended Complaint of
Commercial Industrial the plaintiff;
Bank, Equitable
1. Declaring the Banking Corporation,
extrajudicial Prudential Bank, Board 5. Ordering the plaintiff
foreclosure sale of Trustees- to pay the cost; AND
conducted by the Consortium of Banks-
sheriff and the [VISCO], United BY WAY OF
corresponding Coconut Planters Bank, CROSS CLAIM
certificate of sale City Trust Banking INTERPOSED
executed by the Corporation, BY THE DEFENDANT
defendant sheriffs on Associated Bank, National Steel
March 15, 1985 Insular Bank of Asia Corporation against the
relative to the real and America, Consortium of Banks and
properties of the International Corporate SRM/VISCO, the same is
defendant Bank, Commercial dismissed for lack of
SRM/VISCO of Bank of Manila, Bank merit, without
Cortes, Bohol, of the Philippine pronouncement as to
Philippines, which Islands and the cost.xxv
were registered in the National Steel
Register of Deeds of Corporation in the
Bohol, on May 22, instant case the amount
1985 and the Transfer of FIVE HUNDRED
of Assignment to the Insisting that the trial court erred in holding that
THOUSAND PESOS
defendant National it had failed to prove its case by preponderance of
(P500,000.00)
Steel Corporation of evidence, Coastal filed an appeal with the CA.
representing damages;
any or part of the Allegedly, the purported insufficiency of proof was
foreclosed properties based on the sole ground that petitioner did not file an
arising from the 3. Ordering the plaintiff objection when the properties were sold on execution.
extrajudicial The (sic) Coastal It contended that the court a quo had arrived at this
foreclosure sale as Pacific Trading Inc. to erroneous conclusion by relying on inapplicable
valid and legal; pay the defendants the jurisprudence.xxv

2. Ordering the plaintiff amount of FIFTEEN

Coastal Pacific Trading THOUSAND PESOS
Additionally, Coastal argued that the trial court
Inc. to pay the (P15,000.00)
had erred in not annulling the foreclosure proceedings
defendant Consortium representing attorneys
and sale for being fictitious and done to defraud
of Banks[,] Southern fees;

petitioner as VISCOs creditor. Supposedly, the DBP
mortgage had already been extinguished by payment;
thus, the bank could not have assigned the contract to
the Consortium.xxv
Petitioner also prayed for the annulment of the
sale in favor of NSC on the ground that the latter was a
party to the fraudulent foreclosure and, hence, not a
buyer in good faith.xxv
Ruling of the
Court of Appeals
At the outset, the CA stressed that the validity
of the Consortiums mortgage, foreclosure, and
assignments had already been upheld in CA-GR CV
No. 03719, entitled Southern Industrial Projects v.
United Coconut Planters Bank xxv Citing Valencia v.
RTC of Quezon City, Br. 90xxv and Vda. de Cruzo v.
Carriaga,xxv the CA explained that the absolute
identity of parties was not necessary for the
application of res judicata. All that was required was
a shared identity of interests, as shown by the identity
of reliefs sought by one person in a prior case and by
another in a subsequent case.
While Coastal was not a party to Southern
Industrial Projects, it should nevertheless be bound by that
Decision, because it had raised substantially the same claim
and cause of action as SIP, according to the appellate court.
The CA held that the basic reliefs sought by Coastal and
SIP were substantially the same: the nullification of the
Deed of Assignment in favor of the Consortium, the
foreclosure sale, and the subsequent sale to NSC. Because
this identity of reliefs sought showed an identity of
interests, the CA concluded that it need not rule on those
issues.xxv
As to the issue that the DBP mortgage had been
extinguished by payment, the CA quoted its earlier
Decision in Southern Industrial Projects:
The evidence shows that the
proceeds of the sale of the two
generating sets were applied by
defendants-appellees in the payment of
the outstanding obligation of VISCO. It
appears that said proceeds were
deposited in the bank account of the
consortium of creditors to avoid it being
garnished by the creditors
notwithstanding the set-off, VISCO was
still indebted to the defendants-
appellees.
The evidence x x x shows that
upon VISCOs request for [cash]
advance, the Far East Banks (sic) and
Trust Co., the manager of the
consortium of creditors, issued FEBTC
check No. 239249 on June 29, 1976 in
the amount of P1,342,656.68 payable to
the DBP to pay off its loan to the latter.
xxx xxx
xxx
x x x. A public document
celebrated with all the legal formalities
under the safeguard of notarial
certificate is evidence against a party,
and a high degree [of] proof is necessary
to overcome the legal presumption that
the recital is true. The biased and
interested testimony of one of the parties
to such instrument who attempts to vary
or repudiate what it purports to be,
cannot overcome the evidentiary force
of what is recited in the document.xxv
The appellate court also rejected petitioners
contention that the Consortiums Petition for
Extrajudicial Foreclosure was already barred by the
earlier resort to a judicial foreclosure. The CA clarified
that in filing a Petition for Judicial Foreclosure, the
Consortium had pursued its right as junior
encumbrancer. On the other hand, the Consortium filed
a Petition for Extrajudicial Foreclosure as a first
encumbrancer by virtue of DBPs assignment in its
favor.xxv
The CA also rejected petitioners theory of
extinguishment of obligation by merger. It observed
that the merger could not have possibly taken place,
because respondent banks and VISCO were not
creditors and debtors in their own right.xxv
 Petitioners Motion for Reconsideration,xxv
which was received by the CA on November 15,
1994,xxv was denied for lack of merit.
Hence, this Petition.xxv
Issues
Petitioner raises the following issues for our
consideration:
I Coastal, x x x;xxv
Respondent Court of Appeals,
seemingly to avoid the irrefutable
evidence of fraud and collusion
practised by [respondents] against
[Petitioner] Coastal, erroneously
sustained the trial courts holding that the
present case is barred by res judicata
because of the previous decision in the
case of Southern Industrial Projects,
Inc., vs. United Coconut Planters Bank,
CA-G.R. No. 03719, considering that
the elements that call for the application
of this rule are not present in the case at
bar, and the exceptions allowed by this
Honorable Supreme Court are not
applicable here for variance or
distinction in facts and issues, x x x:xxv
"II
Respondent Court of Appeals further
erred in not annulling the Deed of
Assignment of the DBP mortgage x x x,
the extrajudicial foreclosure proceedings
of the two mortgages x x x, and the
separate sale of the land and
machineries as real and personal
properties by the foreclosing banks to
NSC, as well as the assignment or
waiver of SRM/Viscos legal right of
redemption over the foreclosed
properties, for being fraudulently
executed through collusion among the
[respondents] and in fraud of
SRM/Viscos creditor, [Petitioner]
Stripped of nonessentials, the two issues may be
restated as follows:
1. Whether the present action is barred by
res judicata
2. Whether respondents disposed of
VISCOs assets in fraud of the creditors
The Courts Ruling
The Petition is meritorious.
First Issue:
Res judicata
The CA cited Valencia v. RTC of Quezon Cityxxv
to support the finding that SIP and Coastal were
substantially the same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first
case, Cario, claimed Lot 4 based on an alleged purchase
of Valencias squatters rights over the property. The trial
court dismissed the claim and held that no such
purchase ever took place.xxv It also held that, on the
assumption that a sale had taken place, the sale was null
and void for being contrary to the pertinent housing
law. It also found that all current occupants of Lot 4
were illegal squatters; thus, it ordered their ejectment.
When this first case attained finality, Carinos
daughter, Catbagan, filed another suit against Valencia.
Catbagan challenged the applicability of the ejectment
Order issued to her; as an occupant of the lot, she was
allegedly not a party to the first case. Her Petition was
denied for lack of merit.xxv
The execution of the Decision in the first case
was again forestalled when Llanes, Carios sister-in-law
who was another occupant of Lot 4, filed another suit
against the same respondent. Like Cario, Llanes
insisted on having purchased the subject lot from
Valencia.xxv This Court ruled that the suit was barred by
res judicata. There was a substantial identity of parties,
because the right claimed by both Cario and Llanes

