G.R. No.

147402 January 14, 2004

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 certiorari1 to annul the Commission on Audit’s ("COA") Resolution dated 3
January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The
COA denied petitioner Ranulfo C. Feliciano’s request for COA to cease all audit services, and to
stop charging auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA also denied
petitioner’s 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 COA’s
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")2 , as well as Section 18 of
Republic Act No. 6758 ("RA 6758"). The Regional Director referred petitioner’s 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. Gangan’s 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 COA’s audit jurisdiction over local water districts
in Davao City Water District v. Civil Service Commission and Commission on Audit,3 as
follows:

The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioner’s 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 petitioner’s request for COA to stop charging auditing fees as well as
petitioner’s 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 COA’s 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 laws4 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 COA’s 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 COA’s 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
Commission5 and just recently reiterated in De Jesus v. Commission on Audit.6 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."7

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.8 Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian
Resolution as specified in PD 198.

Petitioner’s 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.9 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.10

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,11 except that the Cooperative Code governs the
incorporation of cooperatives.12

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.13 (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 19814 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. NLRC15 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,16 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)

Petitioner’s 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 Code17does not vest in the Sangguniang Bayan the power to create
corporations.18 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 COA’s audit jurisdiction. The resolution of the
Sangguniang Bayan would constitute an LWD’s 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. Trajano19 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,"20provide 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 19821 declares
that LWDs "shall be considered quasi-public" in nature. Petitioner’s 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. Petitioner’s argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COA’s audit jurisdiction depends
on the government’s 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 COA’s audit jurisdiction.
Neither is the manner of creation of a corporation, whether under a general or special law.

The determining factor of COA’s audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans
Bank,22 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. 3518,23it 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.24 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 laws25 and anti-graft laws.26

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
COA’s audit jurisdiction. However, the stark and undeniable fact is that the government owns LWDs.
Section 4527 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 District’s owner is the District
itself."28 Assuming for the sake of argument that an LWD is "self-owned,"29 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.30 Third, the Local Water Utilities Administration can
require LWDs to merge or consolidate their facilities or operations.31 This element of government
control subjects LWDs to COA’s 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.32The 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."33 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. 34 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.35 (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."36

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs
like LWDs from COA’s audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any
scheme or devise to escape COA’s 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.37

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 COA’s

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 6758,38 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,"39 petitioner asks COA to discontinue its
practice of charging auditing fees to LWDs since such practice allegedly violates the law.

Petitioner’s 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,40 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 latter’s 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 former’s auditing units, the same shall be directly
defrayed by COA from its own appropriations x x x. 41

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
COA’s "actual audit cost." Neither has petitioner alleged that the auditing fees are paid by LWDs
directly to individual COA auditors. Thus, petitioner’s contention must fail.

WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision
dated 30 January 2001 denying petitioner’s 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.

G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE, and
CITY TREASURER OF PARAÑAQUE, respondents.
 DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Parañaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order
No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,
Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land,3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of
Air Transportation.4 The MIAA Charter further provides that no portion of the land transferred to
MIAA shall be disposed of through sale or any other mode unless specifically approved by the
President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real
estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with
respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then paid some
of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:

TAX
TAXABLE YEAR TAX DUE PENALTY TOTAL
DECLARATION
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

 #9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque threatened
to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC
pointed out that Section 206 of the Local Government Code requires persons exempt from real
estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the
proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to
restrain the City of Parañaque from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
60-day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's
motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5
December 2002 the present petition for review.7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public market of Barangay
La Huerta; and in the main lobby of the Parañaque City Hall. The City of Parañaque published the
notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general
circulation in the Philippines. The notices announced the public auction sale of the Airport Lands and
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall
Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
motion sought to restrain respondents — the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
The Court ordered respondents to cease and desist from selling at public auction the Airport Lands
and Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor General
subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties since
the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA
Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general
public. Since the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234
of the Local Government Code because the Airport Lands and Buildings are owned by the Republic.
To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA
points out that the reason for tax exemption of public property is that its taxation would not inure to
any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of
the Local Government Code. Respondents also argue that a basic rule of statutory construction is
that the express mention of one person, thing, or act excludes all others. An international airport is
not among the exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from
real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we
held that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real
estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void.
In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the

National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt
from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or
controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the
real estate tax exemption of government-owned or controlled corporations. The deleted phrase
appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt
from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or
controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to
Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to
be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation
Code defines a non-stock corporation as "one where no part of its income is distributable as
dividends to its members, trustees or officers." A non-stock corporation must have members. Even if
we assume that the Government is considered as the sole member of MIAA, this will not make MIAA
a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury.11 This prevents MIAA from qualifying as a non-stock
corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is
not organized for any of these purposes. MIAA, a public utility, is organized to operate an
international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-
owned or controlled corporation. What then is the legal status of MIAA within the National
Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is that
MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain,12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate
and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a government-owned or controlled corporation. Examples are the Mactan International
Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not
organized as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are sometimes loosely
called government corporate entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative Code, which is the governing
law defining the legal relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
 xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalitiesand local government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax-liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held
in Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.
 "Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the power
to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by
the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the State or the Republic
of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal
fees and other charges from the public does not remove the character of the Airport Lands and
Buildings as properties for public use. The operation by the government of a tollway does not
change the character of the road as one for public use. Someone must pay for the maintenance of
the road, either the public indirectly through the taxes they pay the government, or only those among
the public who actually use the road through the toll fees they pay upon using the road. The tollway
system is even a more efficient and equitable manner of taxing the public for the maintenance of
public roads.

The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed
user's tax. This means taxing those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular public facility. A user's tax is more
equitable — a principle of taxation mandated in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside
the commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v.
Rojas that properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters,
the promenades, and public works of general service supported by said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease it for
the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public
place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor
is it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce,
as was decided by the supreme court of Spain in its decision of February 12, 1895, which
says: "Communal things that cannot be sold because they are by their very nature
outside of commerce are those for public use, such as the plazas, streets, common
lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case of
war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when the
emergency has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the public and free
from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any
property of public dominion is void for being contrary to public policy. Essential public services will
stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale.
This will happen if the City of Parañaque can foreclose and compel the auction sale of the 600-
hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw
from public usethe Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation, entry, sale,
lease, or other disposition until again declared alienable under the provisions of this
Act or by proclamation of the President. (Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the
Airport Lands and Buildings are inalienable in their present status as properties of public dominion,
they are not subject to levy on execution or foreclosure sale. As long as the Airport Lands and
Buildings are reserved for public use, their ownership remains with the State or the Republic of the
Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, which states:
 SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. —
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is
not otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the
Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to
real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings
from the Bureau of Air Transportation of the Department of Transportation and Communications.
The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. — x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned
to the ownership and administration of the Authority, subject to existing rights, if any.
The Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive Order
and the corresponding title to be issued in the name of the Authority. Any portion thereof
shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines. (Emphasis supplied)
 SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to
the Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. — The Manila International Airport including the
Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands
and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies
and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was
not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose
was merely to reorganize a division in the Bureau of Air Transportation into a separate and
autonomous body. The Republic remains the beneficial owner of the Airport Lands and Buildings.
MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAA's
assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x
x dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not
own the Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and
Buildings. This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing "[t]axes, fees or charges of any kind on the National Government,
its agencies and instrumentalitiesx x x." The real properties owned by the Republic are titled either
in the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real properties remain
owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does
not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that
real property owned by the Republic loses its tax exemption only if the "beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person." MIAA, as a government
instrumentality, is not a taxable person under Section 133(o) of the Local Government Code. Thus,
even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use
of such land area for a consideration to a taxable person and therefore such land area is subject to
real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or
juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions are hereby withdrawn upon effectivity of this
Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not
exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized under
our laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus,
the determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its
status — whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code."
Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)

By express mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA. Local governments are devoid of power
to tax the national government, its agencies and instrumentalities. The taxing powers of local
governments do not extend to the national government, its agencies and instrumentalities, "[u]nless
otherwise provided in this Code" as stated in the saving clause of Section 133. The saving clause
refers to Section 234(a) on the exception to the exemption from real estate tax of real property
owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193. Under this theory, local
governments can impose any kind of local tax, and not only real estate tax, on the national
government.

Under the minority's theory, many national government instrumentalities with juridical personalities
will also be subject to any kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng
Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) does not distinguish between national government instrumentalities with or without
juridical personalities. Where the law does not distinguish, courts should not distinguish. Thus,
Section 133(o) applies to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from local taxation is not whether
MIAA is a juridical person, but whether it is a national government instrumentality under Section
133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting local
governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments may
tax the national government, its agencies and instrumentalities only if the Local Government Code
expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial
use of its real properties to a taxable entity. Section 234(a) of the Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment
of the real property tax:
 (a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property to a
taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national government,
its agencies and instrumentalities are subject to any kind of tax by local governments. The exception
to the exemption applies only to real estate tax and not to any other tax. The justification for the
exception to the exemption is that the real property, although owned by the Republic, is not devoted
to public use or public service but devoted to the private gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has
any one presenteda persuasive argument that there is such a conflict. The minority's assumption of
an irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise
provided in this Code." By its own words, Section 193 admits the superiority of other provisions of
the Local Government Code that limit the exercise of the taxing power in Section 193. When a
provision of law grants a power but withholds such power on certain matters, there is no conflict
between the grant of power and the withholding of power. The grantee of the power simply cannot
exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers.
By their very meaning and purpose, the "common limitations" on the taxing power prevail over the
grant or exercise of the taxing power. If the taxing power of local governments in Section 193
prevails over the limitations on such taxing power in Section 133, then local governments can
impose any kind of tax on the national government, its agencies and instrumentalities — a gross
absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception —
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments — refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such property
is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-
owned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling when
it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes
that a statute may require a different meaning than that defined in the Administrative Code.
However, this does not automatically mean that the definition in the Administrative Code does not
apply to the Local Government Code. Section 2 of the Administrative Code clearly states that
"unless the specific words x x x of a particular statute shall require a different meaning," the definition
in Section 2 of the Administrative Code shall apply. Thus, unless there is specific language in the
Local Government Code defining the phrase "government-owned or controlled corporation"
differently from the definition in the Administrative Code, the definition in the Administrative Code
prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative
Code. Indeed, there is none. The Local Government Code is silent on the definition of the phrase
"government-owned or controlled corporation." The Administrative Code, however, expressly defines
the phrase "government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled corporation" applies to
the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus,
the Administrative Code is the governing law defining the status and relationship of government
departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides
for a different status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should
apply only to corporations organized under the Corporation Code, the general incorporation law, and
not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:
 I submit that the definition of "government-owned or controlled corporations" under the
Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs
are not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special
charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos
each, which shall be fully subscribed by the Government, and one hundred and twenty
million preferred shares with a par value of ten pesos each, which shall be issued in
accordance with the provisions of Sections seventy-seven and eighty-three of this Code.
(Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall be
Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per
share. These shares are available for subscription by the National Government. Upon the
effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million
common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid
for by the Government with the net asset values of the Bank remaining after the transfer of
assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters
are the Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and
the Philippine National Bank44 before it was reorganized as a stock corporation under the
Corporation Code. All these government-owned corporations organized under special charters as
stock corporations are subject to real estate tax on real properties owned by them. To rule that they
are not government-owned or controlled corporations because they are not registered with the
Securities and Exchange Commission would remove them from the reach of Section 234 of the
Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first
condition is that the government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or controlled corporation must
meet the test of economic viability. Section 16, Article XII of the 1987 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. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions
of common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to comply
with the two conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic vehicles of the State
for the common good — meaning for economic development purposes — these government-owned
or controlled corporations with special charters are usually organized as stock corporations just like
ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every modern
State must provide its citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These instrumentalities are not the
"government-owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities — known as "government-owned or controlled
corporations" — must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the
test of economic performance. We know what happened in the past. If a government
corporation loses, then it makes its claim upon the taxpayers' money through new equity
infusions from the government and what is always invoked is the common good. That is the
reason why this year, out of a budget of P115 billion for the entire government, about P28
billion of this will go into equity infusions to support a few government financial institutions.
 And this is all taxpayers' money which could have been relocated to agrarian reform, to
social services like health and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse
themselves from the responsibility of meeting the market test so that they become viable.
And so, Madam President, I reiterate, for the committee's consideration and I am glad that I
am joined in this proposal by Commissioner Foz, the insertion of the standard of
"ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test
of economic viability." The addition includes the ideas that they must show capacity to
function efficiently in business and that they should not go into activities which the private
sector can do better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in financial
terms.46(Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.

However, government-owned or controlled corporations with special charters, organized essentially

for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-
owned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create MIAA
to compete in the market place. MIAA does not compete in the market place because there is no
competing international airport operated by the private sector. MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;
 4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from,
the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers
and airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative
fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-
owned or controlled corporation. Without a change in its capital structure, MIAA remains a
government instrumentality under Section 2(10) of the Introductory Provisions of the Administrative
Code. More importantly, as long as MIAA renders essential public services, it need not comply with
the test of economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or
controlled corporations" under Section 16, Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The
Administrative Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of

the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-
stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16,
Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic
viability. MIAA is a government instrumentality vested with corporate powers and performing
essential public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local
governments under Section 133(o) of the Local Government Code. The exception to the exemption
in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local
Government Code. Such exception applies only if the beneficial use of real property owned by the
Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport Lands and Buildings are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any
kind" by local governments. The only exception is when MIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and
Buildings leased to taxable persons like private parties are subject to real estate tax by the City of
Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public
use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As
properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public dominion are not
subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
estate tax imposed by the City of Parañaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the
Airport Lands and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also declare VOID the
assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila
International Airport Authority.

No costs.

SO ORDERED.

G.R. No. 58168 December 19, 1989

CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA

MAGSAYSAY-CORPUZ, assisted be her husband, Dr. Jose Corpuz, FELICIDAD P.
MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix
of the Estate of the late Genaro F. Magsaysay respondents.

FERNAN, C.J.:

In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of
the Court of Appeals dated July l3, 1981, 1 affirming that of the Court of First Instance of Zambales
and Olongapo City which denied petitioners' motion to intervene in an annulment suit filed by herein
private respondent, and [2] its resolution dated September 7, 1981, denying their motion for
reconsideration.

Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly
denied their motion for intervention.

The facts are not controverted.

On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate
of the late Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo
an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's
Bank (FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in
1958, she and her husband acquired, thru conjugal funds, a parcel of land with improvements,
known as "Pequena Island", covered by TCT No. 3258; that after the death of her husband, she
discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her
husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976
purportedly executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was
cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the registration of Deed of
Mortgage dated April 28, 1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of
FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal, her marital consent to the annotation on TCT No.
3258 was not obtained, the change made by the Register of Deeds of the titleholders was effected
without the approval of the Commissioner of Land Registration and that the late Senator did not
execute the purported Deed of Assignment or his consent thereto, if obtained, was secured by
mistake, violence and intimidation. She further alleged that the assignment in favor of SUBIC was
without consideration and consequently null and void. She prayed that the Deed of Assignment and
the Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No.
22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the
ground that on June 20, 1978, their brother conveyed to them one-half (1/2 ) of his shareholdings in
SUBIC or a total of 416,566.6 shares and as assignees of around 41 % of the total outstanding
shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of
litigation and that they have a legal interest in the success of the suit with respect to SUBIC.

On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no
legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees
of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality
separate and distinct from its stockholders.

On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings
of the lower court. The appellate court further stated that whatever claims the petitioners have
against the late Senator or against SUBIC for that matter can be ventilated in a separate proceeding,
such that with the denial of the motion for intervention, they are not left without any remedy or
judicial relief under existing law.

Petitioners' motion for reconsideration was denied. Hence, the instant recourse.

Petitioners anchor their right to intervene on the purported assignment made by the late Senator of a
certain portion of his shareholdings to them as evidenced by a Deed of Sale dated June 20,
1978. 2 Such transfer, petitioners posit, clothes them with an interest, protected by law, in the matter
of litigation.

Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853
(1927), 3petitioners strongly argue that their ownership of 41.66% of the entire outstanding capital
stock of SUBIC entitles them to a significant vote in the corporate affairs; that they are affected by
the action of the widow of their late brother for it concerns the only tangible asset of the corporation
and that it appears that they are more vitally interested in the outcome of the case than SUBIC.

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below. In the case of Batama Farmers'
Cooperative Marketing Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule
12 of the Rules of Court, to be permitted to intervene in a pending action, the party must have a legal
interest in the matter in litigation, or in the success of either of the parties or an interest against both,
or he must be so situated as to be adversely affected by a distribution or other disposition of the
property in the custody of the court or an officer thereof ."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b] consideration must be given as to whether the adjudication
of the rights of the original parties may be delayed or prejudiced, or whether the intervenor's rights
may be protected in a separate proceeding or not. Both requirements must concur as the first is not
more important than the second. 5

The interest which entitles a person to intervene in a suit between other parties must be in the matter
in litigation and of such direct and immediate character that the intervenor will either gain or lose by
the direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action
could be allowed to intervene, proceedings will become unnecessarily complicated, expensive and
interminable. And this is not the policy of the law. 6
The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without
the establishment of which plaintiff could not recover. 7

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in sheer
expectancy of a right in the management of the corporation and to share in the profits thereof and in
the properties and assets thereof on dissolution, after payment of the corporate debts and
obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property, his
interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal
sense the owners of corporate property, which is owned by the corporation as a distinct legal
person. 8

Petitioners further contend that the availability of other remedies, as declared by the Court of
appeals, is totally immaterial to the availability of the remedy of intervention.

We cannot give credit to such averment. As earlier stated, that the movant's interest may be
protected in a separate proceeding is a factor to be considered in allowing or disallowing a motion
for intervention. It is significant to note at this juncture that as per records, there are four pending
cases involving the parties herein, enumerated as follows: [1] Special Proceedings No. 122122
before the CFI of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al. v. Subic
Land Corp., et al.", involving the validity of the transfer by the late Genaro Magsaysay of one-half of
his shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of Zambales,
Branch III, "Adelaida Rodriguez-Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al.
Intervenors", seeking to annul the purported Deed of Assignment in favor of SUBIC and its
annotation at the back of TCT No. 3258 in the name of respondent's deceased husband; [3] SEC
Case No. 001770, filed by respondent praying, among other things that she be declared in her
capacity as the surviving spouse and administratrix of the estate of Genaro Magsaysay as the sole
subscriber and stockholder of SUBIC. There, petitioners, by motion, sought to intervene. Their
motion to reconsider the denial of their motion to intervene was granted; [4] SP No. Q-26739 before
the CFI of Rizal, Branch IV, petitioners herein filing a contingent claim pursuant to Section 5, Rule
86, Revised Rules of Court. 9 Petitioners' interests are no doubt amply protected in these cases.

Neither do we lend credence to petitioners' argument that they are more interested in the outcome of
the case than the corporation-assignee, owing to the fact that the latter is willing to compromise with
widow-respondent and since a compromise involves the giving of reciprocal concessions, the only
conceivable concession the corporation may give is a total or partial relinquishment of the corporate
assets. 10

Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of
litigation.

The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to
intervene on the strength of the transfer of shares allegedly executed by the late Senator. The
corporation did not keep books and records. 11 Perforce, no transfer was ever recorded, much less
effected as to prejudice third parties. The transfer must be registered in the books of the corporation
to affect third persons. The law on corporations is explicit. Section 63 of the Corporation Code
provides, thus: "No transfer, however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of shares
transferred."

And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred
from intervening inasmuch as their rights can be ventilated and amply protected in another
proceeding.

WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.

SO ORDERED.

G.R. No. L-31061 August 17, 1976

SULO NG BAYAN INC., plaintiff-appellant,

vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS &
SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF
BULACAN, defendants-appellees.