were based on each ones alleged purchase of Valencias
squatters rights.xxv
In the first case, sales of squatters rights were
already categorically declared null and void for being
contrary to law. Thus, Llanes admission that she had
purchased Valencias squatters rights placed her in the
same category as Cario. The purchase could not be
treated differently, because the final and executory
Decision held that all purchases of squatters rights
(regardless of who the purchasers were) were null and
void.xxv
Further, the earlier ruling held that the present
occupants are illegal squatters. That ruling included
Llanes, who was admittedly one of the occupants.xxv
Simply put, she and Valencia were considered identical
parties for purposes of res judicata, because they were
obviously litigating under the same void title and
capacity as vendees of squatters rights and as occupants
of Lot 4.
Moreover, we held in Valencia that Llanes suit
was merely a clear attempt to prevent or delay the
execution of the judgment in the first case, which had
become final by reason of the three affirmances by this
Court. The pattern to obstruct the execution of the first
judgment was obvious: after Cario lost the first case,
her daughter filed a second one. When the daughter lost
the second, the daughter-in-law filed a third case. It
may be observed that the three successive plaintiffs
were all occupants of the same property and belonged
to the same family; this fact was also indicative of their
privity.
Given this background, it becomes clear that the
finding of a substantial identity of parties in Valencia
was based on its peculiar factual circumstances, which
are different from those in the present case.
Unlike Llanes, Coastal is not asserting a right
that has been categorically declared null and void in a
prior case. In fact, its right based on the processing
agreement was upheld in Civil Case No. 21272.
Clearly, Coastal cannot be treated in the same manner
as Llanes.
The CA erred in applying Southern Industrial
Projects v. United Coconut Planters Bankxxv as a bar by
res judicata with respect to the present case. For this
principle to apply, the following elements must concur:
a) the former judgment was final; b) the court that
rendered it had jurisdiction over the subject matter and
the parties; c) the judgment was based on the merits;
and, d) between the first and the second actions, there
is an identity of parties, subject matters, and causes of
action.xxv
It is axiomatic that res judicata does not require
an absolute, but only a substantial, identity of parties.
There is a substantial identity when there is privity
between the two parties or they are successors-in-
interest by title subsequent to the commencement of the
action, litigating for the same thing, under the same
title, and in the same capacity.xxv Petitioner was not
acting in the same capacity as SIP when it filed Civil
Case No. 3383, which eventually became AC-GR CV
No. 03719. It brought this latter action as a creditor
under a processing agreement with VISCO; on the other
hand, the latter was sued by SIP, based on an alleged
breach of their management contract. Very clearly,
their rights were entirely distinct and separate from
each other. In no manner were these two creditors
privies of each other.
The causes of action in the two Complaints were
also different. Causes of action arise from violations of
rights. A single right may be violated by several acts or
omissions, in which case the plaintiff has only one
cause of action. Likewise, a single act or omission may
violate several rights at the same time, as when the act
constitutes a violation of separate and distinct legal
obligations.xxv The violation of each of these separate
rights is a separate cause of action in itself.xxv Hence,
although these causes of action arise from the same
state of facts, they are distinct and independent and may
be litigated separately; recovery on one is not a bar to
subsequent actions on the others.xxv
In the present case, the right of SIP (arising from
its management contract with VISCO) is totally distinct
and separate from the right of Coastal (arising from its
processing contract with VISCO). SIP and Coastal are
asserting distinct rights arising from different legal
obligations of the debtor corporation. Thus, VISCOs
violation of those separate rights has given rise to
separate causes of action.
The confusion in the resolution of the issue of
identity of parties occurred, because the two creditors
were assailing the same transactions of VISCO on the
same grounds. Since the two cases they filed presented
similar legal issues, the appellate court held that its
ruling in AC-GR CV No. 03719 was also applicable to
the instant case.

Common but palpable is this misconception of
the doctrine of res judicata. Persons do not become
privies by the mere fact that they are interested in the
same question or in proving the same set of facts, or that
one person is interested in the result of a litigation
involving the other. Hence, several creditors of one
debtor cannot be considered as identical parties for the
purpose of assailing the acts of the debtor. They have
distinct credits, rights, and interests, such that the
failure of one to recover should not preclude the other
creditors from also pursuing their legal remedies.
Further, petitioner, which was not a party to
Southern Industrial Projects (their causes of action
being separate and distinct), did not have the
opportunity to be heard in that case, much less to
present its own evidence. Thus, to bind petitioner to the
Decision in that case would clearly violate its rights to
due process. As a separate party, it has the right to have
its arguments and evidence evaluated on their own
merits.
Second Issue:
Fraud of Creditors
We now come to the heart of the Petition.
Coastal alleges that the assignment of mortgage, the
extrajudicial foreclosure proceedings, and the sale of
the properties of VISCO should all be rescinded on the
ground that they were done to defraud the latters
creditors.
The CA found no merit in petitioners
arguments. It ruled that the assignment conformed to
the requirements of law; that the consideration for the
assignment had allegedly been given by FEBTC; and
that, hence, the Consortium had a right to foreclose on
the mortgaged properties.
By focusing on the innate validity of these
Contracts, the CA totally overlooked the issue of fraud
as a ground for rescission. Elementary is the principle
that the validity of a contract does not preclude its
rescission. Under Articles 1380 and 1381 (3) of the
Civil Code, contracts that are otherwise valid between
the contracting parties may nonetheless be
subsequently rescinded by reason of injury to third
persons, like creditors.xxv In fact, rescission implies that
there is a contract that, while initially valid, produces a
lesion or pecuniary damage to someone.xxv Thus, when
the CA confined itself to the issue of the validity of
these contracts, it did not at all address the heart of
petitioners cause of action: whether these transactions
had been undertaken by the Consortium to defraud
VISCOs other creditors.
There is more than a preponderance of evidence
showing the Consortiums deliberate plan to defraud
VISCOs other creditors.
Consorti
um
Banks as
Directors
It will be recalled that Respondent Consortium
took over management and control of VISCO by
acquiring 90 percent of the latters equity. Thus, 9 out of
the 10 directors of the corporation were all officials of
the Consortium,xxv which may thus be said to have
effectively occupied and/or controlled the board.
Significantly, nowhere in the records can we find any
denial by respondent of this allegation by petitioner.xxv
As directors of VISCO, the officials of the
Consortium were in a position of trust; thus, they owed
it a duty of loyalty. This trust relationship sprang from
the fact that they had control and guidance over its
corporate affairs and property.xxv Their duty was more
stringent when it became insolvent or without sufficient
assets to meet its outstanding obligations that arose.
Because they were deemed trustees of the creditors in
those instances, they should have managed the
corporations assets with strict regard for the creditors
interests. When these directors became corporate
creditors in their own right, they should not have
permitted themselves to secure any undue advantage
over other creditors.xxv In the instant case, the
Consortium miserably failed to observe its duty of
fidelity towards VISCO and its creditors.
Duty of
the
Consorti
um
Banks
to
VISCOs
Creditors