Hill & Associates Law Offices for appellant.

Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.

Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.

Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the Government Corporate
Counsel for appellee National Waterworks & Sewerage Authority.

Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:

The issue posed in this appeal is whether or not plaintiff corporation (non- stock may institute an
action in behalf of its individual members for the recovery of certain parcels of land allegedly owned
by said members; for the nullification of the transfer certificates of title issued in favor of defendants
appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute
owners of the property" and the issuance of the corresponding certificate of title; and for damages.

On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the
Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against defendants-
appellees to recover the ownership and possession of a large tract of land in San Jose del Monte,
Bulacan, containing an area of 27,982,250 square meters, more or less, registered under the
Torrens System in the name of defendants-appellees' predecessors-in-interest. 1 The complaint, as
amended on June 13, 1966, specifically alleged that plaintiff is a corporation organized and existing
under the laws of the Philippines, with its principal office and place of business at San Jose del
Monte, Bulacan; that its membership is composed of natural persons residing at San Jose del
Monte, Bulacan; that the members of the plaintiff corporation, through themselves and their
predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land, cultivated
the same since the Spanish regime and continuously possessed the said property openly and public
under concept of ownership adverse against the whole world; that defendant-appellee Gregorio
Araneta, Inc., sometime in the year 1958, through force and intimidation, ejected the members of the
plaintiff corporation fro their possession of the aforementioned vast tract of land; that upon
investigation conducted by the members and officers of plaintiff corporation, they found out for the
first time in the year 1961 that the land in question "had been either fraudelently or erroneously
included, by direct or constructive fraud, in Original Certificate of Title No. 466 of the Land of
Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious, non-existent
and devoid of legal efficacy due to the fact that "no original survey nor plan whatsoever" appears to
have been submitted as a basis thereof and that the Court of First Instance of Bulacan which issued
the decree of registration did not acquire jurisdiction over the land registration case because no
notice of such proceeding was given to the members of the plaintiff corporation who were then in
actual possession of said properties; that as a consequence of the nullity of the original title, all
subsequent titles derived therefrom, such as Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer Certificate
of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued
in the name of, the National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of Title
No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer certificate of title in the
name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently prayed (1) that
Original Certificate of Title No. 466, as well as all transfer certificates of title issued and derived
therefrom, be nullified; (2) that "plaintiff's members" be declared as absolute owners in common of
said property and that the corresponding certificate of title be issued to plaintiff; and (3) that
defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein
specified.

On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the
amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the
cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda
Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee National Waterworks &
Sewerage Authority did not file any motion to dismiss. However, it pleaded in its answer as special
and affirmative defenses lack of cause of action by the plaintiff-appellant and the barring of such
action by prescription and laches.

During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7,
1966, praying that the case be transferred to another branch of the Court of First Instance sitting at
Malolos, Bulacan, According to defendants-appellees, they were not furnished a copy of said motion,
hence, on October 14, 1966, the lower court issued an Order requiring plaintiff-appellant to furnish
the appellees copy of said motion, hence, on October 14, 1966, defendant-appellant's motion dated
October 7, 1966 and, consequently, prayed that the said motion be denied for lack of notice and for
failure of the plaintiff-appellant to comply with the Order of October 14, 1966. Similarly, defendant-
appellee paradise Farms, Inc. filed, on December 2, 1966, a manifestation information the court that
it also did not receive a copy of the afore-mentioned of appellant. On January 24, 1967, the trial
court issued an Order dismissing the amended complaint.

On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds
that the court had no jurisdiction to issue the Order of dismissal, because its request for the transfer
of the case from the Valenzuela Branch of the Court of First Instance to the Malolos Branch of the
said court has been approved by the Department of Justice; that the complaint states a sufficient
cause of action because the subject matter of the controversy in one of common interest to the
members of the corporation who are so numerous that the present complaint should be treated as a
class suit; and that the action is not barred by the statute of limitations because (a) an action for the
reconveyance of property registered through fraud does not prescribe, and (b) an action to impugn a
void judgment may be brought any time. This motion was denied by the trial court in its Order dated
February 22, 1967. From the afore-mentioned Order of dismissal and the Order denying its motion
for reconsideration, plaintiff-appellant appealed to the Court of Appeals.

On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in
the appeal but only questions of law and jurisdiction, certified this case to this Court for resolution of
the legal issues involved in the controversy.

Appellant contends, as a first assignment of error, that the trial court acted without authority and
jurisdiction in dismissing the amended complaint when the Secretary of Justice had already
approved the transfer of the case to any one of the two branches of the Court of First Instance of
Malolos, Bulacan.

Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in
the different branches of the same Court of First Instance. Jurisdiction implies the power of the court
to decide a case, while venue the place of action. There is no question that respondent court has
jurisdiction over the case. The venue of actions in the Court of First Instance is prescribed in Section
2, Rule 4 of the Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but
must be in accordance with the aforesaid provision of the rules. 2 The mere fact that a request for the
transfer of a case to another branch of the same court has been approved by the Secretary of
Justice does not divest the court originally taking cognizance thereof of its jurisdiction, much less
does it change the venue of the action. As correctly observed by the trial court, the indorsement of
the Undersecretary of Justice did not order the transfer of the case to the Malolos Branch of the
Bulacan Court of First Instance, but only "authorized" it for the reason given by plaintiff's counsel that
the transfer would be convenient for the parties. The trial court is not without power to either grant or
deny the motion, especially in the light of a strong opposition thereto filed by the defendant. We hold
that the court a quo acted within its authority in denying the motion for the transfer the case to
Malolos notwithstanding the authorization" of the same by the Secretary of Justice.

II

Let us now consider the substantive aspect of the Order of dismissal.

In dismissing the amended complaint, the court a quo said:

The issue of lack of cause of action raised in the motions to dismiss refer to the lack
of personality of plaintiff to file the instant action. Essentially, the term 'cause of
action' is composed of two elements: (1) the right of the plaintiff and (2) the violation
of such right by the defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules
require that every action must be prosecuted and defended in the name of the real
party in interest and that all persons having an interest in the subject of the action
and in obtaining the relief demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In
the amended complaint, the people whose rights were alleged to have been violated
by being deprived and dispossessed of their land are the members of the corporation
and not the corporation itself. The corporation has a separate. and distinct
personality from its members, and this is not a mere technicality but a matter of
substantive law. There is no allegation that the members have assigned their rights
to the corporation or any showing that the corporation has in any way or manner
succeeded to such rights. The corporation evidently did not have any rights violated
by the defendants for which it could seek redress. Even if the Court should find
against the defendants, therefore, the plaintiff corporation would not be entitled to the
 reliefs prayed for, which are recoveries of ownership and possession of the land,
issuance of the corresponding title in its name, and payment of damages. Neither
can such reliefs be awarded to the members allegedly deprived of their land, since
they are not parties to the suit. It appearing clearly that the action has not been filed
in the names of the real parties in interest, the complaint must be dismissed on the
ground of lack of cause of action. 3

Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed
the amended complaint.

It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct
legal entity to be considered as separate and apart from the individual stockholders or members who
compose it, and is not affected by the personal rights, obligations and transactions of its
stockholders or members. 4 The property of the corporation is its property and not that of the
stockholders, as owners, although they have equities in it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. 5 Conversely, a
corporation ordinarily has no interest in the individual property of its stockholders unless transferred
to the corporation, "even in the case of a one-man corporation. 6 The mere fact that one is president
of a corporation does not render the property which he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate
similarities. 7 Similarly, stockholders in a corporation engaged in buying and dealing in real estate
whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of
the corporation upon surrender of their stock certificates were considered not to have such legal or
equitable title or interest in the land, as would support a suit for title, especially against parties other
than the corporation. 8

It must be noted, however, that the juridical personality of the corporation, as separate and distinct
from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to
subserve the ends of justice. 9This separate personality of the corporation may be disregarded, or
the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work -an injustice, or where necessary to achieve equity. 10

Thus, when "the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, ... the law will regard the corporation as an association of persons, or in the
case of two corporations, merge them into one, the one being merely regarded as part or
instrumentality of the other. 11 The same is true where a corporation is a dummy and serves no
business purpose and is intended only as a blind, or an alter ego or business conduit for the sole
benefit of the stockholders. 12 This doctrine of disregarding the distinct personality of the corporation
has been applied by the courts in those cases when the corporate entity is used for the evasion of
taxes 13 or when the veil of corporate fiction is used to confuse legitimate issue of employer-
employee relationship, 14 or when necessary for the protection of creditors, in which case the veil of
corporate fiction may be pierced and the funds of the corporation may be garnished to satisfy the
debts of a principal stockholder. 15 The aforecited principle is resorted to by the courts as a measure
protection for third parties to prevent fraud, illegality or injustice. 16

It has not been claimed that the members have assigned or transferred whatever rights they may
have on the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a
corporation, like plaintiff-appellant herein, has no personality to bring an action for and in behalf of its
stockholders or members for the purpose of recovering property which belongs to said stockholders
or members in their personal capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right
conferred' by law upon a person. 17 Evidently, there can be no wrong without a corresponding right,
and no breach of duty by one person without a corresponding right belonging to some other
person. 18 Thus, the essential elements of a cause of action are legal right of the plaintiff, correlative
obligation of the defendant, an act or omission of the defendant in violation of the aforesaid legal
right. 19 Clearly, no right of action exists in favor of plaintiff corporation, for as shown heretofore it
does not have any interest in the subject matter of the case which is material and, direct so as to
entitle it to file the suit as a real party in interest.

III

Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant
to Section 12 of Rule 3 of the Revised Rules of Court.

In order that a class suit may prosper, the following requisites must be present: (1) that the subject
matter of the controversy is one of common or general interest to many persons; and (2) that the
parties are so numerous that it is impracticable to bring them all before the court. 20

Under the first requisite, the person who sues must have an interest in the controversy, common
with those for whom he sues, and there must be that unity of interest between him and all such other
persons which would entitle them to maintain the action if suit was brought by them jointly. 21

As to what constitutes common interest in the subject matter of the controversy, it has been
explained in Scott v. Donald 22 thus:

The interest that will allow parties to join in a bill of complaint, or that will enable the
court to dispense with the presence of all the parties, when numerous, except a
determinate number, is not only an interest in the question, but one in common in the
subject Matter of the suit; ... a community of interest growing out of the nature and
condition of the right in dispute; for, although there may not be any privity between
the numerous parties, there is a common title out of which the question arises, and
which lies at the foundation of the proceedings ... [here] the only matter in common
among the plaintiffs, or between them and the defendants, is an interest in the
Question involved which alone cannot lay a foundation for the joinder of parties.
There is scarcely a suit at law, or in equity which settles a Principle or applies a
principle to a given state of facts, or in which a general statute is interpreted, that
does not involved a Question in which other parties are interested. ... (Emphasis
supplied )

Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in
the subject matter of the controversy, and cannot, therefore, represent its members or stockholders
who claim to own in their individual capacities ownership of the said property. Moreover, as correctly
stated by the appellees, a class suit does not lie in actions for the recovery of property where several
persons claim Partnership of their respective portions of the property, as each one could alleged and
prove his respective right in a different way for each portion of the land, so that they cannot all be
held to have Identical title through acquisition prescription. 23

Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower
court cannot be considered as a class suit, it would be unnecessary and an Idle exercise for this
Court to resolve the remaining issue of whether or not the plaintiffs action for reconveyance of real
property based upon constructive or implied trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant.

G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ,
COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B.
SIACUNCO, et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation known as
the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2,
promulgated by President Corazon C. Aquino on February 28, 1986 and March 12, 1986,
respectively, and (2) the sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on Good Government and/or
its Commissioners and agents, affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery was
issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of
the agents of the Commission, hereafter simply referred to as PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good Government,

by authority of the President of the Philippines, you are hereby directed to sequester
the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island

Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

 6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these

companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President through
the Commission on Good Government should decide otherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of this
sequestration order. 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG,
addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm,
reiterating an earlier request for the production of certain documents, to wit:

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986

2.4. Minutes of the Regular and Special Meetings of the Board of

Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973

to 1986 duly certified by the Corporate Secretary.
 4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others
from 1973 to December 31, 1985.

5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.

8. Updated schedule of Accounts Receivable and Accounts Payable.

9. Complete list of depository banks for all funds with the authorized signatories for
withdrawals thereof.

10. Schedule of company investments and placements. 2

The letter closed with the warning that if the documents were not submitted within five days, the
officers would be cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that
issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to
carry out the basic sequestration order. He sent a letter to BASECO's Vice-President for
Finance, 3 terminating the contract for security services within the Engineer Island compound
between BASECO and "Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM
military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and
Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the
amendment in part of their contracts with BASECO in the sense that the stipulated charges for use
of the BASECO road network were made payable "upon entry and not anymore subject to monthly
billing as was originally agreed upon." 4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO
with Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce
improvements costing approximately P210,000.00 on the BASECO wharf at Engineer Island,
allegedly then in poor condition, avowedly to "optimize its utilization and in return maximize the
revenue which would flow into the government coffers," in consideration of Deltamarine's being
granted "priority in using the improved portion of the wharf ahead of anybody" and exemption "from
the payment of any charges for the use of wharf including the area where it may install its bagging
equipments" "until the improvement remains in a condition suitable for port operations." 5 It seems
however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG)
BASECO Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new
management is not in a position to honor the said contract" and thus "whatever improvements * *
(may be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor
Melba O. Buenaventura, "to plan and implement progress towards maximizing the continuous
operation of the BASECO Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another party, A.T. Abesamis, to
operate the quarry, located at Mariveles, Bataan, an agreement to this effect having been executed
by them on September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura
was also "authorized to clean and beautify the Company's compound," and in this connection, to
dispose of or sell "metal scraps" and other materials, equipment and machineries no longer usable,
subject to specified guidelines and safeguards including audit and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the
PCGG of BASECO, "the Philippine Dockyard Corporation and all their affiliated companies." 9 Diaz
invoked the provisions of Section 3 (c) of Executive Order No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or

dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,
until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco, and was
given the following powers:

1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the companies;

4. Ensures that the assets of the companies are not dissipated and used effectively
and efficiently; revenues are duly accounted for; and disburses funds only as may be
necessary;

5. Does actions including among others, seeking of military support as may be

necessary, that will ensure compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on Good Government

on all aspects related to this take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez,
Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the
PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to
repeat, petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this
Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and
acts done on the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination
of the services of the BASECO executives. 11

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action, might be made
within the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom
Constitution was promulgated, under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when the same ruler opted to
promulgate the Freedom Constitution on March 25, 1986 wherein under Section I of the same,
Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among others, that "No
person shall be deprived of life, liberty and property without due process of law." (Const., Art. I V,
Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * * and Takeover Order * *
issued purportedly under the authority of said Executive Orders, rests on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a purely investigative agency and
therefore not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the same has been effected;
and Fourthly, being directed against specified persons, and in disregard of the constitutional presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently
already complied with, was issued without court authority and infringed its constitutional right against
self-incrimination, and unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and
management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and
against the will of the contracting parties; and amending the mode of payment of entry fees
stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts
being in violation of the non-impairment clause of the constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc., giving the
latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at
Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S.
Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R.
Cuesta I; 19
20
7) planning to elect its own Board of Directors;

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises
at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been
buried therein. 22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders
have been engendered by misapprehension, or incomplete comprehension if not indeed downright
ignorance of the law governing these remedies. It is needful that these misconceptions and doubts
be dispelled so that uninformed and useless debates about them may be avoided, and arguments
tainted b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end,
this opinion will essay an exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command of the
Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of
legislative power which she was authorized to continue to wield "(until a legislature is elected and
convened under a new Constitution" — "shall give priority to measures to achieve the mandate of
the people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters
of the previous regime and protect the interest of the people through orders of sequestration or
freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that
"vast resources of the government have been amassed by former President Ferdinand E. Marcos,
his immediate family, relatives, and close associates both here and abroad." 25 Upon these premises,
the Presidential Commission on Good Government was created, 26 "charged with the task of
assisting the President in regard to (certain specified) matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand

E. Marcos, his immediate family, relatives, subordinates and close associates,
whether located in the Philippines or abroad, including the takeover or
 sequestration of all business enterprises and entities owned or controlled by them,
during his administration, directly or through nominees, by taking undue advantage of
their public office and/or using their powers, authority, influence, connections or
relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its
mission, the PCGG was granted "power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any

building or office wherein any ill-gotten wealth or properties may be found, and any
records pertaining thereto, in order to prevent their destruction, concealment or
disappearance which would frustrate or hamper the investigation or otherwise
prevent the Commission from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the disposal or

dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,
until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or

entity that may render moot and academic, or frustrate or otherwise make ineffectual
the efforts of the Commission to carry out its task under this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct
investigations; require submission of evidence by subpoenae ad testificandum and duces
tecum; administer oaths; punish for contempt. 29It was given power also to promulgate such rules and
regulations as may be necessary to carry out the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the
recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It
declares that:

1) * * the Government of the Philippines is in possession of evidence showing that

there are assets and properties purportedly pertaining to former Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents or nominees which had been or
were acquired by them directly or indirectly, through or as a result of the improper or
illegal use of funds or properties owned by the government of the Philippines or any
of its branches, instrumentalities, enterprises, banks or financial institutions, or by
taking undue advantage of their office, authority, influence, connections or
relationship, resulting in their unjust enrichment and causing grave damage and
prejudice to the Filipino people and the Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world." 31

Upon these premises, the President-

 1) froze "all assets and properties in the Philippines in which former President
Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents, or nominees have any interest
or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close
relatives, subordinates, business associates, duties, agents, or nominees
from transferring, conveying, encumbering, concealing or dissipating said assets or
properties in the Philippines and abroad, pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets or properties
were acquired by them through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of their official position, authority, relationship, connection or
influence to unjustly enrich themselves at the expense and to the grave damage and
prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise

depleting or concealing such assets and properties or from assisting or taking part in
their transfer, encumbrance, concealment or dissipation under pain of such penalties
as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether
located in the Philippines or abroad, in their names as nominees, agents or trustees,
to make full disclosure of the same to the Commission on Good Government within
thirty (30) days from publication of * (the) Executive Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered,
"with the assistance of the Office of the Solicitor General and other government agencies, * * to file
and prosecute all cases investigated by it * * as may be warranted by its findings." 34 All such cases,
whether civil or criminal, are to be filed "with the Sandiganbayan which shall have exclusive and
original jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for
restitution, reparation of damages, or indemnification for consequential damages, forfeiture
proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil
Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may
be filed separately from and proceed independently of any criminal proceedings and may be proved
by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and
evidence shall not be strictly applied to* * (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the
previous regime"; 37

a) more particularly, that ill-gotten wealth (was) accumulated by former President

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, * * located in the Philippines or abroad, * * (and) business enterprises
and entities (came to be) owned or controlled by them, during * * (the Marcos)
 administration, directly or through nominees, by taking undue advantage of their
public office and/or using their powers, authority, influence, Connections or
relationship; 38

b) otherwise stated, that "there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the
Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines"; 39

c) that "said assets and properties are in the form of bank accounts. deposits, trust.
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world;" 40 and

2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to
recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above described factual
premises of the Executive Orders and Proclamation No. 3 to be true, to be demonstrable by
competent evidence, the recovery from Marcos, his family and his dominions of the assets and
properties involved, is not only a right but a duty on the part of Government.

But however plain and valid that right and duty may be, still a balance must be sought with the
equally compelling necessity that a proper respect be accorded and adequate protection assured,
the fundamental rights of private property and free enterprise which are deemed pillars of a free
society such as ours, and to which all members of that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its

necessary components freedom of conscience, freedom of expression, and freedom
in the pursuit of happiness. Along with these freedoms are included economic
freedom and freedom of enterprise within reasonable bounds and under proper
control. * * Evincing much concern for the protection of property, the Constitution
distinctly recognizes the preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a democracy as
democracy is conceived in the Constitution.The Constitution realizes the
indispensable role which property, owned in reasonable quantities and used
legitimately, plays in the stimulation to economic effort and the formation and growth
of a solid social middle class that is said to be the bulwark of democracy and the
backbone of every progressive and happy country. 42
 a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will
have to be duly established by adequate proof in each case, in a proper judicial proceeding, so that
the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated;
although there are some who maintain that the fact-that an immense fortune, and "vast resources of
the government have been amassed by former President Ferdinand E. Marcos, his immediate
family, relatives, and close associates both here and abroad," and they have resorted to all sorts of
clever schemes and manipulations to disguise and hide their illicit acquisitions-is within the realm of
judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may,
the requirement of evidentiary substantiation has been expressly acknowledged, and the procedure
to be followed explicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten
wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary,
provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten
wealth." The remedy of "provisional takeover" is peculiar to cases where "business enterprises and
properties (were) taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten"
means to place or cause to be placed under its possession or control said property, or any building
or office wherein any such property and any records pertaining thereto may be found, including
"business enterprises and entities,"-for the purpose of preventing the destruction, concealment or
dissipation of, and otherwise conserving and preserving, the same-until it can be determined,
through appropriate judicial proceedings, whether the property was in truth will- gotten," i.e.,
acquired through or as a result of improper or illegal use of or the conversion of funds belonging to
the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of official position, authority relationship, connection or influence,
resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the
State. 44 And this, too, is the sense in which the term is commonly understood in other jurisdictions. 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute
"ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing
such property, or from assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the property and conserve it
subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin
to a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver,
transfer, or otherwise dispose of any effects or credits in his possession or control, and thus
becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction
between "ill gotten" "business enterprises and entities" (going concerns, businesses in actual
operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred
that the remedy entails no interference, or the least possible interference with the actual
management and operations thereof; and "business enterprises which were taken over by the
government government of the Marcos Administration or by entities or persons close to him," in
particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent
disposal or dissipation of the enterprises." 48 Such a "provisional takeover" imports something more
than sequestration or freezing, more than the placing of the business under physical possession and
control, albeit without or with the least possible interference with the management and carrying on of
the business itself. In a "provisional takeover," what is taken into custody is not only the physical
assets of the business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going activities. But, to repeat,
such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the
government of the Marcos Administration or by entities or persons close to former President
Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the
remedies just described. Indeed the law plainly qualifies the remedy of take-over by the adjective,
"provisional." These remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and conserve it pending
adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title
or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right to the property
sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other
person. This can be done only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be
understood and exercised, the language of the executive orders in question leaves no doubt.
Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect
shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate
authorities." 49 Executive Order No. 2 declares that the assets or properties therein mentioned shall
remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine
whether any such assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or
not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or
provisional takeover is designed to be an end in itself, that it is the device through which persons
may be deprived of their property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly
declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these
provisional remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule in plain
terms, apart from extending ratification or confirmation (although not really necessary) to the
institution by presidential fiat of the remedy of sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation
No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag
remain operative for not more than eighteen months after the ratification of this
Constitution. However, in the national interest, as certified by the President,
the Congress may extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima

facie case. The order and the list of the sequestered or frozen properties shall
forthwith be registered with the proper court. For orders issued before the ratification
of this Constitution, the corresponding judicial action or proceeding shall be filed
within six months from its ratification. For those issued after such ratification, the
judicial action or proceeding shall be commenced within six months from the
issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action

or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional
remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of a
defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that may
be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the
action. 54 By receivership, property, real or personal, which is subject of litigation, is placed in the
possession and control of a receiver appointed by the Court, who shall conserve it pending final
determination of the title or right of possession over it. 55 All these remedies — sequestration,
freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designed
for-particular exigencies, attended by no character of permanency or finality, and always subject to
the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of
no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936
the Commissioner of Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence on
sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point
that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding
position, is that any change in procedure, or the institution of a new one, should conform to due
process and the other prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a
proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property
in replevin suits, sequestration and provisional takeover writs may issue ex parte. 58 And as in
preliminary attachment, receivership, and delivery of personality, no objection of any significance
may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its
fundamental character of temporariness or conditionality; and taking account specially of the
constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the people;" 59 as well as
the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause
that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-
evident, that "any transfer, disposition, concealment or disappearance of said assets and properties
would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a
prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate
and fair opportunity to contest it and endeavor to cause its negation or nullification. 61

Both are assured under the executive orders in question and the rules and regulations promulgated
by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due
process." 62Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets
and properties, "it is the position of the new democratic government that President Marcos * * (and
other parties affected) be afforded fair opportunity to contest these claims before appropriate
Philippine authorities." 63 Section 7 of the Commission's Rules and Regulations provides that
sequestration or freeze (and takeover) orders issue upon the authority of at least two
commissioners, based on the affirmation or complaint of an interested party, or motu proprio when
the Commission has reasonable grounds to believe that the issuance thereof is warranted. 64 A
similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires
that a "sequestration or freeze order shall be issued only upon showing of a prima facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party
may seek to set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of sequestration or

freeze or hold order is directed may request the lifting thereof in writing, either
personally or through counsel within five (5) days from receipt of the writ or order, or
in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio
for good cause shown, the Commission may lift the writ or order unconditionally or
subject to such conditions as it may deem necessary, taking into consideration the
evidence and the circumstance of the case. The resolution of the commission may
be appealed by the party concerned to the Office of the President of the Philippines
within fifteen (15) days from receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not
expressly imposed by some rule or regulation as a condition to warrant the sequestration or freezing
of property contemplated in the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in
fact or law, or are whimsical and capricious, are condemned and struck down. 66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and
propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these
particular remedies and the authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution
recognizes the power and duty of the President to enact "measures to achieve the mandate of the
people to * * * (recover ill- gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration or freezing of assets or
accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution 67 treats
of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power,
regarded, as t lie power of promoting the public welfare by restraining and regulating the use of
liberty and property," 68 and as "the most essential, insistent and illimitable of powers * * in the
promotion of general welfare and the public interest," 69and said to be co-extensive with self-
protection and * * not inaptly termed (also) the'law of overruling necessity." "70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not,
and was never intended to act as, a judge. Its general function is to conduct investigations in order
to collect evidence establishing instances of "ill-gotten wealth;" issue sequestration, and such
orders as may be warranted by the evidence thus collected and as may be necessary to preserve
and conserve the assets of which it takes custody and control and prevent their disappearance, loss
or dissipation; and eventually file and prosecute in the proper court of competent jurisdiction all
cases investigated by it as may be warranted by its findings. It does not try and decide, or hear and
determine, or adjudicate with any character of finality or compulsion, cases involving the essential
issue of whether or not property should be forfeited and transferred to the State because "ill-gotten"
within the meaning of the Constitution and the executive orders. This function is reserved to the
designated court, in this case, the Sandiganbayan. 71 There can therefore be no serious regard
accorded to the accusation, leveled by BASECO, 72that the PCGG plays the perfidious role of
prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record,
hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed
for will not be issued.

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

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as
a domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and
shipping executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer
Island Shipyard is housed, and its main shipyard is located at Mariveles Bataan." 73 Its Articles of
Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares,
of which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the incorporators. 74The same
articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony
P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11)
Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15)
Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely:
(1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book. 75Their names and the number of shares respectively held by
them are as follows:

1. Jose A. Rojas 1,248

shares

2. Severino G. de 1,248
la Cruz shares

3. Emilio T. Yap 2,508

shares

4. Jose 1,248
Fernandez shares

5. Jose Francisco 128 shares

6. Manuel S. 96 shares
Mendoza

7. Anthony P. Lee 1,248

shares

8. Hilario M. Ruiz 32 shares

9. Constante L. 8 shares
Fariñas

10. Fidelity 65,882

Management, Inc. shares

11. Trident 7,412

Management shares

12. United Phil. 1,240

Lines shares
 13. Renato M. 8 shares
Tanseco

14. Fidel Ventura 8 shares

15. Metro Bay 136,370

Drydock shares

16. Manuel Jacela 1 share

17. Jonathan G. 1 share

Lu

18. Jose J. 1 share

Tanchanco

19. Dioscoro 128 shares

Papa

20. Edward T. 4 shares

Marcelo

TOTAL 218,819
shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel
Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at
Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for NASSCO's
Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all its
structures, buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit.
This it did in virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed on
February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered
to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of P41,600,000.00,
with interest at seven percent (7%) per annum, compounded semi-annually, was stipulated to be
paid in equal semi-annual installments over a term of nine (9) years, payment to commence after a
grace period of two (2) years from date of turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00,
about eight (8) months later. A document to this effect was executed on October 9, 1973, entitled
"Memorandum Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer
of the Board of Directors, and David R. Ines, as General Manager. 77 This agreement bore, at the top
right corner of the first page, the word "APPROVED" in the handwriting of President
Marcos, followed by his usual full signature. The document recited that a down payment of
P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was payable in
equal semi-annual installments over nine (9) years after a grace period of two (2) years, with interest
at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the
Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the
document of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be
payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the
intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO which
had not been included in the first two (2) purchase documents. This was accomplished by a deed
entitled "Contract of Purchase and Sale," 79 which, like the Memorandum of Agreement dated
October 9, 1973 supra also bore at the upper right-hand corner of its first page, the handwritten
notation of President Marcos reading, "APPROVED, July 29, 1973," and underneath it, his usual full
signature. Transferred to BASECO were NASSCO's "ownership and all its titles, rights and interests
over all equipment and facilities including structures, buildings, shops, quarters, houses, plants and
expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer
Island Shops, including all the equipment of the Bataan National Shipyards (BNS) which were
excluded from the sale of NBS to BASECO but retained by BASECO and all other selected
equipment and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed,
NASSCO committed itself to cooperate with BASECO for the acquisition from the National
Government or other appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the
balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over a
term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo Pacificador
again signed for NASSCO, together with the general manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last
available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy
equipment (brand new)." 80 On September 3, 1975, it got another loan also from the NDC in the
amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the
GSIS, in the sum of P12,400,000.00. 81 The claim has been made that not a single centavo has been
paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The
first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The
second was embodied in a confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of BASECO, and that of a
Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been
"no orders or demands for ship construction" for some time and expressed the fear that if that state
of affairs persisted, BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the
situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by
an entirely new corporation to be created;" and towards this end, he informed Marcos that BASECO
was —
 * * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding
loan to BASECO amounting to P341.165M and assuming and converting a portion of
BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of
P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will
participate by absorbing and converting a portion of the REPACOM loan of Bay
Shipyard and Drydock, Inc., amounting to P32.538M.86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with
the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due
chiefly to the fact that "orders to build ships as expected * * did not materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these being:
(1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony
P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major
heart attack," he made the following quite revealing, and it may be added, quite cynical and indurate
recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock
book prior to the implementation of your instructions to pass a board resolution to
legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and waivers; 89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in
"Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering

"Engineer Island";
 5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and
equipment at Mariveles, Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and
equipment at Engineer Island, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of
land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of

P30,000,000.00;

10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the
housing facilities for BASECO's rank-and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when
BASECO will have enough orders for ships in order for the company to meet loan obligations," and
that —

An LOI may be issued to government agencies using floating equipment, that a

linkage scheme be applied to a certain percent of BASECO's net profit as part of
BASECO's amortization payments to make it justifiable for you, Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of
BASECO, yet he has presented a report on BASECO to President Marcos, and his report
demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as

regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco
of the Philippine National Oil Company and Chairman Constante Fariñas of the National
Development Company, directing them "to participate in the formation of a new corporation resulting
from the spin-off of the shipbuilding component of BASECO along the following guidelines:

a. Equity participation of government shall be through LUSTEVECO and NDC in the

amount of P115,903,000 consisting of the following obligations of BASECO which
are hereby authorized to be converted to equity of the said new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

 b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after
receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and
Geronimo Z. Velasco, in representation of their respective corporations, executed a PRE-
INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they undertook to form a
shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to
realization their president's instructions. It would seem that the new corporation ultimately formed
was actually named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February
14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission
REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring Company
(LUSTEVECO), and the National Development Company (NDC). What is commanded therein is
summarized by the Solicitor General, with pithy and not inaccurate observations as to the effects
thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be

transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of
s allegedly representing the handling and incidental expenses incurred by BASECO
in the installation of said equipment (so instead of NDC getting paid on its loan to
BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in the
possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred
to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred
be invested by LUSTEVECO, acting through PNOC and NDC, as the government's
equity participation in a shipbuilding corporation to be established in partnership with
the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan
obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's
REPACOM loan of P32.438M were wiped out and converted into non-voting
preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the
control by President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos not
only exercised control over BASECO, but also that he actually owns well nigh one hundred percent
of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares
of stock outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these twenty are
juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity
Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil.
Lines, 1,240 shares. The first three corporations, among themselves, own an aggregate of 209,664
shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found
in Malacanang shortly after the sudden flight of President Marcos, were certificates corresponding to
more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding shares of stock of the
three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the
owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc.
— which supposedly owns as aforesaid 65,882 shares of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of

Metro Bay Drydock Corporation — which allegedly owns 136,370 shares of BASECO
stock;

3) the deeds of assignment of 800 outstanding shares of Trident Management Co.,

Inc. — which allegedly owns 7,412 shares of BASECO stock, assigned in
blank; 98 and

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares

of BASECO stock; that is, all but 5 % — all endorsed in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the
BASECO stockholders were still in possession of their respective stock certificates and had "never
endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded
statements as a mere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days
"to SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * *
BASECO as of April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension;
and in his motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties, among
whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of
all other Certificates, of Stock of petitioner's stockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to secure
copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their) certificates of
stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in Malacañang after the
former President and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or
accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a
motion filed on December 5, 1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with
the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it
needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to produce the originals of the
stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * *
some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently omitted,
nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not impressed on the supposed
stockholders the primordial importance of convincing this Court of their present custody of the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be
exhibited to the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the
simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having
already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders
and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any
rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and
directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to
BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the
PCGG to persons who are "dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the
private corporation known as BASECO was "owned or controlled by former President Ferdinand E.
Marcos * * during his administration, * * through nominees, by taking advantage of * * (his) public
office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of
the government had been taken over by BASECO; and the situation justified the sequestration as
well as the provisional takeover of the corporation in the public interest, in accordance with the terms
of Executive Orders No. 1 and 2, pending the filing of the requisite actions with the Sandiganbayan
to cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic
pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it
sustains the acts of sequestration and takeover by the PCGG as being in accord with the law, and,
in view of what has thus far been set out in this opinion, pronounces to be without merit the theory
that said acts, and the executive orders pursuant to which they were done, are fatally defective in not
according to the parties affected prior notice and hearing, or an adequate remedy to impugn, set
aside or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge at
the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of
attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-
gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately
make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and
seizures had been transgressed by the Order of April 18, 1986 which required it "to produce
corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do so."
The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the
PCGG's power to "issue subpoenas requiring * * the production of such books, papers, contracts,
records, statements of accounts and other documents as may be material to the investigation
conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to
"require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether
located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full
disclosure of the same * *." The contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions unless

protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when charged with an
abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114

* * corporations are not entitled to all of the constitutional protections which private
individuals have. * * They are not at all within the privilege against self-
incrimination, although this court more than once has said that the privilege runs very
closely with the 4th Amendment's Search and Seizure provisions. It is also settled
that an officer of the company cannot refuse to produce its records in its possession
upon the plea that they will either incriminate him or may incriminate it." (Oklahoma
Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).

* * The corporation is a creature of the state. It is presumed to be incorporated for the

benefit of the public. It received certain special privileges and franchises, and holds
them subject to the laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its charter. Its rights to act
as a corporation are only preserved to it so long as it obeys the laws of its creation.
There is a reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold that a
state, having chartered a corporation to make use of certain franchises, could not, in
the exercise of sovereignty, inquire how these franchises had been employed, and
whether they had been abused, and demand the production of the corporate books
and papers for that purpose. The defense amounts to this, that an officer of the
corporation which is charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To state this
proposition is to answer it. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises may refuse to show
its hand when charged with an abuse of such privileges. (Wilson v. United States, 55
Law Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures
protection to individuals required to produce evidence before the PCGG against any possible
violation of his right against self-incrimination. It gives them immunity from prosecution on the basis
of testimony or information he is compelled to present. As amended, said Section 4 now provides
that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege
against self-incrimination; but no testimony or other information compelled under the
order (or any information directly or indirectly derived from such testimony, or other
information) may be used against the witness in any criminal case, except a
 prosecution for perjury, giving a false statement, or otherwise failing to comply with
the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the
case at bar either. There has been no search undertaken by any agent or representative of the
PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers
that may be wielded by the PCGG with regard to the properties or businesses placed under
sequestration or provisionally taken over. Obviously, it is not a question to which an answer can be
easily given, much less one which will suffice for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

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

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

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to bring and
defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may
be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance
of any office, agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator,
caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons

Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over
by the government of the Marcos Administration or by entities or persons close to former President
Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest or to
prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself. But even in this special situation, the intrusion into management should be
restricted to the minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business
enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or substitution should be avoided if at all possible, and
undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without
saying that where replacement of management officers may be called for, the greatest prudence, circumspection, care and attention - should
accompany that undertaking to the end that truly competent, experienced and honest managers may be recruited. There should be no role to
be played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The
business is not to be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight
should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially
established to be "ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration
and control of business enterprises provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may
properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the
President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum
authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * *
(sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of directors, declaration of
dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed
in such a manner as to be consistent with, and not contradictory of the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to vote simply because
the right exists, or because the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or
by-laws, or otherwise bring about substantial changes in policy, program or practice of the
corporation except for demonstrably weighty and defensible grounds, and always in the context of
the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue
disposal of the corporate assets. Directors are not to be voted out simply because the power to do
so exists. Substitution of directors is not to be done without reason or rhyme, should indeed be
shunned if at an possible, and undertaken only when essential to prevent disappearance or wastage
of corporate property, and always under such circumstances as assure that the replacements are
truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and
elect others in their stead because the evidence showed prima facie that the former were just tools
of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This
is why, in its Resolution of October 28, 1986; 118 this Court declared that —

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

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

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the
execution of certain contracts, inclusive of the termination of the employment of some of its
executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is not necessary to do so. The
issues arising therefrom may and will be left for initial determination in the appropriate action. But the Court will state that absent any showing
of any important cause therefor, it will not normally substitute its judgment for that of the PCGG in these individual transactions. It is clear
however, that as things now stand, the petitioner cannot be said to have established the correctness of its submission that the acts of the
PCGG in question were done without or in excess of its powers, or with grave abuse of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14,
1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

G.R. No. 125986 January 28, 1999

LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners,

vs.
HONORABLE COURT OF APPEALS, JAMES BUILDER CONSTRUCTION and/or JAIME T.
BRAVO, respondents.

MARTINEZ, J.:

This petition for review assails the decision of the respondent Court of Appeals dated March 15,
1996,1 which affirmed with modification the judgment of default rendered by the Regional Trial Court
of Muntinlupa, Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed for in the
complaint of private respondents James Builder Construction and/or Jaime T. Bravo.

As culled from the record, the facts are as follows:

Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectare property in Sucat,
Muntinlupa, which was occupied by squatters. Petitioner Posadas entered into negotiations with
private respondent Jaime T. Bravo regarding the development of the said property into a residential
subdivision. On May 3, 1989, she authorized private respondent to negotiate with the squatters to
leave the said property. With a written authorization, respondent Bravo buckled down to work and
started negotiations with the squatters.