Recall that as early as 1966, the Consortium,
through its directors on the board of VISCO, had
already assumed management and control over the
latter. Hence, when VISCO recognized its outstanding
liability to petitioner in 1970 and offered a Compromise
Agreement,xxv respondent banks were already at the
helm of the debtor corporation. The members of the
Consortium, therefore, cannot deny that they were
aware of those claims against the corporation.
Nonetheless, they did not adopt any measure to protect
petitioners credit.
Quite the opposite, they even took steps to hide
VISCOs unexpended funds. Garcias 1972 letter to
Samonte unmistakably reveals that they kept those
funds in an account named Board of Trustees VISCO
Consortium of Banks. This fact alone shows an effort
to hide, with the evident intent to keep, those funds for
themselves. The letter even says that, for the protection
of the Consortium, the name VISCO should be
eliminated entirely, so that the account name would
read Board of Trustees Consortium of Banks. Clearly,
this particular move was found to be necessary to avoid
a takeover by the government, which was also a creditor
of VISCO.xxv This express intent of the latter, under the
direction and for the benefit of the Consortium,
corroborated petitioners contention that respondent
banks had defrauded VISCOs creditors.
Assignm
ent of
Mortgage
in Favor of the
Consortium
Banks
The assignment of mortgage in favor of the
Consortium also bears the earmarks of fraud. Initially,
respondent banks had agreed that VISCO should sell
two of its generator sets, so that the proceeds could be
utilized to pay DBP. This plan was direct, simple, and
would extinguish the encumbrance in favor of the bank.
Then, quite surprisingly, the Consortium set
down the following payment procedure: Filmag would
pay VISCO; the latter would pay the Consortium,
which would pay DBP; and the Consortium would then
subrogate DBP to the latters rights as first mortgagee.
One is then led to ask: if the intention was to pay DBP;
from the sales proceeds of the generator sets, why did
the money have to pass through the Consortium?
The answer lies in the nature of respondents
mortgage. It will be recalled that this mortgage
remained unrecorded and not legally binding on the
other creditors.xxv Thus, if DBP had been directly paid
by VISCO, the latter could have freed up its properties
to the satisfaction of all its other creditors. This
procedure would have been fair to all, but it was not
followed by the Consortium.
Instead, the proceeds from the sale of the
generator sets were first paid to respondent banks,
which used the money to pay DBP. The last step in the
payment procedure explains the reason for this
preferred though roundabout manner of payment. This
final step entitled the Consortium to obtain DBPs
primary lien through an assignment by allowing it to
pay VISCOs loan to the bank, without incurring
additional expenses.
In the end, by collecting the money from
VISCO, respondent banks recovered what they had
ostensibly remitted to DBP. Moreover, the primary lien
that respondent banks acquired allowed them, as
unsecured creditors of VISCO, to foreclose on the
assets of the corporation without regard to its inferior
claims. It was a clever ruse that would have worked,
were it not done by creditors who were duty-bound, as
directors, not to take clever advantage of other
creditors.
To be sure, there was undue advantage. The
payment scheme devised by the Consortium continued
the efficacy of the primary lien, this time in its favor, to
the detriment of the other creditors. When one
considers its knowledge that VISCOs assets might not
be enough to meet its obligations to several creditors,xxv
the intention to defraud the other creditors is even more
striking. Fraud is present when the debtor knows that
its actions would cause injury.xxv
The assignment in favor of the Consortium was
a rescissible contract for having been undertaken in
fraud of creditors.xxv Article 1385 of the Civil Code
provides for the effect of rescission, as follows:
Rescission creates the obligation
to return the things which were the
object of the contract, together with their

fruits, and the price with its interest;
consequently, it can be carried out only
when he who demands rescission can
return whatever he may be obliged to
restore.
Neither shall rescission take
place when the things which are the
object of the contract are legally in the
possession of third persons who did not
act in bad faith.
In this case, indemnity for
damages may be demanded from the
person causing the loss.
Indeed, mutual restitution is required in all
cases involving rescission. But when it is no longer
possible to return the object of the contract, an
indemnity for damages operates as restitution. The
important consideration is that the indemnity for
damages should restore to the injured party what was
lost.
In the case at bar, it is no longer possible to
order the return of VISCOs properties. They have
already been sold to the NSC, which has not been
shown to have acted in bad faith. The party alleging bad
faith must establish it by competent proof. Sans that
proof, purchasers are deemed to be in good faith, and
their interest in the subject property must not be
disturbed. Purchasers in good faith are those who buy
the property of another without notice that some other
person has a right to or interest in the property; and who
pay the full and fair price for it at the time of the Considering, however, the length of time that
purchase, or before they get notice of some other petitioners just claim has been thwarted, we find it in
persons claim of interest in the property.xxv the best interest of substantial justice to decide the issue
of damages now on the basis of the available records.
A remand for further proceedings would only result in
a needless delay.
In the present case, petitioner failed to discharge
its burden of proving bad faith on the part of NSC.
Going over the records of the case, we find that
There is insufficient evidence on record that the latter
petitioner has a final and executory judgment in its
participated in the design to defraud VISCOs creditors.
favor in Civil Case No. 21272. The judgment in that
To NSC, petitioner imputes fraud from the sole fact that
case reads as follows:
the former was allegedly aware that its vendor, the
Consortium, had taken control over VISCO including
the corporations assets.xxv We cannot appreciate how
knowledge of the takeover would necessarily implicate WHEREFORE, judgment is
anyone in the Consortiums fraudulent designs. Besides, hereby rendered in favor of the plaintiffs
NSC was not shown to be privy to the information that ordering defendant VISCO/SRM to pay
VISCO had no other assets to satisfy other creditors the plaintiffs the sum of P851,316.19
respective claims. with interest thereon at the legal rate
from the filing of this complaint, plus
attorneys fees of P50,000.00 and to pay
The right of an innocent purchaser for value
the costs.xxv
must be respected and protected, even if its vendors
obtained their title through fraud.xxv Pursuant to this
principle, the remedy of the defrauded creditor is to sue
for damages against those who caused or employed the
fraud. Hence, petitioner is entitled to damages from the
Consortium. The foregoing is the judgment credit that
petitioner cannot enforce against VISCO because of
Respondent Consortiums fraudulent disposition of the
Award of Damages corporations assets. In other words, the above amounts
define the extent of the actual damage suffered by
Coastal and the amount that respondent has to restore
It is essential that for damages to be awarded, a
claimant must satisfactorily prove during the trial that pursuant to Article 1385.
they have a factual basis, and that the defendants acts
have a causal connection to them.xxv Thus, the question
of damages should normally call for a remand of the
case to the lower court for further proceedings.

On the basis of the finding of fraud, the award
of exemplary damages is in order, to serve as a warning
to other creditors not to abuse their rights. Under Article
2229 of the Civil Code, exemplary or corrective
damages are imposed by way of example or correction
for the public good. By their nature, exemplary
damages should be imposed in an amount sufficient and
effective to deter possible future similar acts by
respondent banks. The court finds the amount of
P250,000 sufficient in the instant case.
As a rule, a corporation is not entitled to moral
damages because, not being a natural person, it cannot
experience physical suffering or sentiments like
wounded feelings, serious anxiety, mental anguish and
moral shock.xxv The only exception to this rule is when
the corporation has a good reputation that is debased,
resulting in its humiliation in the business realm.xxv In
the present case, the records do not show any evidence
that the name or reputation of petitioner has been
sullied as a result of the Consortiums fraudulent acts.
Accordingly, moral damages are not warranted.
WHEREFORE, the Petition is GRANTED. The
assailed Decision of the Court of Appeals dated
September 27, 1994, and its Resolution dated January
5, 1995, are hereby REVERSED and SET ASIDE.
Respondent Consortium of Banks is ordered to PAY
Petitioner Coastal Pacific Trading, Inc., the sum
adjudged by the Regional Trial Court of Pasig, Branch
167, in Civil Case No. 21272 entitled Coastal Pacific
Trading, Felix de la Costa, and Aurora del Banco v.
Visayan Integrated Corporation, to wit: x x x the sum
of P851,316.19 with interest thereon at the legal rate
from the filing of [the] [C]omplaint, plus attorneys fees
of P50,000 and x x x the costs. Respondent Consortium
of Banks is further ordered to pay petitioner exemplary
damages in the amount of P250,000.
SO ORDERED.
LIBEL
FILIPINAS BROADCASTING NETWORK, INC.,
petitioner, vs. AGO MEDICAL AND
EDUCATIONAL CENTER-BICOL
CHRISTIAN COLLEGE OF MEDICINE,
(AMEC-BCCM) and ANGELITA F. AGO,
respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January
1999 Decision[2] and 26 January 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 40151. The Court
of Appeals affirmed with modification the 14
December 1992 Decision[3] of the Regional Trial Court
of Legazpi City, Branch 10, in Civil Case No. 8236.
The Court of Appeals held Filipinas Broadcasting
Network, Inc. and its broadcasters Hermogenes Alegre
and Carmelo Rima liable for libel and ordered them to
solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages,
attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary[4] program hosted by
Carmelo Mel Rima (Rima) and Hermogenes Jun Alegre
(Alegre).[5] Expos is aired every morning over DZRC-
AM which is owned by Filipinas Broadcasting
Network, Inc. (FBNI). Expos is heard over Legazpi
City, the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima
and Alegre exposed various alleged complaints from
students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of
Medicine (AMEC) and its administrators. Claiming
that the broadcasts were defamatory, AMEC and
Angelita Ago (Ago), as Dean of AMECs College of
Medicine, filed a complaint for damages[7] against
FBNI, Rima and Alegre on 27 February 1990. Quoted
are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you
have children taking medical course at
AMEC-BCCM, advise them to pass all
subjects because if they fail in any subject
they will repeat their year level, taking up
all subjects including those they have
passed already. Several students had
approached me stating that they had consulted
with the DECS which told them that there is
no such regulation. If [there] is no such
regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical
Therapy had complained that the course is
not recognized by DECS. xxx
Third: Students are required to take and
pay for the subject even if the subject does
not have an instructor - such greed for
money on the part of AMECs
administration. Take the subject Anatomy:
students would pay for the subject upon
enrolment because it is offered by the school.
However there would be no instructor for such