Meanwhile, some seven (7) months later, on December 11, 1989, petitioner Posadas and her two
(2) children, through a Deed of Assignment, assigned the said property to petitioner Luxuria Homes,
Inc., purportedly for organizational and tax avoidance purposes. Respondent Bravo signed as one of
the witnesses to the execution of the Deed of Assignment and the Articles of Incorporation of
petitioner Luxuria Homes, Inc.

Then sometime in 1992, the harmonious and congenial relationship of petitioner Posadas and
respondent Bravo turned sour when the former supposedly could not accept the management
contracts to develop the 1.6 hectare property into a residential subdivision, the latter was proposing.
In retaliation, respondent Bravo demanded payment for services rendered in connection with the
development of the land. In his statement of account dated 21 August 19912 respondent demanded
the payment of P1,708,489.00 for various services rendered, i.e., relocation of squatters, preparation
of the architectural design and site development plan, survey and fencing.
Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, private
respondents James Builder Construction and Jaime T. Bravo instituted a complaint for specific
performance before the trial court against petitioners Posadas and Luxuria Homes, Inc. Private
respondents alleged therein that petitioner Posadas asked them to clear the subject parcel of land of
squatters for a fee of P1,100,000.00 for which they were partially paid the amount of P461,511.50,
leaving a balance of P638,488.50. They were also supposedly asked to prepare a site development
plan and an architectural design for a contract price of P450,000.00 for which they were partially
paid the amount of P25,000.00, leaving a balance of P425,000.00. And in anticipation of the signing
of the land development contract, they had to construct a bunkhouse and warehouse on the property
which amounted to P300,000.00, and a hollow blocks factory for P60,000.00. Private respondents
also claimed that petitioner Posadas agreed that private respondents will develop the land into a first
class subdivision thru a management contract and that petitioner Posadas is unjustly refusing to
comply with her obligation to finalize the said management contract.

The prayer in the complaint of the private respondents before the trial court reads as follows:

WHEREFORE, premises considered, it is respectfully prayed of this Honorable Court

that after hearing/trial judgment be rendered ordering defendant to:

a) Comply with its obligation to deliver/finalize Management Contract of its land in

Sucat, Muntinlupa, Metro Manila and to pay plaintiff its balance in the amount of
P1,708,489.00:

b) Pay plaintiff moral and exemplary damages in the amount of P500.000.00;

c) Pay plaintiff actual damages in the amount of P500.000.00

(Bunkhouse/warehouse- P300.000.00, Hollow-block factory-P60.000.00, lumber,
cement, etc., P120.000.00, guard-P20.000.00);

d) Pay plaintiff attorney's fee of P50.000 plus P700 per appearance in court and 5%
of that which may be awarded by the court to plaintiff re its monetary claims:

e) Pay cost of this suit.3

On September 27, 1993, the trial court declared petitioner Posadas in default and allowed the
private respondents to present their evidence ex-parte. On March 8, 1994, it ordered petitioner
Posadas, jointly and in solidum with petitioner Luxuria Homes, Inc., to pay private respondents as
follows:

1. . . . the balance of the payment for the various services performed by Plaintiff with
respect to the land covered by TCT NO. 167895 previously No. 158290 in the total
amount of P1,708,489.00.

2. . . . actual damages incurred for the construction of the warehouse/bunks, and for
the material used in the total sum of P1,500.000.00.

3. Moral and exemplary damages of P500.000.00.

4. Attorney's fee of P50,000.00.

5. And cost of this proceedings.

 Defendant Aida Posadas as the Representative of the Corporation Luxuria Homes,
Incorporated, is further directed to execute the management contract she committed
to do, also in consideration of the various undertakings that Plaintiff rendered for her.4

Aggrieved by the aforecited decision, petitioners appealed to respondent Court of Appeals, which, as
aforestated, affirmed with modification the decision of the trial court. The appellate court deleted the
award of moral damages on the ground that respondent James Builder Construction is a corporation
and hence could not experience physical suffering and mental anguish. It also reduced the award of
exemplary damages. The dispositive portion of the decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED with the

modification that the award of moral damages is ordered deleted and the award of
exemplary damages to the plaintiff's-appellee should only be in the amount of FIFTY
THOUSAND (P50,000.00) PESOS.5

Petitioners' motion for reconsideration was denied, prompting the filing of this petition for review
before this Court.

On January 15, 1997, the Third Division of this Court denied due course to this petition for failing to
show convincingly any reversible error on the part of the Court of Appeals. This Court however
deleted the grant of exemplary damages and attorney's fees. The Court also reduced the trial court's
award of actual damages from P1,500,000.00 to P500,000.00 reasoning that the grant should not
exceed the amount prayed for in the complaint. In the prayer in the complaint respondents asked for
actual damages in the amount of P500,000.00 only.

Still feeling aggrieved with the resolution of this Court, petitioners filed a motion for reconsideration.
On March 17, 1997, this Court found merit in the petitioners' motion for reconsideration and
reinstated this petition for review.

From their petition for review and motion for reconsideration before this Court, we now synthesize
the issues as follows:

1. Were private respondents able to present ex-parte sufficient evidence to substantiate the
allegations in their complaint and entitle them to their prayers?

2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents for the transactions
supposedly entered into between petitioner Posadas and private respondents?

3. Can petitioners be compelled to enter into a management contract with private respondents?

Petitioners who were declared in default assert that the private respondents who presented their
evidence ex-parte nonetheless utterly failed to substantiate the allegations in their complaint and as
such cannot be entitled to the reliefs prayed for.

A perusal of the record shows that petitioner Posadas contracted respondent Bravo to render
various services for the initial development of the property as shown by vouchers evidencing
payments made by petitioner Posadas to respondent Bravo for squatter relocation, architectural
design, survey and fencing.

Respondents prepared the architectural design, site development plan and survey in connection with
petitioner Posadas' application with the Housing and Land Use Regulatory Board (HLURB) for the
issuance of the Development Permit, Preliminary Approval and Locational Clearance.6 Petitioner
benefited from said services as the Development Permit and the Locational Clearance were
eventually issued by the HLURB in her favor. Petitioner Posadas is therefore liable to pay for these
services rendered by respondents. The contract price for the survey of the land is P140,000.00.
Petitioner made partial payments totaling P130,000.00 leaving a payable balance of P10,000.00.

In his testimony,7 he alleged that the agreed price for the preparation of the site development plan is
P500,000.00 and that the preparation of the architectural designs is for P450,000, or a total of
P950,000.00 for the two contracts. In his complaint however, respondent Bravo alleged that he was
asked "to prepare the site development plan and the architectural designs . . . for a contract price of
P450,000.00 . . . "8 The discrepancy or inconsistency was never reconciled and clarified.

We reiterate that we cannot award an amount higher than what was claimed in the complaint.
Consequently for the preparation of both the architectural design and site development plan,
respondent is entitled to the amount of P450,000.00 less partial payments made in the amount of
P25,000.00. In Policarpio v. RTC of Quezon City,9 it was held that a court is bereft of jurisdiction to
award, in a judgment by default, a relief other than that specifically prayed for in the complaint.

As regards the contracts for the ejectment of squatters and fencing, we believe however that
respondents failed to show proof that they actually fulfilled their commitments therein. Aside from the
bare testimony of respondent Bravo, no other evidence was presented to show that all the squatters
were ejected from the property. Respondent Bravo failed to show how many shanties or structures
were actually occupying the property before he entered the same, to serve as basis for concluding
whether the task was finished or not. His testimony alone that he successfully negotiated for the
ejectment of all the squatters from the property will not suffice.

Likewise, in the case of fencing, there is no proof that it was accomplished as alleged. Respondent
Bravo claims that he finished sixty percent (60%) of the fencing project but he failed to present
evidence showing the area sought to be fenced and the actual area fenced by him. We therefore
have no basis to determining the veracity respondent's allegations. We cannot assume that the said
services rendered for it will be unfair to require petitioner to pay the full amount claimed in case the
respondents obligations were not completely fulfilled.

For respondents' failure to show proof of accomplishment of the aforesaid services, their claims
cannot be granted. In P.T. Cerna Corp. v. Court of Appeals,10 we ruled that in civil cases, the burden
of proof rests upon the party who, as determined by the pleadings or the nature of the case, asserts
the affirmative of an issue. In this case the burden lies on the complainant, who is duty bound to
prove the allegations in the complaint. As this Court has held, he who alleges a fact has the burden
of proving it and A MERE ALLEGATION IS NOT EVIDENCE.

And the rules do not change even if the defendant is declared in default. In the leading case
of Lopez v. Mendezona,11 this Court ruled that after entry of judgment in default against a defendant
who has neither appeared nor answered, and before final judgment in favor of the plaintiff, the latter
must establish by competent evidence all the material allegations of his complaint upon which he
bases his prayer for relief. In De los Santos v. De la Cruz,12this Court declared that a judgement by
default against a defendant does not imply a waiver of rights except that of being heard and of
presenting evidence in his favor. It does not imply admission by the defendant of the facts and
causes of action of the plaintiff, because the codal section requires the latter to adduce his evidence
in support of his allegations as an indispensable condition before final judgment could be given in his
favor. Nor could it be interpreted as an admission by the defendant that the plaintiff's causes of
action finds support in the law or that the latter is entitled to the relief prayed for.
We explained the rule in judgments by default in Pascua v. Florendo,13 where we said that nowhere
is it stated that the complainants are automatically entitled to the relief prayed for, once the
defendants are declared in default. Favorable relief can be granted only after the court has
ascertained that the evidence offered and the facts proven by the presenting party warrant the grant
of the same. Otherwise it would be meaningless to require presentation of evidence if everytime the
other party is declared in default, a decision would automatically be rendered in favor of the non-
defaulting party and exactly according to the tenor of his prayer. In Lim Tanhu v. Ramolete 14 we
elaborated and said that a defaulted defendant is not actually thrown out of court. The rules see to it that any judgment against him must be
in accordance with law. The evidence to support the plaintiff's cause is, of course, presented in his absence, but the court is not supposed to
admit that which is basically incompetent. Although the defendant would not be in a position to object, elementary justice requires that only
legal evidence should be considered against him. If the evidence presented should not be sufficient to justify a judgment for the plaintiff, the
complaint must be dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed the amount or be different in kind from
what is prayed for in the complaint.

The prayer for actual damages in the amount of P500,000.00, supposedly for the
bunkhouse/warehouse, hollow-block factory, lumber, cement, guard, etc., which the trial court
granted and even increased to P1,500,000.00, and which this Court would have rightly reduced to
the amount prayed for in the complaint, was not established, as shown upon further review of the
record. No receipts or vouchers were presented by private respondents to show that they actually
spent the amount. In Salas v. Court of Appeals,15 we said that the burden of proof of the damages
suffered is on the party claiming the same. It his duty to present evidence to support his claim for
actual damages. If he failed to do so, he has only himself to blame if no award for actual damages is
handed down.

In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of Appeals,16 basic is the rule
that to recover actual damages, the amount of loss must not only be capable of proof but must
actually be proven with reasonable degree of certainty, premised upon competent proof or best
evidence obtainable of the actual amount thereof.

We go to the second issue of whether Luxuria Homes, Inc., was a party to the transactions entered
into by petitioner Posadas and private respondents and thus could be held jointly and severally with
petitioner Posadas. Private respondents contend that petitioner Posadas surreptitiously formed
Luxuria Homes, Inc., and transferred the subject parcel of land to it to evade payment and defraud
creditors, including private respondents. This allegation does not find support in the evidence on
record.

On the contrary we hold that respondent Court of Appeals committed a reversible error when it
upheld the factual finding of the trial court that petitioners' liability was aggravated by the fact that
Luxuria Homes, Inc., was formed by petitioner Posadas after demand for payment had been made,
evidently for her to evade payment of her obligation, thereby showing that the transfer of her
property to Luxuria Homes, Inc., was in fraud of creditors.

We easily glean from the record that private respondents sent demand letters on 21 August 1991
and 14 September 1991, or more than a year and a half after the execution of the Deed of
Assignment on 11 December 1989, and the issuance of the Articles of Incorporation of petitioner
Luxuria Homes on 26 January 1990. And, the transfer was made at the time the relationship
between petitioner Posadas and private respondents was supposedly very pleasant. In fact the
Deed of Assignment dated 11 December 1989 and the Articles of Incorporation of Luxuria Homes,
Inc., issued 26 January 1990 were both signed by respondent Bravo himself as witness. It cannot be
said then that the incorporation of petitioner Luxuria Homes and the eventual transfer of the subject
property to it were in fraud of private respondents as such were done with the full knowledge of
respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes, Inc., as
erroneously stated by the lower court. The Articles of Incorporation of petitioner Luxuria Homes, Inc.,
clearly show that petitioner Posadas owns approximately 33% only of the capital stock. Hence
petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria Homes, Inc.

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. This is elementary. Thus in Bayer-Roxas v. Court
of Appeals,17 we said that the separate personality of the corporation may be disregarded only when
the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where
necessary for the protection of the creditors. Accordingly in Del Roscrrio v. NLRC,18 where the Philsa
International Placement and Services Corp. was organized and registered with the POEA in 1981,
several years before the complainant was filed a case in 1985, we held that this cannot imply fraud.

Obviously in the instant case, private respondents failed to show proof that petitioner Posadas acted
in bad faith. Consequently since private respondents failed to show that petitioner Luxuria Homes,
Inc., was a party to any of the supposed transactions, not even to the agreement to negotiate with
and relocate the squatters, it cannot be held liable, nay jointly and in solidum, to pay private
respondents. In this case since it was petitioner Aida M. Posadas who contracted respondent Bravo
to render the subject services, only she is liable to pay the amounts adjudged herein.

We now resolve the third and final issue. Private respondents urge the court to compel petitioners to
execute a management contract with them on the basis of the authorization letter dated May 3,
1989. The full text of Exh. "D" reads:

I hereby certify that we have duly authorized the bearer, Engineer Bravo to negotiate,
in our behalf, the ejectment of squatters from our property of 1.6 hectares, more or
less, in Sucat Muntinlupa. This authority is extended to him as the representative of
the Managers; under our agreement for them to undertake the development of said
area and the construction of housing units intended to convert the land into a first
class subdivision.

The aforecited document is nothing more than a "to-whom-it-may-concern" authorization letter to

negotiate with the squatters. Although it appears that there was an agreement for the development
of the area, there is no showing that same was ever perfected and finalized. Private respondents
presented in evidence only drafts of a proposed management contract with petitioner's handwritten
marginal notes but the management contract was not put in its final form. The reason why there was
no final uncorrected draft was because the parties could not agree on the stipulations of said
contract, which even private respondents admitted as found by the trial court.19 As a consequence
the management drafts submitted by the private respondents should at best be considered as mere
unaccepted offers. We find no cogent reason, considering that the parties no longer are in a
harmonious relationship, for the execution of a contract to develop a subdivision.

It is fundamental that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. To compel petitioner Posadas, whether as
representative of petitioner Luxuria Homes or in her personal capacity, to execute a management
contract under the terms and conditions of private respondents would be to violate the principle of
consensuality of contracts. In Philippine National Bank v. Court of Appeals,20 we held that if the
assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind. In ordering petitioner Posadas to execute a
management contract with private respondents, the trial court in effect is putting her under duress.
The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime prior
to the perfection of a contract, unaccepted offers and proposals remain as such and cannot be
considered as binding commitments; hence not demandable.

WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision dated March 15, 1996,
of respondent Honorable Court of Appeals and its Resolution dated August 12, 1996, are MODIFIED
ordering PETITIONER AIDA M. POSADAS to pay PRIVATE RESPONDENTS the amount of
P435,000.00 as balance for the preparation of the architectural design, site development plan and
survey. All other claims of respondents are hereby DENIED for lack of merit. 1âwphi1.nêt

SO ORDERED.

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe;
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo
Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana,
Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the
corporate fiction or the notion of legal entity should come to naught. The law in these instances will regard the corporation as a mere
association of persons and, in case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct
from the other corporation. The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a "break-open order" to the sheriff
to be enforced against personal property found in the premises of petitioner's sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were
employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices
that their contracts of employment had expired and the project in which they were hired had been
completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private
respondent's employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-
payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and
executory.2

On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents' back wages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums
from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff
to collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment
award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution
on petitioner through the security guard on duty but the service was refused on the ground that
petitioner no longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second
alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report,
dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila,
claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had
levied upon.4

The said special sheriff recommended that a "break-open order" be issued to enable him to enter
petitioner's premises so that he could proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order,"
alleging that HPPI and petitioner corporation were owned by the same incorporator/stockholders.
They also alleged that petitioner temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer because of the issuance of the
break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities Exchange
Commission (SEC) and the General Information Sheet, dated May 25, 1987, submitted by HPPI to
the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

 Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office
 355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a
break-open order, contending that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for
break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of
the Labor Arbiter, issued a break-open order and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied
upon. It dismissed the third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated
December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution
of its decision despite a third-party claim on the levied property. Petitioner further contends, that the
doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of
any showing that it created HPPI in order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a
business which is distinct and separate from petitioner's construction business. Hence, it is of no
consequence that petitioner and HPPI shared the same premises, the same President and the same
set of officers and subscribers.7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected.8 But, this separate
and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice.9 So, when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
laws,10 this separate personality of the corporation may be disregarded or the veil of corporate fiction
pierced.11 This is true likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.12

The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

 4. Methods of conducting the business.13

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding
the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted
so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded. The control necessary
to invoke the rule is not majority or even complete stock control but such domination
of instances, policies and practices that the controlled corporation has, so to speak,
no separate mind, will or existence of its own, and is but a conduit for its principal. It
must be kept in mind that the control must be shown to have been exercised at the
time the acts complained of took place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintiff's 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 defendant's
relationship to that operation.14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a
sham or a subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on
April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May
15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet
stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño as the corporate
secretary of both corporations. It would also not be amiss to note that both
corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.
 From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated
to avoid the financial liability that already attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had
the occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioner. It is very clear that
the latter corporation was a continuation and successor of the first entity . . . . Both
predecessors and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of the same
business. This "avoiding-the-liability" scheme is very patent, considering that 90% of
the subscribed shares of stock of the Claparols Steel Corporation (the second
corporation) was owned by respondent . . . Claparols himself, and all the assets of
the dissolved Claparols Steel and Nail plant were turned over to the emerging
Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial obligation to its
employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the
third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with
Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or
his representative entry to the place where the property subject of execution is
located or kept, the judgment creditor may apply to the Commission or Labor Arbiter
concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing
were complied with. Petitioner and the third-party claimant were given the opportunity to submit
evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.

G.R. No. L-23893 October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE
COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.

PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,

vs.
JOSE M. VILLARAMA, third-party defendant-appellee.

Chuidian Law Office for plaintiff-appellant.

Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.

ANGELES, J.:

This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No.
41845, declaring null and void the sheriff's sale of two certificates of public convenience in favor of
defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan
Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the
said certificates of public convenience; and ordering the private defendants, jointly and severally, to
pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The case against the PSC was
dismissed.

The rather ramified circumstances of the instant case can best be understood by a chronological
narration of the essential facts, to wit:

Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name
of Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service
Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a
total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On
January 8, 1959, he sold the aforementioned two certificates of public convenience to the
Pangasinan Transportation Company, Inc. (otherwise known as Pantranco), for P350,000.00 with
the condition, among others, that the seller (Villarama) "shall not for a period of 10 years from the
date of this sale, apply for any TPU service identical or competing with the buyer."

Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc.
(which shall be referred to hereafter as the Corporation) was organized with a capital stock of
P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the
subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators,
and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother and
sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid to the
treasurer of the corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and Exchange Commission (March 10,
1959), the Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine
buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which
P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final
approval of the sale by the PSC; P49,500.00 one year after the final approval of the sale; and the
balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the SELLER."

The very same day that the aforementioned contract of sale was executed, the parties thereto
immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional
authority in favor of the vendee Corporation to operate the service therein involved.1 On May 19,
1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be modified
or revoked by the Commission at any time, shall be subject to whatever action that may be taken on
the basic application and shall be valid only during the pendency of said application." Before the
PSC could take final action on said application for approval of sale, however, the Sheriff of Manila,
on July 7, 1959, levied on two of the five certificates of public convenience involved therein, namely,
those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the
Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff,
judgment creditor, against Valentin Fernando, defendant, judgment debtor. The Sheriff made and
entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the
Sheriff of the said two certificates of public convenience. Ferrer was the highest bidder, and a
certificate of sale was issued in his name.

Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted
for approval their corresponding contract of sale to the PSC.2 Pantranco therein prayed that it be
authorized provisionally to operate the service involved in the said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case
No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint hearing.
In the meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the
pendency of the cases and before a final resolution on the aforesaid applications, the Pantranco
shall be the one to operate provisionally the service under the twocertificates embraced in the
contract between Ferrer and Pantranco. The Corporation took issue with this particular ruling of the
PSC and elevated the matter to the Supreme Court,3 which decreed, after deliberation, that until the
issue on the ownership of the disputed certificates shall have been finally settled by the proper court,
the Corporation should be the one to operate the lines provisionally.

On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for
the annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC
Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by
the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed
therein that all the orders of the PSC relative to the parties' dispute over the said certificates be
annulled.

In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had
no valid title to the certificates in question because the contract pursuant to which it acquired them
from Fernando was subject to a suspensive condition — the approval of the PSC — which has not
yet been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to Pantranco, were valid and
regular, and vested unto Pantranco, a superior right thereto.

Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama
and the Corporation, are one and the same; that Villarama and/or the Corporation was disqualified
from operating the two certificates in question by virtue of the aforementioned agreement between
said Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years from
the date of this sale, apply for any TPU service identical or competing with the buyer."

Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried,
and thereafter decision was rendered in the terms, as above stated.

As stated at the beginning, all the parties involved have appealed from the decision. They submitted
a joint record on appeal.

Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc.
(Corporation) is a distinct and separate entity from Jose M. Villarama; that the restriction clause in
the contract of January 8, 1959 between Pantranco and Villarama is null and void; that the Sheriff's
sale of July 16, 1959, is likewise null and void; and the failure to award damages in its favor and
against Villarama.

Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void;
and the sale of the two certificates in question by Valentin Fernando to the Corporation, is valid. He
also assails the award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to
award moral damages to him as prayed for in his counterclaim.

The Corporation, on the other hand, prays for a review of that portion of the decision awarding only
P5,000.00 as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of
exemplary damages.

After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does
the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former
"SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY
TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it
include existing lines?; (2) Assuming that said stipulation covers all kinds of lines, is such stipulation
valid and enforceable?; (3) In the affirmative, that said stipulation is valid, did it bind the Corporation?

For convenience, We propose to discuss the foregoing issues by starting with the last proposition.

The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the
Corporation, alleging that he did not become such, because he did not have sufficient funds to
invest, his wife, however, was an incorporator with the least subscribed number of shares, and was
elected treasurer of the Corporation. The finances of the Corporation which, under all concepts in
the law, are supposed to be under the control and administration of the treasurer keeping them as
trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the
private funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-
treasurer of the business without regard to the rights of the stockholders. The following testimony of
Villarama,4together with the other evidence on record, attests to that effect:

Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You
heard the testimony presented here by the bank regarding the initial opening deposit of ONE
HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a
check drawn by yourself personally. In the direct examination you told the Court that the
reason you drew a check for Eighty-Five Thousand Pesos was because you and your wife,
or your wife, had spent the money of the stockholders given to her for incorporation. Will you
please tell the Honorable Court if you knew at the time your wife was spending the money to
pay debts, you personally knew she was spending the money of the incorporators?
 A. You know my money and my wife's money are one. We never talk about those things.

Q. Doctor, your answer then is that since your money and your wife's money are one
money and you did not know when your wife was paying debts with the incorporator's
money?

A. Because sometimes she uses my money, and sometimes the money given to her she
gives to me and I deposit the money.

Q. Actually, aside from your wife, you were also the custodian of some of the
incorporators here, in the beginning?

A. Not necessarily, they give to my wife and when my wife hands to me I did not know it
belonged to the incorporators.

Q. It supposes then your wife gives you some of the money received by her in her
capacity as treasurer of the corporation?

A. Maybe.

Q. What did you do with the money, deposit in a regular account?

A. Deposit in my account.

Q. Of all the money given to your wife, she did not receive any check?

A. I do not remember.

Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what
is this?

xxx xxx xxx

JUDGE: Reform the question.

Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did
your wife give you Fifty-two Thousand Pesos?

A. I have testified before that sometimes my wife gives me money and I do not know
exactly for what.

The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was
mostly financed by Villarama. Of the P105,000.00 deposited in the First National City Bank of New
York, representing the initial paid-up capital of the Corporation, P85,000.00 was covered by
Villarama's personal check. The deposit slip for the said amount of P105,000.00 was admitted in
evidence as Exh. 23, which shows on its face that P20,000.00 was paid in cash and P85,000.00
thereof was covered by Check No. F-50271 of the First National City Bank of New York. The
testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of said bank, have proved
that the drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the
corporation there appears an entry that the treasurer received P95,000.00 as second installment of
the paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for
second subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him
(Rivera) to make vouchers liquidating the sums.7 Thus, it was made to appear that the P95,000.00
was delivered to Villarama in payment for equipment purchased from him, and the P100,000.00 was
loaned as advances to the stockholders. The said accountant, however, testified that he was not
aware of any amount of money that had actually passed hands among the parties involved,8 and
actually the only money of the corporation was the P105,000.00 covered by the deposit slip Exh. 23,
of which as mentioned above, P85,000.00 was paid by Villarama's personal check.

Further, the evidence shows that when the Corporation was in its initial months of operation,
Villarama purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits 20
and 21 disclose that the said purchases were paid by Philippine Bank of Commerce Checks Nos.
992618-B and 993621-B, respectively. These checks have been sufficiently established by Fausto
Abad, Assistant Accountant of Manila Trading & Supply Co., from which the trucks were
purchased9 and Aristedes Solano, an employee of the Philippine Bank of Commerce,10as having
been drawn by Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing
that Villarama had co-mingled his personal funds and transactions with those made in the name of
the Corporation, are very illuminating evidence. Villarama has assailed the admissibility of these
exhibits, contending that no evidentiary value whatsoever should be given to them since "they were
merely photostatic copies of the originals, the best evidence being the originals themselves."
According to him, at the time Pantranco offered the said exhibits, it was the most likely possessor of
the originals thereof because they were stolen from the files of the Corporation and only Pantranco
was able to produce the alleged photostat copies thereof.

Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of
secondary evidence when the original is in the custody of the adverse party, thus: (1) opponent's
possession of the original; (2) reasonable notice to opponent to produce the original; (3) satisfactory
proof of its existence; and (4) failure or refusal of opponent to produce the original in
court.11 Villarama has practically admitted the second and fourth requisites.12As to the third, he
admitted their previous existence in the files of the Corporation and also that he had seen some of
them.13 Regarding the first element, Villarama's theory is that since even at the time of the issuance
of the subpoena duces tecum, the originals were already missing, therefore, the Corporation was no
longer in possession of the same. However, it is not necessary for a party seeking to introduce
secondary evidence to show that the original is in the actual possession of his adversary. It is
enough that the circumstances are such as to indicate that the writing is in his possession or under
his control. Neither is it required that the party entitled to the custody of the instrument should, on
being notified to produce it, admit having it in his possession.14 Hence, secondary evidence is
admissible where he denies having it in his possession. The party calling for such evidence may
introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule
is "when the original has been lost, destroyed, or cannot be produced in court."15 The originals of the
vouchers in question must be deemed to have been lost, as even the Corporation admits such loss.
Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19
and 22.

Taking account of the foregoing evidence, together with Celso Rivera's testimony,16 it would appear
that: Villarama supplied the organization expenses and the assets of the Corporation, such as trucks
and equipment;17 there was no actual payment by the original subscribers of the amounts of
P95,000.00 and P100,000.00 as appearing in the books;18 Villarama made use of the money of the
Corporation and deposited them to his private accounts;19 and the Corporation paid his personal
accounts.20

Villarama himself admitted that he mingled the corporate funds with his own money.21 He also
admitted that gasoline purchases of the Corporation were made in his name22 because "he had
existing account with Stanvac which was properly secured and he wanted the Corporation to benefit
from the rebates that he received."23

The foregoing circumstances are strong persuasive evidence showing that Villarama has been too
much involved in the affairs of the Corporation to altogether negative the claim that he was only a
part-time general manager. They show beyond doubt that the Corporation is his alter ego.

It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness
with the Corporation has been denied by him. On the contrary, he has admitted them with offered
excuses.

Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation
with the lame excuse that "his wife had requested him to reimburse the amount entrusted to her by
the incorporators and which she had used to pay the obligations of Dr. Villarama (her husband)
incurred while he was still the owner of Villa Rey Transit, a single proprietorship." But with his
admission that he had received P350,000.00 from Pantranco for the sale of the two certificates and
one unit,24 it becomes difficult to accept Villarama's explanation that he and his wife, after
consultation,25 spent the money of their relatives (the stockholders) when they were supposed to
have their own money. Even if Pantranco paid the P350,000.00 in check to him, as claimed, it could
have been easy for Villarama to have deposited said check in his account and issued his own check
to pay his obligations. And there is no evidence adduced that the said amount of P350,000.00 was
all spent or was insufficient to settle his prior obligations in his business, and in the light of the
stipulation in the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price
was earmarked for the payments of accounts due to his creditors, the excuse appears unbelievable.

On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co.
with his personal checks, his reason was that he was only sharing with the Corporation his credit
with some companies. And his main reason for mingling his funds with that of the Corporation and
for the latter's paying his private bills is that it would be more convenient that he kept the money to
be used in paying the registration fees on time, and since he had loaned money to the Corporation,
this would be set off by the latter's paying his bills. Villarama admitted, however, that the corporate
funds in his possession were not only for registration fees but for other important obligations which
were not specified.26

Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time
manager,27 he admitted not only having held the corporate money but that he advanced and lent
funds for the Corporation, and yet there was no Board Resolution allowing it.28

Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation
only renders more credible Pantranco's claim that his control over the corporation, especially in the
management and disposition of its funds, was so extensive and intimate that it is impossible to
segregate and identify which money belonged to whom. The interference of Villarama in the complex
affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and
purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that the acts and conduct of the
corporation be carried out in its own corporate name because it has its own personality.
The doctrine that a corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which are within reason and
the law.29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime,30 the veil with which the
law covers and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals.

Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of
evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that
the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and
binding against the said Corporation. For the rule is that a seller or promisor may not make use of a
corporate entity as a means of evading the obligation of his covenant.31 Where the Corporation is
substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee.32

The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are
one and the same, the restrictive clause in the contract between Villarama and Pantranco does not
include the purchase of existing lines but it only applies to application for the new lines. The clause
in dispute reads thus:

(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for
any TPU service identical or competing with the BUYER. (Emphasis supplied)

As We read the disputed clause, it is evident from the context thereof that the intention of the parties
was to eliminate the seller as a competitor of the buyer for ten years along the lines of operation
covered by the certificates of public convenience subject of their transaction. The word "apply" as
broadly used has for frame of reference, a service by the seller on lines or routes that would
compete with the buyer along the routes acquired by the latter. In this jurisdiction, prior authorization
is needed before anyone can operate a TPU service,33whether the service consists in a new line or
an old one acquired from a previous operator. The clear intention of the parties was to prevent the
seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to
apply for authorization to operate along such lines for the duration of such period.34

If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru
an application with the Public Service Commission, this would, in effect, allow the seller just the
same to compete with the buyer as long as his authority to operate is only acquired thru transfer or
sale from a previous operator, thus defeating the intention of the parties. For what would prevent the
seller, under the circumstances, from having a representative or dummy apply in the latter's name
and then later on transferring the same by sale to the seller? Since stipulations in a contract is the
law between the contracting parties,

Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. (Art. 19, New Civil
Code.)

We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the
contract of sale between Villarama and Pantranco is significant in that as it now appears, the parties
intended to effect the least restriction. We are persuaded, after an examination of the supposed
drafts, that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just
as broad and comprehensive. At most, it can be said that the re-wording was done merely for brevity
and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a competitor, and this
must be, considering such factors as the good will35 that the seller had already gained from the riding
public and his adeptness and proficiency in the trade. On this matter, Corbin, an authority on
Contracts has this to say.36

When one buys the business of another as a going concern, he usually wishes to keep it
going; he wishes to get the location, the building, the stock in trade, and the customers. He
wishes to step into the seller's shoes and to enjoy the same business relations with other
men. He is willing to pay much more if he can get the "good will" of the business, meaning by
this the good will of the customers, that they may continue to tread the old footpath to his
door and maintain with him the business relations enjoyed by the seller.

... In order to be well assured of this, he obtains and pays for the seller's promise not to
reopen business in competition with the business sold.

As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the
matter37says:

The law concerning contracts which tend to restrain business or trade has gone through a
long series of changes from time to time with the changing condition of trade and commerce.
With trifling exceptions, said changes have been a continuous development of a general rule.
The early cases show plainly a disposition to avoid and annul all contract which prohibited or
restrained any one from using a lawful trade "at any time or at any place," as being against
the benefit of the state. Later, however, the rule became well established that if the restraint
was limited to "a certain time" and within "a certain place," such contracts were valid and not
"against the benefit of the state." Later cases, and we think the rule is now well established,
have held that a contract in restraint of trade is valid providing there is a limitation upon either
time or place. A contract, however, which restrains a man from entering into business or
trade without either a limitation as to time or place, will be held invalid.

The public welfare of course must always be considered and if it be not involved and the
restraint upon one party is not greater than protection to the other requires, contracts like the
one we are discussing will be sustained. The general tendency, we believe, of modern
authority, is to make the test whether the restraint is reasonably necessary for the protection
of the contracting parties. If the contract is reasonably necessary to protect the interest of the
parties, it will be upheld. (Emphasis supplied.)

Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of
an agreement suppressing competition, it is, however, merely ancillary or incidental to the main
agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope,
it refers only to application for TPU by the seller in competition with the lines sold to the buyer;
second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the
restraint is only along the lines covered by the certificates sold. In view of these limitations, coupled
with the consideration of P350,000.00 for just two certificates of public convenience, and
considering, furthermore, that the disputed stipulation is only incidental to a main agreement, the
same is reasonable and it is not harmful nor obnoxious to public service.38 It does not appear that the
ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to operate
along the lines in question, thereby establishing monopoly or predominance approximating thereto.
We believe the main purpose of the restraint was to protect for a limited time the business of the
buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or
deterioration of the service because of the close supervision of the Public Service
Commission.39 This Court had stated long ago,40that "when one devotes his property to a use in
which the public has an interest, he virtually grants to the public an interest in that use and submits it
to such public use under reasonable rules and regulations to be fixed by the Public Utility
Commission."

Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the
underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:

... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a
trade or business, and which purports to bind the seller not to engage in the same business
in competition with the purchaser, is lawful and enforceable. While such covenants are
designed to prevent competition on the part of the seller, it is ordinarily neither their purpose
nor effect to stifle competition generally in the locality, nor to prevent it at all in a way or to an
extent injurious to the public. The business in the hands of the purchaser is carried on just as
it was in the hands of the seller; the former merely takes the place of the latter; the
commodities of the trade are as open to the public as they were before; the same
competition exists as existed before; there is the same employment furnished to others after
as before; the profits of the business go as they did before to swell the sum of public wealth;
the public has the same opportunities of purchasing, if it is a mercantile business; and
production is not lessened if it is a manufacturing plant.

The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding
that the stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement
therein sought to be enforced was virtually a division of territory between two operators, each
company imposing upon itself an obligation not to operate in any territory covered by the routes of
the other. Restraints of this type, among common carriers have always been covered by the general
rule invalidating agreements in restraint of trade. 42

Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case.
In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not to apply for the
lifting of restrictions imposed on his certificates of public convenience was not an ancillary or
incidental agreement. The restraint was the principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the
line, or trips, or increase of equipment — was not an agreement between the parties but a condition
imposed in the certificate of public convenience itself.

Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a
period of 10 years to "apply" for TPU service along the lines covered by the certificates of public
convenience sold by him to Pantranco is valid and reasonable. Having arrived at this conclusion,
and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is
itself the alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint, that the
said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from
operating the line subject of the prohibition.

To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon
Villarama is not against his application for, or purchase of, certificates of public convenience, but
merely the operation of TPU along the lines covered by the certificates sold by him to Pantranco.
Consequently, the sale between Fernando and the Corporation is valid, such that the rightful
ownership of the disputed certificates still belongs to the plaintiff being the prior purchaser in good
faith and for value thereof. In view of the ancient rule of caveat emptor prevailing in this jurisdiction,
what was acquired by Ferrer in the sheriff's sale was only the right which Fernando, judgment
debtor, had in the certificates of public convenience on the day of the sale.45

Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was
notified that "by virtue of an Order of Execution issued by the Court of First Instance of Pangasinan,
the rights, interests, or participation which the defendant, VALENTIN A. FERNANDO — in the above
entitled case may have in the following realty/personalty is attached or levied upon, to wit: The
rights, interests and participation on the Certificates of Public Convenience issued to Valentin A.
Fernando, in Cases Nos. 59494, etc. ... Lines — Manila to Lingayen, Dagupan, etc. vice versa."
Such notice of levy only shows that Ferrer, the vendee at auction of said certificates, merely stepped
into the shoes of the judgment debtor. Of the same principle is the provision of Article 1544 of the
Civil Code, that "If the same thing should have been sold to different vendees, the ownership shall
be transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property."

There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public
convenience in question, between the Corporation and Fernando, was not consummated, it being
only a conditional sale subject to the suspensive condition of its approval by the Public Service
Commission. While section 20(g) of the Public Service Act provides that "subject to established
limitation and exceptions and saving provisions to the contrary, it shall be unlawful for any public
service or for the owner, lessee or operator thereof, without the approval and authorization of the
Commission previously had ... to sell, alienate, mortgage, encumber or lease its property, franchise,
certificates, privileges, or rights or any part thereof, ...," the same section also provides:

... Provided, however, That nothing herein contained shall be construed to prevent the
transaction from being negotiated or completed before its approval or to prevent the sale,
alienation, or lease by any public service of any of its property in the ordinary course of its
business.

It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the
validity and consummation of the sale.

Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his
own version to allege.

Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer)
in acquiring the certificates of public convenience in question, despite constructive and actual
knowledge on their part of a prior sale executed by Fernando in favor of the said corporation, which
necessitated the latter to file the action to annul the sheriff's sale to Ferrer and the subsequent
transfer to Pantranco, it is entitled to collect actual and compensatory damages, and attorney's fees
in the amount of P25,000.00. The evidence on record, however, does not clearly show that said
defendants acted in bad faith in their acquisition of the certificates in question. They believed that
because the bill of sale has yet to be approved by the Public Service Commission, the transaction
was not a consummated sale, and, therefore, the title to or ownership of the certificates was still with
the seller. The award by the lower court of attorney's fees of P5,000.00 in favor of Villa Rey Transit,
Inc. is, therefore, without basis and should be set aside.

Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had
suffered and should be awarded moral, exemplary damages and attorney's fees, cannot be
entertained, in view of the conclusion herein reached that the sale by Fernando to the Corporation
was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that when it
purchased ViIlarama's business for P350,000.00, it intended to build up the traffic along the lines
covered by the certificates but it was rot afforded an opportunity to do so since barely three months
had elapsed when the contract was violated by Villarama operating along the same lines in the
name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the underhanded manner in
which Villarama violated the contract is pertinent in establishing punitive or moral damages. Its
contention as to the proper measure of damages is that it should be the purchase price of
P350,000.00 that it paid to Villarama. While We are fully in accord with Pantranco's claim of
entitlement to damages it suffered as a result of Villarama's breach of his contract with it, the record
does not sufficiently supply the necessary evidentiary materials upon which to base the award and
there is need for further proceedings in the lower court to ascertain the proper amount.

PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa
Rey Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the aforesaid
certificate of public convenience in favor of Eusebio Ferrer;

2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co.
against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and separate from
the personality of Jose M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's
fees in favor of Villa Rey Transit, Inc.;

3. The case is remanded to the trial court for the reception of evidence in consonance with the above
findings as regards the amount of damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered.

THIRD DIVISION

[G.R. NOS. 117622-23 : October 23, 2006]

FRANCISCO MOTORS CORP., Petitioner, v. HON. COURT OF

APPEALS AND ANTONIO RAQUIZA,Respondents.

DECISION

VELASCO, JR., J.:

It is the spirit and not the form of law that keeps justice alive.
 ''former US Chief Justice Earl Warren

The Court, at times, bends in its regimen of strictly enforcing its

own rules and issuances when technicalities would becloud the
serving of equity and fairnessespecially when protracted litigation
ensues and such prolonged dispute bars litigants from having a
genuine day in court. However, protracted litigation, which by its
nature puts the odds against a party, should not be a bar to
discovering the truth and ruling on the merits of a case.

The Case

This Petition for Review 1 challenges the April 28, 1994 Decision2 of
the Court of Appeals in CA-G.R. SP No. 15512 and CA-G.R. SP No.
15515 entitled Antonio Raquiza v. Hon. Milagros Caguioa, Judge,
RTC of Pasig, M.M. Branch 165. The assailed Decision granted
respondent Raquiza's right to the issuance of a writ of execution
against the lot which was in the name of petitioner Francisco Motors
Corporation (FMC).

The Facts

We reiterate the facts found by the Court of Appeals, in addition to

those borne by the records.

The present controversy originated in 1958 concerning the

annulment of public auction sales of parcels of land in San Jose and
Norzagaray, Bulacan; Antipolo; and Las Piñas, Metro Manila owned
by spouses Epifanio Alano and Cecilia Pading-Alano. Records show
that Raquiza was the lawyer of the Alano spouses in Civil Case Nos.
2608 and 4622.3 As payment for Raquiza's legal services, the Alano
spouses agreed in a written contract to pay him attorney's fees
equivalent to 30% of the properties in litigation. Raquiza, however,
was subsequently dismissed by the Alano spouses without justifiable
cause. Hence, he was allowed to intervene in the civil cases with
respect to his claim for attorney's fees.4

On May 30, 1958, the Court of First Instance of Rizal, Branch VI,
granted the motion of Raquiza to have his contract of legal retainer
annotated in the titles involved in Civil Case No. 4622, which
includes Transfer Certificate of Title (TCT) No. 56520 covering a
parcel of land in Las Piñas (Las Piñas property) then in the name of
Miguel Campos. On January 30, 1959, said annotation of attorney's
lien was cancelled.5

On December 11, 1970, Presiding Judge Herminio C. Mariano of the

Court of First Instance (CFI) of Pasig, Branch 10, rendered a Joint
Decision6 in Civil Case Nos. 2608 and 4622. The dispositive portion
partly reads:

Regarding the claim of intervenor, Atty. Antonio V. Raquiza, the

Court declares that said intervenor is entitled to 30% of whatever
rights and interests the Alanos may have in the Natalia Realty, Inc.
as stockholder thereof considering that the Contract of Legal
Retainer is obviously on a contingent basis. The Alanos are further
ordered to reimburse Atty. Antonio V. Raquiza the sum of
P10,000.00 representing various advances made by the latter to the
former and as litigation and other expenses.

SO ORDERED.7

Separate appeals were filed by Raquiza and the Alanos before the
Court of Appeals (CA) which were docketed as CA-G.R. NOS.
52159-60-R. Meanwhile, the Las Piñas property was transferred
from Miguel Campos to CPJ Corporation as nominee of the Alano
spouses, and TCT No. 56520 was replaced with TCT No. 190712 in
the name of CPJ Corporation on May 18, 1967. The property was
transferred to the Alano spouses on October 3, 1973, but the Deed
of Reconveyance was not immediately presented to the Register of
Deeds for registration. On December 7, 1973, the Alano spouses
executed a Deed of Sale with First Mortgage in favor of petitioner
FMC.8 Both the Deed of Reconveyance and Deed of Sale with First
Mortgage were presented to the Register of Deeds of Rizal only on
January 21, 1974. On the same date, TCT No. 190712 was
cancelled and replaced by TCT No. 432260 in the name of the
Alanos, which in turn, was cancelled and replaced by TCT No.
4322619 in the name of petitioner FMC.
On January 17, 1980, the Special First Division of the CA rendered a
Decision in CA-G.R. NOS. 52159-60-R. The dispositive portion
reads:

IN VIEW OF THE FOREGOING, the judgment of the lower Court in

Civil Cases Nos. 2608 and 4622 is MODIFIED insofar as the claim of
Atty. Raquiza for attorney's fees is concerned in the sense that he
shall be entitled to 30% pro indiviso interest in all the properties
reconveyed by Campos, Philamgen and Philamlife under the
Compromise Agreement of December 28, 1965, except the Antipolo
properties covered by the Deed of Sale of September 10, 1953 in
favor of Natalia Realty, and to 30% interest in the participation of
the Alanos as shareholder of Natalia Realty, subject to his
reimbursing the Alanos the amount of P195,000.00, representing
30% of the consideration paid by the Alanos for said reconveyance.
The Alanos shall also reimburse Atty. Raquiza the sum of
P10,000.00, representing various advances made by him to the
Alanos.

In all other respects, the appealed decision is AFFIRMED in toto with

costs against appellant Alanos.

SO ORDERED.10 (Emphasis supplied.)

This Decision became final and executory on July 13, 1981.11

On October 1, 1980, Raquiza filed with the trial court an Ex-Parte

Motion for Execution of the Decision of the CA. He also filed an Ex-
Parte Motion for Production of Title alleging that the title which
eventually replaced TCT No. 56520, TCT No. 190712, is missing in
the Register of Deeds.12 A Writ of Execution was issued on February
10, 1982 ordering the Sheriff of Pasig to implement the judgment of
the CA within 60 days from receipt of the writ.13

On April 15, 1982 and May 19, 1982, Raquiza filed with the trial
court Motions for the Issuance of a Separate Transfer Certificate of
Title14 in his name covering the area corresponding to his attorney's
fees. This was opposed by the Alano spouses on June 14, 1982
through the filing of an Opposition.15
On October 8, 1982, the trial court issued an Order granting
Raquiza's motion for the issuance of a separate title, thus:

WHEREFORE, premises considered, and in accordance with the

decision of the Court of Appeals dated January 17, 1980 which has
long become final and executory, as prayed for, a portion with an
area of 162,576.60 sq.m. of the real property with Transfer
Certificate of Title No. S-65162 is hereby ordered segregated from
the total area of the real property covered by said titles S-65161
and S-65162 and a separate transfer certificate of title be issued in
the name of Antonio Epifanio J. Alano, Sr. and Cecilia P. Alano and
Trans-Resource Management and Development Corporation are
further ordered to surrender Transfer Certificate of Title No. 190713
(S-65161) and Transfer Certificate of Title No. 190714 (now S-
65162) to the custody of this Court within fifteen (15) days from
receipt hereof in order that the corresponding segregation and
issuance of a separate transfer certificate of title in favor of Antonio
V. Raquiza can be effected.

SO ORDERED.16

On May 8, 1983, Trans-Resource Management and Development

Corporation, a party in one of the original civil cases, appealed the
above Order through a Petition for Certiorari and Prohibition.17 The
appeal was dismissed by the Intermediate Appellate Court (IAC) on
August 27, 1985.18

On January 31, 1986, Raquiza filed with the lower court a

Supplemental Motion for Execution19 alleging that the October 8,
1982 Order failed to include the lot covered by TCT No. 56520, that
is, the Las Piñas property which was acquired by petitioner FMC.

On February 5, 1986, the trial court, through Judge Eficio Acosta,

issued an Order of Execution directing FMC to surrender its title so
that Raquiza's 30% of the property can be segregated. The Order
reads:

AS PRAYED FOR by Intervenor Antonio V. Raquiza in his

supplemental Motion for Execution and there being no objection
thereto, the Court hereby orders the segregation of the 30% of the
parcel of land previously covered by Transfer Certificate of Title No.
5652120 of the Register of Deeds of Rizal in the name of CPJ
Corporation which the said company later transferred and conveyed
to Francisco Motors, Inc., and the issuance of a new Certificate of
Title over said portion in the name of the intervenor Antonio V.
Raquiza and that Francisco Motors, Inc. is hereby ordered to
surrender to this Court the title of the subject parcel of land so that
the segregation and issuance of a separate transfer of certificate of
title in favor of the intervenor over 30% can be effected.

SO ORDERED.21

On February 14, 1986, Raquiza filed an Urgent Ex-Parte Motion for

correction of the above Order. He alleged that upon further inquiry,
what was conveyed to FMC was the parcel of land covered by TCT
No. 190712 in the name of CPJ Corporation, not TCT No.
56521.22 Finding merit in the motion, the lower court, on February
18, 1986, issued an Order correcting the February 5, 1986 Order by
changing TCT No. 56521 to TCT No. 190712.23

On March 10, 1986, Raquiza filed an Ex-Parte Motion praying that

FMC be ordered to explain why it had not surrendered TCT No.
190712.24 In its March 13, 1986 Opposition, FMC alleged inter
alia that it is a buyer in good faith as the attorney's lien of Raquiza
was not annotated at the back of TCT No. 190712.25On June 3,
1986, FMC filed a Motion to Quash the Writ of Execution.26

On June 6, 1986, the lower court, also through Judge Eficio Acosta,
granted Raquiza's motion. It held that FMC's defense of good faith
was without merit. The dispositive portion of the order reads:

WHEREFORE, premises considered, the motion to quash writ of

execution field by Francisco Motors Corporation is hereby denied.
The opposition to motion of intervenor Raquiza filed by Francisco
Motors Corporation is hereby denied and the Orders of this Court
dated February 5, 1986 and February 18, 1986 stand. Francisco
Motors Corporation is hereby ordered to submit to the Court the
portion of the property it prefers to hold so that the remaining
portion shall be segregated and titled in the name of the intervenor
Antonio Raquiza.
SO ORDERED.27

On June 19, 1986, Raquiza filed an Ex-Parte Motion for the Issuance
of a Writ of Execution pursuant to the orders dated February 5 and
18, 1986.28

On July 8, 1986, FMC filed a Motion for Reconsideration of the said

Order. FMC alleged that it purchased the property from the Alano
spouses as early as December 7, 1973, while Raquiza's attorney's
fees were awarded by the CA much later, or only on January 17,
1980; hence, it cannot be levied upon to answer for his attorney's
fees.29

On September 23, 1986, the lower court, through Judge Nicolas

Galing, issued an Order quashing the writ of execution issued by
Judge Eficio Acosta on the ground that the land, having been sold
by the Alano spouses to FMC as early as December 7, 1973, long
before the Court of Appeals awarded Raquiza's attorney's fees,
could no longer be reached by execution.30 On November 4, 1986,
Raquiza filed a Motion for Reconsideration while FMC opposed.31

On June 10, 1987, Raquiza filed a Motion to Enforce his Motion to

Execute alleging that the decision sought to be enforced had long
become final and executory. He prayed that the writ of execution,
which was quashed in the order dated September 23, 1986, be
reinstated and enforced immediately.32 FMC and Alano spouses
opposed the motion. Meanwhile, the entire judiciary was
reorganized. The cases were re-raffled to Branch 164.
Subsequently, Branch 164 was converted into a Special Criminal
Court; hence, the cases were re-raffled to Branch 165 which was
presided by Judge Milagros V. Caguioa.33

On January 19, 1988, the lower court denied Raquiza's Motion to

Enforce the Motion to Execute for lack of merit on the ground that
the decision sought to be enforced had become final and executory
after the lapse of five years, and the same Decision could no longer
be enforced by a mere motion.34

On February 11, 1988, Raquiza filed a Motion for Reconsideration

citing the delay in the implementation of the judgment which was
brought about by various causes. Again, spouses Alano and FMC
opposed the motion. On May 13, 1988, respondent court denied the
Motion for Reconsideration.35

On June 21, 1988, Raquiza filed a Motion for Extension of Time to

file a petition for certiorari before the Supreme Court. In the July 4,
1988 Resolution, this Court granted Raquiza 30 days within which to
file a petition for certiorari .36 The petition37 was filed on July 25,
1988 and the case was docketed as G.R. No. 83718-19. In that
petition, Raquiza prayed that the Court (1) give due course to the
petition, (2) include FMC as respondent, and (3) reverse the
Decision of Judge Caguioa and order the execution of the January
17, 1980 Decision of the CA. In the August 15, 1988 Resolution, the
Court remanded the case to the CA.38 The case was docketed as CA-
G.R. SP No. 15512 and 1551539 which is now for review.

The Ruling of the Court of Appeals

The April 28, 1994 Decision of the CA set aside the January 19 and
May 13, 1988 Orders of the trial court, citing the following three (3)
reasons: (1) that Raquiza's motions dated April 15 and May 19,
1982 for the segregation of titles were for the execution of the
decision in his favor; thus, the subsequent motions should be
treated as mere follow-up;40 (2) that FMC, as a successor-in-
interest in relation to the property of the Alano spouses and
transferee pendente lite, was bound to recognize the encumbrances
attached to the land, including the attorney's liens, although not
inscribed in the title;41and (3) it justified Raquiza's petition
for certiorari after finding the appeal was not a speedy or sufficient
remedy.42

FMC's Motion for Reconsideration was denied by the CA in its

October 26, 1994 Resolution.43

Intervening Events

On January 2, 1995, FMC filed the instant Petition for Review . After
the submission of the parties' respective Memoranda in August
1995, counsel for private respondent filed on June 19, 2002 an
Urgent Motion for Substitution of Parties and Early
Resolution.44 Furthermore, Antonio Raquiza reportedly passed away
last December 24, 1999.45 In the July 28, 2003 Resolution, we
denied the motion for substitution for lack of merit.46

The Issues

The parties submitted the following issues for our consideration:

WHETHER OR NOT THE PROPER REMEDY OF PRIVATE RESPONDENT

IS CERTIORARI AND NOT APPEAL

WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS IN

CA-G.R. NOS. 52159-60-R CAN STILL BE ENFORCED BY A SIMPLE
MOTION UNDER SEC. 6, RULE 39 OF THE RULES OF COURT

WHETHER OR NOT THE ATTORNEY'S FEES AWARDED TO PRIVATE

RESPONDENT IN CA-G.R. NOS. 52159-60-R [ON JANUARY 17,
1980] CAN BE ENFORCED/SATISFIED AS AGAINST THE PARCELS OF
LAND ACQUIRED BY PETITIONER FROM THE ALANOS ON DECEMBER
7, 1973

The Court's Ruling

We find the petition partly meritorious.

(1) Resort to Certiorari

Petitioner contends that Raquiza's resort to certiorari is erroneous

because one of the essential requisites for the issuance of a writ
of certiorari is that there must be no appeal or any plain, speedy,
and adequate remedy in the ordinary course of law. Petitioner
reasoned that since the subject of the petition for certiorari were the
orders of the trial court dated January 19 and May 13, 1988,
appeal, not certiorari, is the proper remedy. Petitioner further
alleged that the petition for certiorari was filed with the CA only in
March 1989, after the lapse of more than one year from the assailed
orders.

Section 1, Rule 65 of the Revised Rules of Court provides that a writ

of certiorari lies when any tribunal, board or officer exercising
judicial or quasi-judicial functions has acted without or in excess of
its or his [/her] jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal,
or any plain, speedy, and adequate remedy in the ordinary course
of law. We have consistently held that where the error sought to be
corrected neither relates to the court's jurisdiction nor involves
grave abuse of discretion, review [of the error]
through certiorari will not be allowed. This rule, however, admits
exceptions such as (1) when it is necessary to prevent irreparable
damages and injury to a party, (2) where the trial judge capriciously
and whimsically exercised his [/her] judgment, (3) where there may
be danger of failure of justice, (4) where an appeal would be slow,
inadequate, and insufficient, (5) where the issue raised is one
purely of law, (6) where public interest is involved, and (7) in case
of urgency.47 In Jaca v. Davao Lumber Company, we further ruled
that:

Although Sec. 1, Rule 65 of the Rules of Court provides that the

special civil action of certiorarimay only be invoked when "there is
no appeal, nor any plain, speedy and adequate remedy in the
[ordinary] course of law," this rule is not without exception. The
availability of the ordinary course of appeal does not constitute
sufficient ground to prevent a party from making use of the
extraordinary remedy of certiorari where the appeal is not an
adequate remedy or equally beneficial, speedy and sufficient. It is
the inadequacy - not the mere absence of all other legal remedies
and the danger of failure of justice without the writ that must
usually determine the propriety of certiorari .48

In this case, while private respondent had other legal remedies

against the trial courts' orders, these remedies would be slow,
inadequate and insufficient in light of the excessive delay in this
case. Private respondent's attempts to collect his fees in 1958 was
evident when he intervened in Civil Case Nos. 2608 and 4622. He
received a favorable decision after 22 years, or on January 17,
1980, after an appeal to the CA. The Decision became final on July
13, 1981. Since then private respondent had been trying to execute
the decision by filing various motions. The trial court, however,
frustrated private respondent's efforts when it issued its January 19
and May 13, 1988 Orders. Thereafter, private respondent filed the
questioned petition for certiorari and the CA issued its Decision only
in 1994. The number of years alone that the private respondent had
devoted in enforcing his claim, that is, almost half a century to date,
exceptionally calls for certiorari as a more speedy and adequate
remedy. The availability of other legal remedies cannot prevent the
recourse to certiorari when these remedies would be slow and
inadequate to effectively dispense justice in favor of the private
respondent.

We take special cognizance that when the CA issued the questioned

Decision in 1994, private respondent Raquiza was almost 90 years
old. Private respondent had once appealed the case which resulted
in a Decision in his favor after ten years of pendency in the
appellate court. Considering the private respondent's age and the
slow disposition of his previous appeal, it is easy to understand why
he had resorted to certiorari instead of appeal in trying to execute
the Decision in his favor. Dismissing the instant petition on the basis
of technicality alone would be unjust to private respondent. We
reiterate that:

Technicalities should be disregarded if only to render to the

respective parties that which is their due. Thus, although We have
said that certiorari cannot be a substitute for a lapsed appeal, We
have, time and again, likewise held that where a rigid application of
that rule will result in a manifest failure or miscarriage of justice,
the rule may be relaxed. Hence, considering the broader and
primordial interests of justice, particularly when there is grave
abuse of discretion, thus impelling occasional departure from the
general rule that the extraordinary writ of certiorari cannot
substitute for a lost appeal, respondent appellate court may legally
entertain the special civil action for certiorari .49

Petitioner FMC mistakenly pointed out that private respondent filed

the petition for certiorari before the CA in 1989, concluding that
more than one year had elapsed from the assailed orders of the trial
court dated January 19 and May 13, 1988. As previously mentioned,
private respondent initially filed a petition for certiorari on July 25,
1988 which was within the extended period of time granted to him
by this Court.50 On August 15, 1988, the Court remanded the case
to the CA.51 While the case was pending in the CA, Raquiza asked
for an extension of time to file his Amended Petition. The appellate
court granted his motion and on March 30, 1989, Raquiza filed the
Amended Petition for Certiorari.52 Thus, private respondent's
Petition for Certiorari was filed within the time set by the rules and
with the approval of the Supreme Court and CA. Private respondent,
therefore, cannot be said to have slept on his right to appeal for
more than a year.