subject. Students would be informed that
course would be moved to a later date because
the school is still searching for the appropriate
instructor.
xxx
It is a public knowledge that the Ago Medical
and Educational Center has survived and has
been surviving for the past few years since its
inception because of funds support from
foreign foundations. If you will take a look at
the AMEC premises youll find out that the
names of the buildings there are foreign
soundings. There is a McDonald Hall. Why
not Jose Rizal or Bonifacio Hall? That is a
very concrete and undeniable evidence that the
support of foreign foundations for AMEC is
substantial, isnt it? With the report which is
the basis of the expose in DZRC today, it
would be very easy for detractors and enemies
of the Ago family to stop the flow of support
of foreign foundations who assist the medical
school on the basis of the latters purpose. But
if the purpose of the institution (AMEC) is to
deceive students at cross purpose with its
reason for being it is possible for these foreign
foundations to lift or suspend their donations
temporarily.[8]
xxx
On the other hand, the administrators of
AMEC-BCCM, AMEC Science High
School and the AMEC-Institute of Mass
Communication in their effort to minimize
expenses in terms of salary are absorbing or
continues to accept rejects. For example how
many teachers in AMEC are former teachers
of Aquinas University but were removed
because of immorality? Does it mean that the
present administration of AMEC have the total
definite moral foundation from catholic
administrator of Aquinas University. I will
prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of
moral and physical misfits. Probably they
only qualify in terms of intellect. The Dean of
Student Affairs of AMEC is Justita Lola, as
the family name implies. She is too old to
work, being an old woman. Is the AMEC
administration exploiting the very
[e]nterprising or compromising and
undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola
were if she is very old. As in atmospheric
situation zero visibility the plane cannot land,
meaning she is very old, low pay follows. By
the way, Dean Justita Lola is also the chairman
of the committee on scholarship in AMEC.
She had retired from Bicol University a long
time ago but AMEC has patiently made use of
her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC
is a dumping ground for moral and physically
misfit people. What does this mean? Immoral
and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But
this is the truth. The truth is this, that your are
no longer fit to teach. You are too old. As an
aviation, your case is zero visibility. Dont
insist.
xxx Why did AMEC still absorb her as a
teacher, a dean, and chairman of the
scholarship committee at that. The reason is
practical cost saving in salaries, because an old
person is not fastidious, so long as she has
money to buy the ingredient of beetle juice.
The elderly can get by thats why she (Lola)
was taken in as Dean.
xxx
xxx On our end our task is to attend to the
interests of students. It is likely that the
students would be influenced by evil. When
they become members of society outside of
campus will be liabilities rather than assets.
What do you expect from a doctor who while
studying at AMEC is so much burdened with
unreasonable imposition? What do you expect
from a student who aside from peculiar
problems because not all students are rich in
their struggle to improve their social status are
even more burdened with false regulations.
xxx[9] (Emphasis supplied)
The complaint further alleged that AMEC is a
reputable learning institution. With the supposed
exposs, FBNI, Rima and Alegre transmitted malicious
imputations, and as such, destroyed plaintiffs (AMEC
and Ago) reputation. AMEC and Ago included FBNI
as defendant for allegedly failing to exercise due
diligence in the selection and supervision of its
employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through
Atty. Rozil Lozares, filed an Answer[10] alleging that
the broadcasts against AMEC were fair and true. FBNI,
Rima and Alegre claimed that they were plainly
impelled by a sense of public duty to report the goings-
on in AMEC, [which is] an institution imbued with
public interest.
Thereafter, trial ensued. During the presentation of
the evidence for the defense, Atty. Edmundo Cea,

collaborating counsel of Atty. Lozares, filed a Motion
to Dismiss[11] on FBNIs behalf. The trial court denied
the motion to dismiss. Consequently, FBNI filed a
separate Answer claiming that it exercised due
diligence in the selection and supervision of Rima and
Alegre. FBNI claimed that before hiring a broadcaster,
the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and
training program after passing the interview. FBNI
likewise claimed that it always reminds its broadcasters
to observe truth, fairness and objectivity in their
broadcasts and to refrain from using libelous and
indecent language. Moreover, FBNI requires all
broadcasters to pass the Kapisanan ng mga Brodkaster
sa Pilipinas (KBP) accreditation test and to secure a
KBP permit.
On 14 December 1992, the trial court rendered a
Decision[12] finding FBNI and Alegre liable for libel
except Rima. The trial court held that the broadcasts are
libelous per se. The trial court rejected the broadcasters
claim that their utterances were the result of straight
reporting because it had no factual basis. The
broadcasters did not even verify their reports before
airing them to show good faith. In holding FBNI liable
for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its
employees.
In absolving Rima from the charge, the trial court
ruled that Rimas only participation was when he agreed
with Alegres expos. The trial court found Rimas
statement within the bounds of freedom of speech,
expression, and of the press. The dispositive portion of
the decision reads:
WHEREFORE, premises considered, this
court finds for the plaintiff. Considering the
degree of damages caused by the
controversial utterances, which are not
found by this court to be really very serious
and damaging, and there being no showing
that indeed the enrollment of plaintiff
school dropped, defendants Hermogenes Jun
Alegre, Jr. and Filipinas Broadcasting
Network (owner of the radio station DZRC),
are hereby jointly and severally ordered to pay
plaintiff Ago Medical and Educational Center-
Bicol Christian College of Medicine (AMEC-
BCCM) the amount of P300,000.00 moral
damages, plus P30,000.00 reimbursement of
attorneys fees, and to pay the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on
one hand, and AMEC and Ago, on the other, appealed
the decision to the Court of Appeals. The Court of
Appeals affirmed the trial courts judgment with
modification. The appellate court made Rima solidarily
liable with FBNI and Alegre. The appellate court
denied Agos claim for damages and attorneys fees
because the broadcasts were directed against AMEC,
and not against her. The dispositive portion of the Court
of Appeals decision reads:
WHEREFORE, the decision appealed
from is hereby AFFIRMED, subject to the
modification that broadcaster Mel Rima is
SOLIDARILY ADJUDGED liable with
FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for
reconsideration which the Court of Appeals denied in
its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling
that the questioned broadcasts are libelous per se and
that FBNI, Rima and Alegre failed to overcome the
legal presumption of malice. The Court of Appeals
found Rima and Alegres claim that they were actuated
by their moral and social duty to inform the public of
the students gripes as insufficient to justify the
utterance of the defamatory remarks.
Finding no factual basis for the imputations against
AMECs administrators, the Court of Appeals ruled that
the broadcasts were made with reckless disregard as to
whether they were true or false. The appellate court
pointed out that FBNI, Rima and Alegre failed to
present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely
gave a single name when asked to identify the students.
According to the Court of Appeals, these circumstances
cast doubt on the veracity of the broadcasters claim that
they were impelled by their moral and social duty to
inform the public about the students gripes.
The Court of Appeals found Rima also liable for
libel since he remarked that (1) AMEC-BCCM is a
dumping ground for morally and physically misfit
teachers; (2) AMEC obtained the services of Dean
Justita Lola to minimize expenses on its employees
salaries; and (3) AMEC burdened the students with
unreasonable imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to
exercise due diligence in the selection and supervision
of its employees for allowing Rima and Alegre to make
the radio broadcasts without the proper KBP
accreditation. The Court of Appeals denied Agos claim
for damages and attorneys fees because the libelous
remarks were directed against AMEC, and not against
her. The Court of Appeals adjudged FBNI, Rima and
Alegre solidarily liable to pay AMEC moral damages,
attorneys fees and costs of suit.

Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE
LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO
MORAL DAMAGES;
III. WHETHER THE AWARD OF
ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY
LIABLE WITH RIMA AND ALEGRE
FOR PAYMENT OF MORAL
DAMAGES, ATTORNEYS FEES
AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the
allegedly defamatory remarks of Rima and Alegre
against AMEC.[17] While AMEC did not point out
clearly the legal basis for its complaint, a reading of the
complaint reveals that AMECs cause of action is based
on Articles 30 and 33 of the Civil Code. Article 30[18]
authorizes a separate civil action to recover civil
liability arising from a criminal offense. On the other
hand, Article 33[19] particularly provides that the injured
party may bring a separate civil action for damages in
cases of defamation, fraud, and physical injuries.
AMEC also invokes Article 19[20] of the Civil Code to
justify its claim for damages. AMEC cites Articles
2176[21] and 2180[22] of the Civil Code to hold FBNI
solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a
crime, or of a vice or defect, real or imaginary, or any
act or omission, condition, status, or circumstance
tending to cause the dishonor, discredit, or contempt of
a natural or juridical person, or to blacken the memory
of one who is dead.[24]
There is no question that the broadcasts were made
public and imputed to AMEC defects or circumstances
tending to cause it dishonor, discredit and contempt.
Rima and Alegres remarks such as greed for money on
the part of AMECs administrators; AMEC is a dumping
ground, garbage of xxx moral and physical misfits; and
AMEC students who graduate will be liabilities rather
than assets of the society are libelous per se. Taken as
a whole, the broadcasts suggest that AMEC is a money-
making institution where physically and morally unfit
teachers abound.
However, FBNI contends that the broadcasts are
not malicious. FBNI claims that Rima and Alegre were
plainly impelled by their civic duty to air the students
gripes. FBNI alleges that there is no evidence that ill
will or spite motivated Rima and Alegre in making the
broadcasts. FBNI further points out that Rima and
Alegre exerted efforts to obtain AMECs side and gave
Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no
malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed
malicious.[25] Rima and Alegre failed to show
adequately their good intention and justifiable motive
in airing the supposed gripes of the students. As hosts
of a documentary or public affairs program, Rima and
Alegre should have presented the public issues free
from inaccurate and misleading information.[26]
Hearing the students alleged complaints a month before
the expos,[27] they had sufficient time to verify their
sources and information. However, Rima and Alegre
hardly made a thorough investigation of the students
alleged gripes. Neither did they inquire about nor
confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre
testified that he merely went to AMEC to verify his
report from an alleged AMEC official who refused to
disclose any information. Alegre simply relied on the
words of the students because they were many and not
because there is proof that what they are saying is
true.[28] This plainly shows Rima and Alegres reckless
disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not
the result of straight reporting. Significantly, some
courts in the United States apply the privilege of neutral
reportage in libel cases involving matters of public
interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports
certain defamatory statements made against public
figures is shielded from liability, regardless of the
republishers subjective awareness of the truth or falsity
of the accusation.[29] Rima and Alegre cannot invoke
the privilege of neutral reportage because unfounded
comments abound in the broadcasts. Moreover, there is
no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral
reportage applies where the defamed person is a public
figure who is involved in an existing controversy, and
a party to that controversy makes the defamatory
statement.[30]
However, FBNI argues vigorously that malice in
law does not apply to this case. Citing Borjal v. Court
of Appeals,[31] FBNI contends that the broadcasts fall
within the coverage of qualifiedly privileged
communications for being commentaries on matters of
public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC
allegedly failed to prove actual malice, there is no libel.

FBNIs reliance on Borjal is misplaced. In Borjal,
the Court elucidated on the doctrine of fair comment,
thus:
[F]air commentaries on matters of public
interest are privileged and constitute a valid
defense in an action for libel or slander. The
doctrine of fair comment means that while in
general every discreditable imputation
publicly made is deemed false, because every
man is presumed innocent until his guilt is
judicially proved, and every false imputation
is deemed malicious, nevertheless, when the
discreditable imputation is directed against a
public person in his public capacity, it is not
necessarily actionable. In order that such
discreditable imputation to a public official
may be actionable, it must either be a false
allegation of fact or a comment based on a
false supposition. If the comment is an
expression of opinion, based on established
facts, then it is immaterial that the opinion
happens to be mistaken, as long as it might
reasonably be inferred from the facts.[32]
(Emphasis supplied)
True, AMEC is a private learning institution whose
business of educating students is genuinely imbued
with public interest. The welfare of the youth in general
and AMECs students in particular is a matter which the
public has the right to know. Thus, similar to the
newspaper articles in Borjal, the subject broadcasts
dealt with matters of public interest. However, unlike
in Borjal, the questioned broadcasts are not based on
established facts. The record supports the following
findings of the trial court:
xxx Although defendants claim that they were
motivated by consistent reports of students
and parents against plaintiff, yet, defendants
have not presented in court, nor even gave
name of a single student who made the
complaint to them, much less present written
complaint or petition to that effect. To accept
this defense of defendants is too dangerous
because it could easily give license to the
media to malign people and establishments
based on flimsy excuses that there were
reports to them although they could not
satisfactorily establish it. Such laxity would
encourage careless and irresponsible
broadcasting which is inimical to public
interests.
Secondly, there is reason to believe that
defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and
analyze the truth of the reports before they
aired it, in order to prove that they are in good
faith.
Alegre contended that plaintiff school had
no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff
produced a certificate coming from DECS that
as of Sept. 22, 1987 or more than 2 years
before the controversial broadcast,
accreditation to offer Physical Therapy course
had already been given the plaintiff, which
certificate is signed by no less than the
Secretary of Education and Culture herself,
Lourdes R. Quisumbing (Exh. C-rebuttal).
Defendants could have easily known this were
they careful enough to verify. And yet,
defendants were very categorical and sounded
too positive when they made the erroneous
report that plaintiff had no permit to offer
Physical Therapy courses which they were
offering.
The allegation that plaintiff was getting
tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true
also. The truth is there is no Mcdonald
Foundation existing. Although a big building
of plaintiff school was given the name
Mcdonald building, that was only in order to
honor the first missionary in Bicol of plaintiffs
religion, as explained by Dr. Lita Ago.
Contrary to the claim of defendants over the
air, not a single centavo appears to be received
by plaintiff school from the aforementioned
McDonald Foundation which does not exist.
Defendants did not even also bother to
prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject,
they are made to repeat all the other subject[s],
even those they have already passed, nor their
claim that the school charges laboratory fees
even if there are no laboratories in the school.
No evidence was presented to prove the bases
for these claims, at least in order to give
semblance of good faith.
As for the allegation that plaintiff is the
dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita
Lola who is said to be so old, with zero
visibility already. Dean Lola testified in court
last Jan. 21, 1991, and was found to be 75
years old. xxx Even older people prove to be
effective teachers like Supreme Court Justices
who are still very much in demand as law
professors in their late years. Counsel for
defendants is past 75 but is found by this court
to be still very sharp and effective. So is
plaintiffs counsel.

Dr. Lola was observed by this court not to
be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs graduates
become liabilities rather than assets of our
society is a mere conclusion. Being from the
place himself, this court is aware that majority
of the medical graduates of plaintiffs pass the
board examination easily and become
prosperous and responsible professionals.[33]
Had the comments been an expression of opinion
based on established facts, it is immaterial that the
opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.[34] However, the
comments of Rima and Alegre were not backed up by
facts. Therefore, the broadcasts are not privileged and
remain libelous per se.
The broadcasts also violate the Radio Code of [35]
the Kapisanan ng mga Brodkaster sa Pilipinas, Ink.
(Radio Code). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES
AND COMMENTARIES
1. x x x
4. Public affairs program shall present
public issues free from personal
bias, prejudice and inaccurate and
misleading information. x x x
Furthermore, the station shall strive
to present balanced discussion of
issues. x x x.
xxx
7. The station shall be responsible at all
times in the supervision of public
affairs, public issues and commentary
programs so that they conform to the wounded feelings, serious anxiety, mental anguish or
provisions and standards of this code. moral shock.[40] The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.[41] to justify the award of
8. It shall be the responsibility of the
moral damages. However, the Courts statement in
newscaster, commentator, host and
Mambulao that a corporation may have a good
announcer to protect public interest,
reputation which, if besmirched, may also be a ground
general welfare and good order in the
for the award of moral damages is an obiter dictum.[42]
presentation of public affairs and
public issues.[36] (Emphasis supplied) Nevertheless, AMECs claim for moral damages
falls under item 7 of Article 2219[43] of the Civil Code.
The broadcasts fail to meet the standards
This provision expressly authorizes the recovery of
prescribed in the Radio Code, which lays down the code
moral damages in cases of libel, slander or any other
of ethical conduct governing practitioners in the radio
form of defamation. Article 2219(7) does not qualify
broadcast industry. The Radio Code is a voluntary code
whether the plaintiff is a natural or juridical person.
of conduct imposed by the radio broadcast industry on
Therefore, a juridical person such as a corporation can
its own members. The Radio Code is a public warranty
validly complain for libel or any other form of
by the radio broadcast industry that radio broadcast
defamation and claim for moral damages.[44]
practitioners are subject to a code by which their
conduct are measured for lapses, liability and sanctions. Moreover, where the broadcast is libelous per se,
the law implies damages.[45] In such a case, evidence of
The public has a right to expect and demand that
an honest mistake or the want of character or reputation
radio broadcast practitioners live up to the code of
of the party libeled goes only in mitigation of
conduct of their profession, just like other
damages.[46] Neither in such a case is the plaintiff
professionals. A professional code of conduct provides
required to introduce evidence of actual damages as a
the standards for determining whether a person has
condition precedent to the recovery of some
acted justly, honestly and with good faith in the exercise
damages.[47] In this case, the broadcasts are libelous per
of his rights and performance of his duties as required
se. Thus, AMEC is entitled to moral damages.
by Article 19[37] of the Civil Code. A professional code
of conduct also provides the standards for determining However, we find the award of P300,000 moral
whether a person who willfully causes loss or injury to damages unreasonable. The record shows that even
another has acted in a manner contrary to morals or though the broadcasts were libelous per se, AMEC has
good customs under Article 21[38] of the Civil Code. not suffered any substantial or material damage to its
reputation. Therefore, we reduce the award of moral
II.
damages from P300,000 to P150,000.
Whether AMEC is entitled to moral damages
III.
FBNI contends that AMEC is not entitled to moral
damages because it is a corporation.[39] Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to
A juridical person is generally not entitled to moral
moral damages, there is no basis for the award of
damages because, unlike a natural person, it cannot
attorneys fees. FBNI adds that the instant case does not
experience physical suffering or such sentiments as

[48]
fall under the enumeration in Article 2208 of the
Civil Code.
The award of attorneys fees is not proper because
AMEC failed to justify satisfactorily its claim for
attorneys fees. AMEC did not adduce evidence to
warrant the award of attorneys fees. Moreover, both the
trial and appellate courts failed to explicitly state in
their respective decisions the rationale for the award of
attorneys fees.[49] In Inter-Asia Investment Industries,
Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award
thereof as an item of damages is the exception
rather than the rule, and counsels fees are not
to be awarded every time a party wins a suit.
The power of the court to award attorneys
fees under Article 2208 of the Civil Code
demands factual, legal and equitable
justification, without which the award is a
conclusion without a premise, its basis
being improperly left to speculation and
conjecture. In all events, the court must
explicitly state in the text of the decision, and
not only in the decretal portion thereof, the
legal reason for the award of attorneys fees.[51]
(Emphasis supplied)
While it mentioned about the award of attorneys
fees by stating that it lies within the discretion of the
court and depends upon the circumstances of each case,
the Court of Appeals failed to point out any
circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and
Alegre
for moral damages, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with
Rima and Alegre for the payment of damages and
attorneys fees because it exercised due diligence in the
selection and supervision of its employees, particularly
Rima and Alegre. FBNI maintains that its broadcasters,
including Rima and Alegre, undergo a very regimented
process before they are allowed to go on air. Those who
apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of
training are irrelevant to his competence as a
broadcaster. FBNI points out that the minor
deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not
exercise the diligence of a good father of a family in
selecting and supervising them. Rimas accreditation
lapsed due to his non-payment of the KBP annual fees
while Alegres accreditation card was delayed allegedly
for reasons attributable to the KBP Manila Office.
FBNI claims that membership in the KBP is merely
voluntary and not required by any law or government
regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort
feasors are jointly and severally liable for the tort which
they commit.[52] Joint tort feasors are all the persons
who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission
of a tort, or who approve of it after it is done, if done
for their benefit.[53] Thus, AMEC correctly anchored its
cause of action against FBNI on Articles 2176 and 2180
of the Civil Code.
As operator of DZRC-AM and employer of Rima
and Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the
Court of Appeals, recovery for defamatory statements
published by radio or television may be had from the
owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the
making of the defamatory statements.[54] An employer
and employee are solidarily liable for a defamatory
statement by the employee within the course and scope
of his or her employment, at least when the employer
authorizes or ratifies the defamation.[55] In this case,
Rima and Alegre were clearly performing their official
duties as hosts of FBNIs radio program Expos when
they aired the broadcasts. FBNI neither alleged nor
proved that Rima and Alegre went beyond the scope of
their work at that time. There was likewise no showing
that FBNI did not authorize and ratify the defamatory
broadcasts.
Moreover, there is insufficient evidence on record
that FBNI exercised due diligence in the selection and
supervision of its employees, particularly Rima and
Alegre. FBNI merely showed that it exercised diligence
in the selection of its broadcasters without introducing
any evidence to prove that it observed the same
diligence in the supervision of Rima and Alegre. FBNI
did not show how it exercised diligence in supervising
its broadcasters. FBNIs alleged constant reminder to its
broadcasters to observe truth, fairness and objectivity
and to refrain from using libelous and indecent
language is not enough to prove due diligence in the
supervision of its broadcasters. Adequate training of the
broadcasters on the industrys code of conduct,
sufficient information on libel laws, and continuous
evaluation of the broadcasters performance are but a
few of the many ways of showing diligence in the
supervision of broadcasters.
FBNI claims that it has taken all the precaution in
the selection of Rima and Alegre as broadcasters,
bearing in mind their qualifications. However, no clear
and convincing evidence shows that Rima and Alegre
underwent FBNIs regimented process of application.
Furthermore, FBNI admits that Rima and Alegre had