(2) Enforcement of the Decision by Motion

There is no dispute that the judgment sought to be enforced by

private respondent was the January 17, 1980 Decision of the CA
which became final on July 13, 1981. Petitioner asserts, however,
that judgments can be enforced by mere motion within five years
from finality and since private respondent's Motion to Enforce the
Motion to Execute was filed only on June 10, 1987, said Motion had
already prescribed.

Section 6, Rule 39 of the Revised Rules of Court states:

SEC. 6. Execution by motion or by independent action - A final and

executory judgment or order may be executed on motion within five
(5) years from the date of its entry. After the lapse of such time,
and before it is barred by the statute of limitations, a judgment may
be enforced by action. The revived judgment may also be enforced
by motion within five (5) years from the date of its entry and
thereafter by action before it is barred by the statute of limitations.

In Lancita v. Magbanua, we held that:

In computing the time limited for suing out of an execution,

although there is authority to the contrary, the general rule is that
there should not be included the time when execution is stayed,
either by agreement of the parties for a definite time, by injunction,
by the taking of an appeal or writ of error so as to operate as a
supersedeas, by the death of a party or otherwise. Any interruption
or delay occasioned by the debtor will extend the time within which
the writ may be issued without scire facias (citation omitted).53
As pointed above, in computing the time limited for suing out an
execution, the time during which execution is stayed should be
excluded, and the said time will be extended by any delay
occasioned by the debtor. In Blouse Potenciano v. Mariano, we held
that the motion for examination of the judgment debtor, which is a
proceeding supplementary to execution, and the action
for mandamus amounted to a stay of execution which effectively
interrupted or suspended the five (5)-year period for enforcing the
judgment by motion.54 In Camacho v. Court of Appeals, et.
al., where after a final judgment, the petitioner (obligor) moved to
defer the execution, elevated the matter to the CA and the Supreme
Court, transferred the property to her daughter, in addition to the
issues regarding counsel and subsequent vacancies in the courts,
we ruled that:

Under the peculiar circumstances of the present case where

the delays were occasioned by petitioner's own initiatives and for
her advantage as well as beyond the respondents' control, we hold
that the five [5]-year period allowed for the enforcement of the
judgment by motion was deemed to have been effectively
interrupted or suspended. Once again we rely upon basic notions of
equity and justice in so ruling. (Emphasis supplied.)

The purpose of the law in prescribing time limitations for enforcing

judgment or actions is to prevent obligors from sleeping on their
rights. Far from sleeping on their rights, respondents persistently
pursued their rights of action. It is revolting to the conscience to
allow petitioner to further avert the satisfaction of her obligation
because of sheer literal adherence to technicality (citation
omitted).55

We also subtracted from the five (5)-year period the time when the
judgment could not be enforced due to the restraining order issued
by this Court,56 and when the records of the case were lost or
misplaced through no fault of the petitioner.57 In Provincial
Government of Sorsogon v. Vda. de Villaroya, we likewise excluded
the delays caused by the auditor's requirements which were not the
fault of the parties who sought execution, and ruled that "[i]n the
eight years that elapsed from the time the judgment became final
until the filing of the restraining motion by the private respondents,
the judgment never became dormant. Section 6, Rule 39 of the
Revised Rules of Court does not apply."58 In Jacinto v. Intermediate
Appellate Court, this Court further held:

Granting for the sake of argument that the motion for an alias writ
of execution was beyond the five [5]-year limitation within which a
judgment may be executed by mere motion, still under the
circumstances prevailing wherein all the delay in the execution of
the judgment lasting for more than eight [8]-years was beneficial to
private respondents, this Court[,] for reasons of equity[,] is
constrained to treat the motion for execution as having been filed
within the reglementary period required by law.59 (Emphasis
supplied.)

Republic v. Court of Appeals summed it up as follows:

To be sure, there had been many instances where this Court

allowed execution by motion even after the lapse of five years, upon
meritorious grounds. These exceptions have one common
denominator, and that is: the delay is caused or occasioned by
actions of the judgment debtor and/or is incurred for his benefit or
advantage (emphasis supplied).60

In the case at bar, since the judgment of the CA became final on

July 13, 1981, private respondent had filed several motions for and
in support of its execution. After the dismissal of the appeal of
Trans-Resource Management Corporation in 1985, private
respondent moved for the inclusion of the Las Piñas property in the
order of execution. He reasoned that the February 10, 1982 Writ of
Execution could not be enforced against the Las Piñas property
because the title number was already changed and could not be
traced or found in the Register of Deeds.61

Nevertheless, during the five (5) year period from the finality of
judgment, private respondent filed several motions for and in
support of execution. His persistence is manifest in the number of
motions, manifestations, oppositions, and memoranda he had filed
since the judgment became final on July 13, 1981. He obtained
three writs of execution (February 10, 1982; February 5, 1986 and
June 6, 1986) and two orders in aid of execution (October 8, 1982
and February 18, 1986) but the alleged loss of the title, incorrect
orders, and the subsequent refusal of petitioner FMC to surrender
its title prevented the satisfaction of judgment. While the delay was
not wholly attributable to FMC, it nevertheless worked to FMC's
advantage. FMC's motion for reconsideration of the order of
execution prevented the implementation of said order, especially
considering that it was filed on July 8, 1986. Said motion effectively
suspended the five (5) year prescriptive period which was supposed
to expire on July 13, 1986.

Subsequently, an order quashing the writ of execution was issued

by the court a quo on September 23, 1986 which private
respondent questioned in a motion for reconsideration. Before the
lower court released its Decision, on private respondent's motion for
reconsideration, Raquiza filed the assailed Motion to Enforce the
Motion to Execute. In view of the foregoing circumstances and for
reasons of equity, we are constrained to treat the Motion to Enforce
the Motion to Execute as having been filed within the reglementary
period. The purpose of the law in prescribing time limitations for
enforcing judgments or actions is to prevent obligors from sleeping
on their rights.62 Private respondent, on the contrary, persistently
sought the execution of the judgment in his favor.

(3) Satisfaction of Claims Against the Petitioner's Property

Private respondent's claim on the property is based on the January

17, 1980 decision of the CA which awarded him "30% pro
indiviso interest in all the properties reconveyed by Campos,
Philamgen and Philamlife under the Compromise Agreement of
December 28, 1965." One of the properties that was reconveyed to
the Alano spouses is the Las Piñas property which is now in dispute.

Petitioner contends that when it acquired the property, there was

neither an attorney's lien at the back of TCT No. 56520 nor a notice
of lis pendens; thus, it was in good faith at the time of purchase.
Petitioner also asserts that it acquired the property before the CA
awarded the attorney's fees against the property in
question.63 Nevertheless, the trial court ruled that petitioner should
have been alerted by the fact that TCT No. 190712 was in the name
of CPJ as nominee and assignee of the Alanos. The appellate court
affirmed this finding, adding that the petitioner is bound to
recognize the encumbrances including attorney's lien although not
inscribed in the title and that petitioner is bound by the judgment
even though there was no formal substitution of the parties. The
appellate court ruled that petitioner should have exercised the
ordinary care expected of a buyer in real estate. 64

We DISAGREE.

The annotation of attorney's lien on TCT No. 56520 was cancelled

on January 30, 1959, long before petitioner FMC acquired the
property in question, on December 7, 1973. TCT No. 56520 was
later cancelled and replaced by TCT No. 190712 in the name of CPJ
Corporation. A notice of lis pendens was inscribed on TCT No.
190712 on February 6, 1958 by spouses Epifanio J. Alano and
Cecilia Alano in view of the pendency of Civil Case No. 4622
entitled Epifanio J. Alano; et al. v. Miguel Campos, et al. On the
other hand, respondent Antonio Raquiza did not bother to have his
attorney's lien annotated at the back of TCT NO. 190712, to protect
his interests in it. This annotation was cancelled on June 19, 1967
by the Alano spouses.65 Private respondent did not cause the
reannotation of the attorney's lien and the notice of lis
pendens despite the pendency of the two civil cases. Thus, when
petitioner bought the property in question on December 7, 1973,
the title was free from the attorney's lien and notice of lis pendens.

Private respondent argued that the reannotation of his claim could

not be effected due to the alleged loss of TCT No. 190712 (formerly
TCT No. 56520) and its derivatives. This posture does not hold
water. The annotation of lis pendens is done on the original
certificate of title which is on file with the Register of Deeds. Even
conceding that the original TCT No. 190712 was missing, still
respondent Raquiza should have filed the notice of lis pendens with
the Office of the Register of Deeds so that the latter will be
forewarned if a person requests for the transfer of the title which
appears to have been misplaced or lost. Another remedy would be
to file a motion for preliminary injunction to prevent the Alano
spouses from selling the lot subject of TCT No. 190712, and to
direct the Register of Deeds not to transfer the title to any third
party. Unfortunately, respondent Raquiza failed to undertake the
safeguards necessary to protect his attorney's lien. Thus, we hold
that petitioner FMC bought the property without notice of any defect
in the title. It is therefore a purchaser in good faith and for value.

In Spouses Po Lam v. Court of Appeals, we held that the filing of a

notice of lis pendens in effect (1) keeps the subject matter of the
litigation within the power of the court until the entry of the final
judgment so as to prevent the defeat of the latter by successive
alienations; and (2) binds the purchaser of the land subject of the
litigation to the judgment or decree that will be promulgated there
on whether such a purchaser is a bona fide purchaser or not; but
(3) does not create a non-existent right or lien. The cancellation of a
notice of pendency terminates the effects of such notice; thus, the
buyers of the property cannot be considered transferees pendente
lite and purchasers in bad faith.66 This ruling holds true for
petitioner FMC. Similar to the aforementioned case, petitioner FMC
bought the property pending appeal. The title carried no notice of lis
pendens and the private respondent did not cause the reannotation
of or the attorney's lien. Thus, petitioner FMC could not be
considered a transferee pendente lite and buyer in bad faith.

Furthermore, private respondent's right over the property is based

on the January 17, 1980 Decision of the CA in CA-GR No. 52159-
60R which modified the ruling of the lower court by granting the
claim of respondent Raquiza for attorney's fees of 30% pro
indiviso interest in all the properties reconveyed by Campos, et al.
At the time of the sale on December 7, 1973 in favor of petitioner
FMC, private respondent Raquiza did not yet have a right over 30%
of the Las Piñas property. Had respondent Raquiza been vigilant, he
could have impleaded petitioner FMC as a party-litigant in the civil
cases. However, it was only in March 1986 when respondent
Raquiza asked that petitioner be ordered to surrender its title. By
that time, it was already too late. Apparently, private respondent
slept on his rights, and verily such inaction should not prejudice an
innocent purchaser for value. Having bought the property in good
faith, petitioner FMC cannot be considered a transferee pendente
lite which could be bound by the 1980 judgment of the appellate
court.

WHEREFORE, the Petition for Review is GRANTED IN PART and

the April 28, 1994 Decision and the October 26, 1994 Resolution of
the Court of Appeals are MODIFIED, sothat the attorney's fees
awarded to petitioner Raquiza in the January 17, 1980 Decision in
CA-G.R. NOS. 52159-60-R entitled Natasha Realty, Inc. v. Sheriff,
Province of Rizal, et al. can no longer be satisfied and enforced
against the lot registered under TCT No. 432261 in the name of
petitioner Francisco Motor Corporation being an innocent purchaser
for value of said lot.

No costs.

SO ORDERED.
G.R. No. 142435 April 30, 2003

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners,

vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF
QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision1 dated October 21, 1999 of
the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners' appeal from the
Decision2 dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 84, in
Civil Case No. Q-89-4152. The trial court had dismissed petitioners' complaint for annulment of real
estate mortgage and the extra-judicial foreclosure thereof. Likewise brought for our review is the
Resolution3 dated February 23, 2000 of the Court of Appeals which denied petitioners' motion for
reconsideration.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export Trading"
(BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City.
BET was engaged in the manufacture of garments for domestic and foreign consumption. The Lipats
also owned the "Mystical Fashions" in the United States, which sells goods imported from the
Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in
the Philippines while she was managing "Mystical Fashions" in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed on December 14, 1978,
a special power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and other
credit accommodations from respondent Pacific Banking Corporation (Pacific Bank). She likewise
authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as
security for the obligations to be extended by Pacific Bank including any extension or renewal
thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for
and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to P583,854.00
to buy fabrics to be manufactured by BET and exported to "Mystical Fashions" in the United States.
As security therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate
Mortgage over their property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property
was likewise made to secure "other additional or new loans, discounting lines, overdrafts and credit
accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain
from the Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the
whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the Mortgagor and/or
Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary, as appears in
the accounts, books and records of the Mortgagee."4

On September 5, 1979, BET was incorporated into a family corporation named Bela's Export
Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in the
business of manufacturing and exportation of all kinds of garments of whatever kind and
description5 and utilized the same machineries and equipment previously used by BET. Its
incorporators and directors included the Lipat spouses who owned a combined 300 shares out of the
420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives and friends of
the Lipats.6 Estelita Lipat was named president of BEC, while Teresita became the vice-president
and general manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained
by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the
corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting
Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust
receipt therefor. Export bills were also executed in favor of Pacific Bank for additional finances.
These transactions were all secured by the real estate mortgage over the Lipats' property.

The promissory notes, export bills, and trust receipt eventually became due and demandable.
Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's demand letters, Estelita
Lipat went to the office of the bank's liquidator and asked for additional time to enable her to
personally settle BEC's obligations. The bank acceded to her request but Estelita failed to fulfill her
promise.

Consequently, the real estate mortgage was foreclosed and after compliance with the requirements
of the law the mortgaged property was sold at public auction. On January 31, 1989, a certificate of
sale was issued to respondent Eugenio D. Trinidad as the highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued
over the property against Pacific Bank and Eugenio D. Trinidad. The complaint, which was docketed
as Civil Case No. Q-89-4152, alleged, among others, that the promissory notes, trust receipt, and
export bills were all ultra vires acts of Teresita as they were executed without the requisite board
resolution of the Board of Directors of BEC. The Lipats also averred that assuming said acts were
valid and binding on BEC, the same were the corporation's sole obligation, it having a personality
distinct and separate from spouses Lipat. It was likewise pointed out that Teresita's authority to
secure a loan from Pacific Bank was specifically limited to Mrs. Lipat's sole use and benefit and that
the real estate mortgage was executed to secure the Lipats' and BET's P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat
cannot evade payments of the value of the promissory notes, trust receipt, and export bills with their
property because they and the BEC are one and the same, the latter being a family corporation.
Respondent Trinidad further claimed that he was a buyer in good faith and for value and that
petitioners are estopped from denying BEC's existence after holding themselves out as a
corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the record, the
complaint filed in this case must be, as is hereby, dismissed. Plaintiffs however has five (5)
months and seventeen (17) days reckoned from the finality of this decision within which to
exercise their right of redemption. The writ of injunction issued is automatically dissolved if
no redemption is effected within that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and factual basis.

No costs.

IT IS SO ORDERED.7

The trial court ruled that there was convincing and conclusive evidence proving that BEC was a
family corporation of the Lipats. As such, it was a mere extension of petitioners' personality and
business and a mere alter ego or business conduit of the Lipats established for their own benefit.
Hence, to allow petitioners to invoke the theory of separate corporate personality would sanction its
use as a shield to further an end subversive of justice.8 Thus, the trial court pierced the veil of
corporate fiction and held that Bela's Export Corporation and petitioners (Lipats) are one and the
same. Pacific Bank had transacted business with both BET and BEC on the supposition that both
are one and the same. Hence, the Lipats were estopped from disclaiming any obligations on the
theory of separate personality of corporations, which is contrary to principles of reason and good
faith.

The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No. 41536.
Said appeal, however, was dismissed by the appellate court for lack of merit. The Court of Appeals
found that there was ample evidence on record to support the application of the doctrine of piercing
the veil of corporate fiction. In affirming the findings of the RTC, the appellate court noted that Mrs.
Lipat had full control over the activities of the corporation and used the same to further her business
interests.9 In fact, she had benefited from the loans obtained by the corporation to finance her
business. It also found unnecessary a board resolution authorizing Teresita Lipat to secure loans
from Pacific Bank on behalf of BEC because the corporation's by-laws allowed such conduct even
without a board resolution. Finally, the Court of Appeals ruled that the mortgage property was not
only liable for the original loan of P583,854.00 but likewise for the value of the promissory notes,
trust receipt, and export bills as the mortgage contract equally applies to additional or new loans,
discounting lines, overdrafts, and credit accommodations which petitioners subsequently obtained
from Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by the appellate court in its
Resolution of February 23, 2000.10

Hence, this petition, with petitioners submitting that the court a quo erred —
 1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION APPLIES IN THIS CASE.

2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE UNDER

THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT
ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND
EXPORT BILLS OF BELA'S EXPORT CORPORATION.

3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN THE

EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT'S JURISDICTION FOR IT IS
BEING RAISED FOR THE FIRST TIME IN THIS APPEAL."

4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED

PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS
DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.

5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND IN HOLDING

THAT SAID MOTION FOR RECONSIDERATION IS "AN UNAUTHORIZED MOTION, A
MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY
CONSEQUENCE TO APPELLANTS."11

In sum, the following are the relevant issues for our resolution:

1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case;

2. Whether or not petitioners' property under the real estate mortgage is liable not only for the
amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and export bills
subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney's fees stipulated in the deed of real
estate mortgage.

On the first issue, petitioners contend that both the appellate and trial courts erred in holding them
liable for the obligations incurred by BEC through the application of the doctrine of piercing the veil of
corporate fiction absent any clear showing of fraud on their part.

Respondents counter that there is clear and convincing evidence to show fraud on part of petitioners
given the findings of the trial court, as affirmed by the Court of Appeals, that BEC was organized as
a business conduit for the benefit of petitioners.

Petitioners' contentions fail to persuade this Court. A careful reading of the judgment of the RTC and
the resolution of the appellate court show that in finding petitioners' mortgaged property liable for the
obligations of BEC, both courts below relied upon the alter ego doctrine or instrumentality rule, rather
than fraud in piercing the veil of corporate fiction. When the corporation is the mere alter ego or
business conduit of a person, the separate personality of the corporation may be disregarded.12 This
is commonly referred to as the "instrumentality rule" or the alter ego doctrine, which the courts have
applied in disregarding the separate juridical personality of corporations. As held in one case,

Where one corporation is so organized and controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of
 the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of finances, policies and
practices that the controlled corporation has, so to speak, no separate mind, will or existence
of its own, and is but a conduit for its principal. x x x .13

We find that the evidence on record demolishes, rather than buttresses, petitioners' contention that
BET and BEC are separate business entities. Note that Estelita Lipat admitted that she and her
husband, Alfredo, were the owners of BET14 and were two of the incorporators and majority
stockholders of BEC.15 It is also undisputed that Estelita Lipat executed a special power of attorney
in favor of her daughter, Teresita, to obtain loans and credit lines from Pacific Bank on her
behalf.16 Incidentally, Teresita was designated as executive-vice president and general manager of
both BET and BEC, respectively.17 We note further that: (1) Estelita and Alfredo Lipat are the owners
and majority shareholders of BET and BEC, respectively;18 (2) both firms were managed by their
daughter, Teresita;19 (3) both firms were engaged in the garment business, supplying products to
"Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held office in the same
building owned by the Lipats;20 (5) BEC is a family corporation with the Lipats as its majority
stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such
that they were practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and
the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the
Burgos and Lipat family members;21 (9) Estelita had full control over the activities of and decided
business matters of the corporation;22 and that (10) Estelita Lipat had benefited from the loans
secured from Pacific Bank to finance her business abroad23 and from the export bills secured by
BEC for the account of "Mystical Fashion."24 It could not have been coincidental that BET and BEC
are so intertwined with each other in terms of ownership, business purpose, and management.
Apparently, BET and BEC are one and the same and the latter is a conduit of and merely succeeded
the former. Petitioners' attempt to isolate themselves from and hide behind the corporate personality
of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In our view, BEC is a mere
continuation and successor of BET, and petitioners cannot evade their obligations in the mortgage
contract secured under the name of BEC on the pretext that it was signed for the benefit and under
the name of BET. We are thus constrained to rule that the Court of Appeals did not err when it
applied the instrumentality doctrine in piercing the corporate veil of BEC.