[56]
deficiencies in their KBP accreditation, which is one
of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary,
indicates the broadcasters strong commitment to
observe the broadcast industrys rules and regulations.
Clearly, these circumstances show FBNIs lack of
diligence in selecting and supervising Rima and
Alegre. Hence, FBNI is solidarily liable to pay damages
together with Rima and Alegre.
WHEREFORE, we DENY the instant petition.
We AFFIRM the Decision of 4 January 1999 and
Resolution of 26 January 2000 of the Court of Appeals
in CA-G.R. CV No. 40151 with the MODIFICATION
that the award of moral damages is reduced from
P300,000 to P150,000 and the award of attorneys fees
is deleted. Costs against petitioner.
SO ORDERED.
LIABILITY FOR TORTS
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO
TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Coruña, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.
ANTONIO, J.:
Certiorari to review the decision of the Court of
Appeals which affirmed the judgment of the Court of
First Instance of Manila in Civil Case No. 34185,
ordering petitioner, as third-party defendant, to pay
respondent Rita Gueco Tapnio, as third-party plaintiff,
the sum of P2,379.71, plus 12% interest per annum
from September 19, 1957 until the same is fully paid,
P200.00 attorney's fees and costs, the same amounts
which Rita Gueco Tapnio was ordered to pay the
Philippine American General Insurance Co., Inc., to be
paid directly to the Philippine American General
Insurance Co., Inc. in full satisfaction of the judgment
rendered against Rita Gueco Tapnio in favor of the
former; plus P500.00 attorney's fees for Rita Gueco
Tapnio and costs. The basic action is the complaint filed
by Philamgen (Philippine American General Insurance
Co., Inc.) as surety against Rita Gueco Tapnio and
Cecilio Gueco, for the recovery of the sum of P2,379.71
paid by Philamgen to the Philippine National Bank on
behalf of respondents Tapnio and Gueco, pursuant to an
indemnity agreement. Petitioner Bank was made third-
party defendant by Tapnio and Gueco on the theory that
their failure to pay the debt was due to the fault or
negligence of petitioner.
The facts as found by the respondent Court of Appeals,
in affirming the decision of the Court of First Instance
of Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant
Rita Gueco Tapnio as principal, in favor of the
Philippine National Bank Branch at San Fernando,
Pampanga, to guarantee the payment of defendant
Rita Gueco Tapnio's account with said Bank. In turn,
to guarantee the payment of whatever amount the
bonding company would pay to the Philippine
National Bank, both defendants executed the
indemnity agreement, Exh. B. Under the terms and
conditions of this indemnity agreement, whatever
amount the plaintiff would pay would earn interest
at the rate of 12% per annum, plus attorney's fees in
the amount of 15 % of the whole amount due in case
of court litigation.
The original amount of the bond was for P4,000.00;
but the amount was later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio
was indebted to the bank in the sum of P2,000.00,
plus accumulated interests unpaid, which she failed
to pay despite demands. The Bank wrote a letter of
demand to plaintiff, as per Exh. C; whereupon,
plaintiff paid the bank on September 18, 1957, the
full amount due and owing in the sum of P2,379.91,
for and on account of defendant Rita Gueco's
obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal
and written, upon defendants (Exhs. E and F), but to
no avail.
Defendant Rita Gueco Tapnio admitted all the
foregoing facts. She claims, however, when demand
was made upon her by plaintiff for her to pay her
debt to the Bank, that she told the Plaintiff that she
did not consider herself to be indebted to the Bank
at all because she had an agreement with one Jacobo-
Nazon whereby she had leased to the latter her
unused export sugar quota for the 1956-1957
agricultural year, consisting of 1,000 piculs at the
rate of P2.80 per picul, or for a total of P2,800.00,
which was already in excess of her obligation
guaranteed by plaintiff's bond, Exh. A. This lease
agreement, according to her, was with the
knowledge of the bank. But the Bank has placed
obstacles to the consummation of the lease, and the
delay caused by said obstacles forced 'Nazon to
rescind the lease contract. Thus, Rita Gueco Tapnio
filed her third-party complaint against the Bank to
recover from the latter any and all sums of money
which may be adjudged against her and in favor of
the plaitiff plus moral damages, attorney's fees and
costs.

Insofar as the contentions of the parties herein are
concerned, we quote with approval the following
findings of the lower court based on the evidence
presented at the trial of the case:
It has been established during the trial that Mrs.
Tapnio had an export sugar quota of 1,000
piculs for the agricultural year 1956-1957
which she did not need. She agreed to allow Mr.
Jacobo C. Tuazon to use said quota for the
consideration of P2,500.00 (Exh. "4"-Gueco).
This agreement was called a contract of lease of
sugar allotment.
At the time of the agreement, Mrs. Tapnio was
indebted to the Philippine National Bank at San
Fernando, Pampanga. Her indebtedness was
known as a crop loan and was secured by a
mortgage on her standing crop including her
sugar quota allocation for the agricultural year
corresponding to said standing crop. This
arrangement was necessary in order that when
Mrs. Tapnio harvests, the P.N.B., having a lien
on the crop, may effectively enforce collection
against her. Her sugar cannot be exported
without sugar quota allotment Sometimes,
however, a planter harvest less sugar than her
quota, so her excess quota is utilized by another
who pays her for its use. This is the arrangement
entered into between Mrs. Tapnio and Mr.
Tuazon regarding the former's excess quota for
1956-1957 (Exh. "4"-Gueco).
Since the quota was mortgaged to the P.N.B.,
the contract of lease had to be approved by said
Bank, The same was submitted to the branch
manager at San Fernando, Pampanga. The latter
required the parties to raise the consideration of
P2.80 per picul or a total of P2,800.00 (Exh. "2-
Gueco") informing them that "the minimum
lease rental acceptable to the Bank, is P2.80 per
picul." In a letter addressed to the branch
manager on August 10, 1956, Mr. Tuazon
informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He
further informed the manager that he was ready
to pay said amount as the funds were in his
folder which was kept in the bank.
Explaining the meaning of Tuazon's statement
as to the funds, it was stated by him that he had
an approved loan from the bank but he had not
yet utilized it as he was intending to use it to pay
for the quota. Hence, when he said the amount
needed to pay Mrs. Tapnio was in his folder
which was in the bank, he meant and the
manager understood and knew he had an
approved loan available to be used in payment
of the quota. In said Exh. "6-Gueco", Tuazon
also informed the manager that he would want
for a notice from the manager as to the time
when the bank needed the money so that Tuazon
could sign the corresponding promissory note.
Further Consideration of the evidence discloses that
when the branch manager of the Philippine National
Bank at San Fernando recommended the approval of
the contract of lease at the price of P2.80 per picul
(Exh. 1 1-Bank), whose recommendation was
concurred in by the Vice-president of said Bank, J.
V. Buenaventura, the board of directors required that
the amount be raised to 13.00 per picul. This act of
the board of directors was communicated to Tuazon,
who in turn asked for a reconsideration thereof. On
November 19, 1956, the branch manager submitted
Tuazon's request for reconsideration to the board of
directors with another recommendation for the
approval of the lease at P2.80 per picul, but the board
returned the recommendation unacted upon,
considering that the current price prevailing at the
time was P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of
the board of directors of the Bank to grant the motion
for reconsideration. The matter stood as it was until
February 22, 1957, when Tuazon wrote a letter (Exh.
10-Bank informing the Bank that he was no longer
interested to continue the deal, referring to the lease
of sugar quota allotment in favor of defendant Rita
Gueco Tapnio. The result is that the latter lost the
sum of P2,800.00 which she should have received
from Tuazon and which she could have paid the
Bank to cancel off her indebtedness,
The court below held, and in this holding we concur
that failure of the negotiation for the lease of the
sugar quota allocation of Rita Gueco Tapnio to
Tuazon was due to the fault of the directors of the
Philippine National Bank, The refusal on the part of
the bank to approve the lease at the rate of P2.80 per
picul which, as stated above, would have enabled
Rita Gueco Tapnio to realize the amount of
P2,800.00 which was more than sufficient to pay off
her indebtedness to the Bank, and its insistence on
the rental price of P3.00 per picul thus unnecessarily
increasing the value by only a difference of P200.00.
inevitably brought about the rescission of the lease
contract to the damage and prejudice of Rita Gueco
Tapnio in the aforesaid sum of P2,800.00. The
unreasonableness of the position adopted by the
board of directors of the Philippine National Bank in
refusing to approve the lease at the rate of P2.80 per
picul and insisting on the rate of P3.00 per picul, if
only to increase the retail value by only P200.00 is
shown by the fact that all the accounts of Rita Gueco
Tapnio with the Bank were secured by chattel
mortgage on standing crops, assignment of
leasehold rights and interests on her properties, and
surety bonds, aside from the fact that from Exh. 8-

Bank, it appears that she was offering to execute a
real estate mortgage in favor of the Bank to replace
the surety bond This statement is further bolstered
by the fact that Rita Gueco Tapnio apparently had
the means to pay her obligation fact that she has been
granted several value of almost P80,000.00 for the
agricultural years from 1952 to 56. 1
Its motion for the reconsideration of the decision of the
Court of Appeals having been denied, petitioner filed
the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of
the 1,000 piculs of sugar quota allocation of respondent
Rita Gueco Tapnio by Jacobo C. Tuazon was due to the
unjustified refusal of petitioner to approve said lease
contract, and its unreasonable insistence on the rental
price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar
price and prices of sugar quota in the possession of the
petitioner, the latter's Board of Directors correctly fixed
the rental of price per picul of 1,000 piculs of sugar
quota leased by respondent Rita Gueco Tapnio to
Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota
of Tapnio, it has the right, both under its own Charter
and under the Corporation Law, to safeguard and
protect its rights and interests under the deed of
assignment, which include the right to approve or
disapprove the said lease of sugar quota and in the
exercise of that authority, its
Board of Directors necessarily had authority to
determine and fix the rental price per picul of the sugar
quota subject of the lease between private respondents
and Jacobo C. Tuazon. It argued further that both under
its Charter and the Corporation Law, petitioner, acting
thru its Board of Directors, has the perfect right to adopt
a policy with respect to fixing of rental prices of export
sugar quota allocations, and in fixing the rentals at
P3.00 per picul, it did not act arbitrarily since the said
Board was guided by statistics of sugar price and prices
of sugar quotas prevailing at the time. Since the fixing
of the rental of the sugar quota is a function lodged with
petitioner's Board of Directors and is a matter of policy,
the respondent Court of Appeals could not substitute its
own judgment for that of said Board of Directors, which
acted in good faith, making as its basis therefore the
prevailing market price as shown by statistics which
were then in their possession.
Finally, petitioner emphasized that under the appealed
judgment, it shall suffer a great injustice because as a
creditor, it shall be deprived of a just claim against its
debtor (respondent Rita Gueco Tapnio) as it would be
required to return to respondent Philamgen the sum of
P2,379.71, plus interest, which amount had been
previously paid to petitioner by said insurance company
in behalf of the principal debtor, herein respondent Rita
Gueco Tapnio, and without recourse against respondent
Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate
jurisdiction in proceedings of this nature is limited to
reviewing only errors of law, accepting as conclusive
the factual fin dings of the Court of Appeals upon its
own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50
per picul between Rita Gueco Tapnio and Jacobo C.
Tuazon was executed on April 17, 1956. This contract
was submitted to the Branch Manager of the Philippine
National Bank at San Fernando, Pampanga. This
arrangement was necessary because Tapnio's
indebtedness to petitioner was secured by a mortgage
on her standing crop including her sugar quota
allocation for the agricultural year corresponding to
said standing crop. The latter required the parties to
raise the consideration to P2.80 per picul, the minimum
lease rental acceptable to the Bank, or a total of
P2,800.00. Tuazon informed the Branch Manager, thru
a letter dated August 10, 1956, that he was agreeable to
raising the consideration to P2.80 per picul. He further
informed the manager that he was ready to pay the said
sum of P2,800.00 as the funds were in his folder which
was kept in the said Bank. This referred to the approved
loan of Tuazon from the Bank which he intended to use
in paying for the use of the sugar quota. The Branch
Manager submitted the contract of lease of sugar quota
allocation to the Head Office on September 7, 1956,
with a recommendation for approval, which
recommendation was concurred in by the Vice-
President of the Bank, Mr. J. V. Buenaventura. This
notwithstanding, the Board of Directors of petitioner
required that the consideration be raised to P3.00 per
picul.
Tuazon, after being informed of the action of the Board
of Directors, asked for a reconsideration thereof. On
November 19, 1956, the Branch Manager submitted the
request for reconsideration and again recommended the
approval of the lease at P2.80 per picul, but the Board
returned the recommendation unacted, stating that the
current price prevailing at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing
the Bank that he was no longer interested in continuing
the lease of sugar quota allotment. The crop year 1956-
1957 ended and Mrs. Tapnio failed to utilize her sugar
quota, resulting in her loss in the sum of P2,800.00
which she should have received had the lease in favor
of Tuazon been implemented.
It has been clearly shown that when the Branch
Manager of petitioner required the parties to raise the
consideration of the lease from P2.50 to P2.80 per picul,
or a total of P2,800-00, they readily agreed. Hence, in
his letter to the Branch Manager of the Bank on August

10, 1956, Tuazon informed him that the minimum lease
rental of P2.80 per picul was acceptable to him and that
he even offered to use the loan secured by him from
petitioner to pay in full the sum of P2,800.00 which was
the total consideration of the lease. This arrangement
was not only satisfactory to the Branch Manager but it
was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement,
Rita Gueco Tapnio could have realized the amount of
P2,800.00, which was more than enough to pay the
balance of her indebtedness to the Bank which was
secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her
sugar quota for the crop year 1956-1957 was due to the
disapproval of the lease by the Board of Directors of
petitioner. The issue, therefore, is whether or not
petitioner is liable for the damage caused.
As observed by the trial court, time is of the essence in
the approval of the lease of sugar quota allotments,
since the same must be utilized during the milling
season, because any allotment which is not filled during
such milling season may be reallocated by the Sugar
Quota Administration to other holders of allotments. 3
There was no proof that there was any other person at
that time willing to lease the sugar quota allotment of
private respondents for a price higher than P2.80 per
picul. "The fact that there were isolated transactions
wherein the consideration for the lease was P3.00 a
picul", according to the trial court, "does not necessarily
mean that there are always ready takers of said price. "
The unreasonableness of the position adopted by the
petitioner's Board of Directors is shown by the fact that
the difference between the amount of P2.80 per picul
offered by Tuazon and the P3.00 per picul demanded
by the Board amounted only to a total sum of P200.00.
Considering that all the accounts of Rita Gueco Tapnio
with the Bank were secured by chattel mortgage on
standing crops, assignment of leasehold rights and
interests on her properties, and surety bonds and that
she had apparently "the means to pay her obligation to
the Bank, as shown by the fact that she has been granted
several sugar crop loans of the total value of almost
P80,000.00 for the agricultural years from 1952 to
1956", there was no reasonable basis for the Board of
Directors of petitioner to have rejected the lease
agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of
approving or disapproving the proposed lease since the
quota was mortgaged to the Bank, the latter certainly
cannot escape its responsibility of observing, for the
protection of the interest of private respondents, that
degree of care, precaution and vigilance which the
circumstances justly demand in approving or
disapproving the lease of said sugar quota. The law
makes it imperative that 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, 4 This petitioner failed
to do. Certainly, it knew that the agricultural year was
about to expire, that by its disapproval of the lease
private respondents would be unable to utilize the sugar
quota in question. In failing to observe the reasonable
degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is
consequently liable for the damages caused on private
respondents. Under Article 21 of the New Civil Code,
"any person who wilfully causes loss or injury to
another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for
the damage." The afore-cited provisions on human
relations were intended to expand the concept of torts
in this jurisdiction by granting adequate legal remedy
for the untold number of moral wrongs which is
impossible for human foresight to specifically provide
in the statutes. 5
A corporation is civilly liable in the same manner as
natural persons for torts, because "generally speaking,
the rules governing the liability of a principal or master
for a tort committed by an agent or servant are the same
whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a
natural or artificial person. All of the authorities agree
that a principal or master is liable for every tort which
he expressly directs or authorizes, and this is just as true
of a corporation as of a natural person, A corporation is
liable, therefore, whenever a tortious act is committed
by an officer or agent under express direction or
authority from the stockholders or members acting as a
body, or, generally, from the directors as the governing
body." 6
WHEREFORE, in view of the foregoing, the decision
of the Court of Appeals is hereby AFFIRMED.