On the second issue, petitioners contend that their mortgaged property should not be made liable for
the subsequent credit lines and loans incurred by BEC because, first, it was not covered by the
mortgage contract of BET which only covered the loan of P583,854.00 and which allegedly had
already been paid; and, second, it was secured by Teresita Lipat without any authorization or board
resolution of BEC.

We find petitioners' contention untenable. As found by the Court of Appeals, the mortgaged property
is not limited to answer for the loan of P583,854.00. Thus:

Finally, the extent to which the Lipats' property can be held liable under the real estate
mortgage is not limited to P583,854.00. It can be held liable for the value of the promissory
notes, trust receipt and export bills as well. For the mortgage was executed not only for the
purpose of securing the Bela's Export Trading's original loan of P583,854.00, but also for
"other additional or new loans, discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the
mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole
or part of said original, additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the Mortgagor
and/or Debtor owing to the Mortgagee, whether directly, or indirectly principal or secondary,
as appears in the accounts, books and records of the mortgagee.25
As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot be
reviewed on appeal by the Supreme Court, provided they are borne out by the record or based on
substantial evidence.26 As noted earlier, BEC merely succeeded BET as petitioners' alter ego;
hence, petitioners' mortgaged property must be held liable for the subsequent loans and credit lines
of BEC.

Further, petitioners' contention that the original loan had already been paid, hence, the mortgaged
property should not be made liable to the loans of BEC, is unsupported by any substantial evidence
other than Estelita Lipat's self-serving testimony. Two disputable presumptions under the rules on
evidence weigh against petitioners, namely: (a) that a person takes ordinary care of his
concerns;27 and (b) that things have happened according to the ordinary course of nature and the
ordinary habits of life.28 Here, if the original loan had indeed been paid, then logically, petitioners
would have asked from Pacific Bank for the required documents evidencing receipt and payment of
the loans and, as owners of the mortgaged property, would have immediately asked for the
cancellation of the mortgage in the ordinary course of things. However, the records are bereft of any
evidence contradicting or overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property should not bind the loans and credit lines
obtained by BEC as they were secured without any proper authorization or board resolution. They
also blame the bank for its laxity and complacency in not requiring a board resolution as a requisite
for approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution since per admissions
by both petitioner Estelita Lipat and Alice Burgos, petitioners' rebuttal witness, no business or
stockholder's meetings were conducted nor were there election of officers held since its
incorporation. In fact, not a single board resolution was passed by the corporate board29 and it was
Estelita Lipat and/or Teresita Lipat who decided business matters.30

Secondly, the principle of estoppel precludes petitioners from denying the validity of the transactions
entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the
former as manager to act on behalf of petitioner Estelita Lipat and both BET and BEC. While the
power and responsibility to decide whether the corporation should enter into a contract that will bind
the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, or
relevant provisions of law, yet, just as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate some of its functions and powers to
officers, committees, or agents. The authority of such individuals to bind the corporation is generally
derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by
habit, custom, or acquiescence in the general course of business.31 Apparent authority, is derived
not merely from practice. Its existence may be ascertained through (1) the general manner in which
the corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers.32

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a
special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager
of both BEC and BET and had been deciding business matters in the absence of Estelita Lipat.
Further, the export bills secured by BEC were for the benefit of "Mystical Fashion" owned by Estelita
Lipat.33 Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita
Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a
corporation knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority.34

We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent credit
lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the real estate
mortgage of the original loan; hence, he cannot now dispute the subsequent loans obtained using
the same mortgage contract since it is, by its very terms, a continuing mortgage contract.

On the third and final issue, petitioners assail the decision of the Court of Appeals for not taking
cognizance of the issue on attorney's fees on the ground that it was raised for the first time on
appeal. We find the conclusion of the Court of Appeals to be in accord with settled jurisprudence.
Basic is the rule that matters not raised in the complaint cannot be raised for the first time on
appeal.35 A close perusal of the complaint yields no allegations disputing the attorney's fees imposed
under the real estate mortgage and petitioners cannot now allege that they have impliedly disputed
the same when they sought the annulment of the contract.

In sum, we find no reversible error of law committed by the Court of Appeals in rendering the
decision and resolution herein assailed by petitioners.

WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the Resolution
dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs
against petitioners.

SO ORDERED.

G.R. No. 168306 June 19, 2007

WILLIAM C. YAO, SR., LUISA C. YAO, RICHARD C. YAO, WILLIAM C. YAO JR., and ROGER C.
YAO,petitioners,
vs.
THE PEOPLE OF THE PHILIPPINES, PETRON CORPORATION and PILIPINAS SHELL
PETROLEUM CORP., and its Principal, SHELL INT’L PETROLEUM CO. LTD., respondents.

DECISION

CHICO-NAZARIO, J.:

In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners William C.
Yao, Sr., Luisa C. Yao, Richard C. Yao, William C. Yao, Jr., and Roger C. Yao pray for the reversal
of the Decision dated 30 September 2004,2 and Resolution dated 1 June 2005, of the Court of
Appeals in CA G.R. SP No. 79256,3 affirming the two Orders, both dated 5 June 2003, of the
Regional Trial Court (RTC), Branch 17, Cavite City, relative to Search Warrants No. 2-2003 and No.
3-2003.4 In the said Orders, the RTC denied the petitioners’ Motion to Quash Search Warrant5 and
Motion for the Return of the Motor Compressor and Liquified Petroleum Gas (LPG) Refilling
Machine.6

The following are the facts:

Petitioners are incorporators and officers of MASAGANA GAS CORPORATION (MASAGANA), an
entity engaged in the refilling, sale and distribution of LPG products. Private respondents Petron
Corporation (Petron) and Pilipinas Shell Petroleum Corporation (Pilipinas Shell) are two of the
largest bulk suppliers and producers of LPG in the Philippines. Their LPG products are sold under
the marks "GASUL" and "SHELLANE," respectively. Petron is the registered owner in the Philippines
of the trademarks GASUL and GASUL cylinders used for its LPG products. It is the sole entity in the
Philippines authorized to allow refillers and distributors to refill, use, sell, and distribute GASUL LPG
containers, products and its trademarks. Pilipinas Shell, on the other hand, is the authorized user in
the Philippines of the tradename, trademarks, symbols, or designs of its principal, Shell International
Petroleum Company Limited (Shell International), including the marks SHELLANE and SHELL
device in connection with the production, sale and distribution of SHELLANE LPGs. It is the only
corporation in the Philippines authorized to allow refillers and distributors to refill, use, sell and
distribute SHELLANE LPG containers and products.7

On 3 April 2003, National Bureau of Investigation (NBI) agent Ritche N. Oblanca (Oblanca) filed two
applications for search warrant with the RTC, Branch 17, Cavite City, against petitioners and other
occupants of the MASAGANA compound located at Governor’s Drive, Barangay Lapidario, Trece
Martires, Cavite City, for alleged violation of Section 155, in relation to Section 170 of Republic Act
No. 8293, otherwise known as "The Intellectual Property Code of the Philippines."8 The two
applications for search warrant uniformly alleged that per information, belief, and personal
verification of Oblanca, the petitioners are actually producing, selling, offering for sale and/or
distributing LPG products using steel cylinders owned by, and bearing the tradenames, trademarks,
and devices of Petron and Pilipinas Shell, without authority and in violation of the rights of the said
entities.

In his two separate affidavits9 attached to the two applications for search warrant, Oblanca alleged:

1. [That] on 11 February 2003, the National Bureau of Investigation ("NBI") received a letter-
complaint from Atty. Bienvenido I. Somera Jr. of Villaraza and Angangco, on behalf of among others,
[Petron Corporation (PETRON)] and Pilipinas Shell Petroleum Corporation (PSPC), the authorized
representative of Shell International Petroleum Company Limited ("Shell International"), requesting
assistance in the investigation and, if warranted, apprehension and prosecution of certain persons
and/or establishments suspected of violating the intellectual property rights [of PETRON] and of
PSPC and Shell International.

2. [That] on the basis of the letter-complaint, I, together with Agent Angelo Zarzoso, was assigned as
the NBI agent on the case.

3. [That] prior to conducting the investigation on the reported illegal activities, he reviewed the
certificates of trademark registrations issued in favor of [PETRON], PSPC and Shell International as
well as other documents and other evidence obtained by the investigative agency authorized by
[PETRON], PSPC and Shell International to investigate and cause the investigation of persons and
establishments violating the rights of [PETRON], PSPC and Shell International, represented by Mr.
Bernabe C. Alajar. Certified copies of the foregoing trademark registrations are attached hereto as
Annexes "A" to ":E".

4. [That] among the establishments alleged to be unlawfully refilling and unlawfully selling and
distributing [Gasul LPG and] Shellane products is Masagana Gas Corporation ("MASAGANA").
Based on Securities and Exchange Commission Records, MASAGANA has its principal office
address at 9775 Kamagong Street, San Antonio Village, Makati, Metro Manila. The incorporators
and directors of MASAGANA are William C. Yao, Sr., Luisa C. Yao, Richard C. Yao, William C. Yao,
Jr., and Roger C. Yao. x x x.
5. I confirmed that MASAGANA is not authorized to use [PETRON and] Shellane LPG cylinders and
its trademarks and tradenames or to be refillers or distributors of [PETRON and] Shellane LPG’s.

6. I went to MASAGANA’s refilling station located at Governor’s Drive, Barangay Lapidario, Trece
Martires City (sic), Cavite to investigate its activities. I confirmed that MASAGANA is indeed
engaged in the unauthorized refilling, sale and/or distribution of [Gasul and] Shellane LPG cylinders.
I found out that MASAGANA delivery trucks with Plate Nos. UMN-971, PEZ-612, WTE-527, XAM-
970 and WFC-603 coming in and out of the refilling plant located at the aforementioned address
contained multi-brand LPG cylinders including [Gasul and] Shellane. x x x.

7. [That] on 13 February 2003, I conducted a test-buy accompanied by Mr. Bernabe C. Alajar. After
asking the purpose of our visit, MASAGANA’s guard allowed us to enter the MASAGANA refilling
plant to purchase GASUL and SHELLANE LPGs. x x x. We were issued an order slip which we
presented to the cashier’s office located near the refilling station. After paying the amount x x x
covering the cost of the cylinders and their contents, they were issued Cash Invoice No. 56210
dated February 13, 2003. We were, thereafter, assisted by the plant attendant in choosing empty
GASUL and SHELLANE 11 kg. cylinders, x x x were brought to the refilling station [and filled in their
presence.] I noticed that no valve seals were placed on the cylinders.

[That] while inside the refilling plant doing the test-buy, I noticed that stockpiles of multi-branded
cylinders including GASUL and SHELLANE cylinders were stored near the refilling station. I also
noticed that the total land area of the refilling plant is about 7,000 to 10,000 square meters. At the
corner right side of the compound immediately upon entering the gate is a covered area where the
maintenance of the cylinders is taking place. Located at the back right corner of the compound are
two storage tanks while at the left side also at the corner portion is another storage tank. Several
meters and fronting the said storage tank is where the refilling station and the office are located. It is
also in this storage tank where the elevated blue water tank depicting MASAGANA CORP. is
located. About eleven (11) refilling pumps and stock piles of multi-branded cylinders including
Shellane and GASUL are stored in the refilling station. At the left side of the entrance gate is the
guard house with small door for the pedestrians and at the right is a blue steel gate used for
incoming and outgoing vehicles.

8. [That] on 27 February 2003, I conducted another test-buy accompanied by Mr. Bernabe C. Alajar.
x x x After choosing the cylinders, we were issued an order slip which we presented to the cashier.
Upon payment, Cash Invoice No. 56398 was issued covering the cost of both GASUL and
SHELLANE LPG cylinders and their contents. x x x Both cylinders were refilled in our presence and
no valve seals were placed on the cylinders.

Copies of the photographs of the delivery trucks, LPG cylinders and registration papers were also
attached to the aforementioned affidavits.10

Bernabe C. Alajar (Alajar), owner of Able Research and Consulting Services Inc., was hired by
Petron and Pilipinas Shell to assist them in carrying out their Brand Protection Program. Alajar
accompanied Oblanca during the surveillance of and test-buys at the refilling plant of MASAGANA.
He also executed two separate affidavits corroborating the statements of Oblanca. These were
annexed to the two applications for search warrant.11

After conducting the preliminary examination on Oblanca and Alajar, and upon reviewing their sworn
affidavits and other attached documents, Judge Melchor Q.C. Sadang (Judge Sadang), Presiding
Judge of the RTC, Branch 17, Cavite City, found probable cause and correspondingly issued Search
Warrants No. 2-2003 and No. 3-2003.12 The search warrants commanded any peace officer to make
an immediate search of the MASAGANA compound and to seize the following items:
Under Search Warrant No. 2-2003:

a. Empty/filled LPG cylinder tanks/containers, bearing the tradename "SHELLANE", "SHELL"

(Device) of Pilipinas Shell Petroleum Corporation and the trademarks and other devices owned by
Shell International Petroleum Company, Ltd.;

b. Machinery and/or equipment being used or intended to be used for the purpose of illegally refilling
LPG cylinders belonging to Pilipinas Shell Petroleum Corporation bearing the latter’s tradename as
well as the marks belonging to Shell International Petroleum Company, Ltd., enumerated hereunder:

1. Bulk/Bullet LPG storage tanks;

2. Compressor/s (for pneumatic refilling system);

3. LPG hydraulic pump/s;

4. LPG refilling heads/hoses and appurtenances or LPG filling assembly;

5. LPG pipeline gate valve or ball valve and handles and levers;

6. LPG weighing scales; and

7. Seals simulating the shell trademark.

c. Sales invoices, ledgers, journals, official receipts, purchase orders, and all other books of
accounts, inventories and documents pertaining to the production, sale and/or distribution of the
aforesaid goods/products.

d. Delivery truck bearing Plate Nos. WTE-527, XAM-970 and WFC-603, hauling trucks, and/or other
delivery trucks or vehicles or conveyances being used or intended to be used for the purpose of
selling and/or distributing the above-mentioned counterfeit products.

Under Search Warrant No. 3-2003:

a. Empty/filled LPG cylinder tanks/containers, bearing Petron Corporation’s (Petron) tradename and
its tradename "GASUL" and other devices owned and/or used exclusively by Petron;

b. Machinery and/or equipment being used or intended to be used for the purpose of illegally refilling
LPG cylinders belonging to Petron enumerated hereunder;

1. Bulk/Bullet LPG storage tanks;

2. Compressor/s (for pneumatic filling system);

3. LPG hydraulic pump/s;

4. LPG filling heads/hoses and appurtenances or LPG filling assembly;

5. LPG pipeline gate valve or ball valve and handles levers;

6. LPG weighing scales; and

7. Seals bearing the Petron mark;

c. Sales invoices, ledgers, journals, official receipts, purchase orders, and all other books of
accounts, inventories and documents pertaining to the production, sale and/or distribution of the
aforesaid goods/products; and

d. Delivery trucks bearing Plate Nos. UMN-971, PEZ-612 and WFC-603, hauling trucks, and/or other
delivery trucks or vehicles or conveyances being used for the purpose of selling and/or distributing
the above-mentioned counterfeit products.

Upon the issuance of the said search warrants, Oblanca and several NBI operatives immediately
proceeded to the MASAGANA compound and served the search warrants on petitioners.13 After
searching the premises of MASAGANA, the following articles described in Search Warrant No. 2-
2003 were seized:

a. Thirty-eight (38) filled 11 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum
Corporation and the trademarks and other devices owned by Shell International Petroleum
Company, Ltd.;

b. Thirty-nine (39) empty 11 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum
Corporation and the trademarks and other devices owned by Shell International Petroleum
Company, Ltd.;

c. Eight (8) filled 50 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum
Corporation and the trademarks and other devices owned by Shell International Petroleum
Company, Ltd.;

d. Three (3) empty 50 kg. LPG cylinders, bearing the tradename of Pilipinas Shell Petroleum
Corporation and the trademarks and other devices owned by Shell International Petroleum
Company, Ltd.;

e. One (1) set of motor compressor for filling system.

Pursuant to Search Warrant No. 3-2003, the following articles were also seized:

a. Six (6) filled 11 kg. LPG cylinders without seal, bearing Petron’s tradename and its trademark
"GASUL" and other devices owned and/or used exclusively by Petron;

b. Sixty-three (63) empty 11 kg. LPG cylinders, bearing Petron’s tradename and its trademark
"GASUL" and other devices owned and/or used exclusively by Petron;

c. Seven (7) tampered 11 kg. LPG cylinders, bearing Petron’s tradename and its trademark
"GASUL" and other devices owned and/or used exclusively by Petron;

d. Five (5) tampered 50 kg. LPG cylinders, bearing Petron’s tradename and its trademark "GASUL"
and other devices owned and/or used exclusively by Petron with tampered "GASUL" logo;

e. One (1) set of motor compressor for filling system; and

f. One (1) set of LPG refilling machine.

On 22 April 2003, petitioners filed with the RTC a Motion to Quash Search Warrants No. 2-2003 and
No. 3-200314on the following grounds:

1. There is no probable cause for the issuance of the search warrant and the conditions for the
issuance of a search warrant were not complied with;

2. Applicant NBI Agent Ritchie N. Oblanca and his witness Bernabe C. Alajar do not have any
authority to apply for a search warrant. Furthermore, they committed perjury when they alleged in
their sworn statements that they conducted a test-buy on two occasions;

3. The place to be searched was not specified in the Search Warrant as the place has an area of
10,000 square meters (one hectare) more or less, for which reason the place to be searched must
be indicated with particularity;

4. The search warrant is characterized as a general warrant as the items to be seized as mentioned
in the search warrant are being used in the conduct of the lawful business of respondents and the
same are not being used in refilling Shellane and Gasul LPGs.

On 30 April 2003, MASAGANA, as third party claimant, filed with the RTC a Motion for the Return of
Motor Compressor and LPG Refilling Machine.15 It claimed that it is the owner of the said motor
compressor and LPG refilling machine; that these items were used in the operation of its legitimate
business; and that their seizure will jeopardize its business interests.

On 5 June 2003, the RTC issued two Orders, one of which denied the petitioners’ Motion to Quash
Search Warrants No. 2-2003 and No. 3-2003, and the other one also denied the Motion for the
Return of Motor Compressor and LPG Refilling Machine of MASAGANA, for lack of merit.16

With respect to the Order denying the petitioners’ motion to quash Search Warrants No. 2-2003 and
No. 3-2003, the RTC held that based on the testimonies of Oblanca and Alajar, as well as the
documentary evidence consisting of receipts, photographs, intellectual property and corporate
registration papers, there is probable cause to believe that petitioners are engaged in the business
of refilling or using cylinders which bear the trademarks or devices of Petron and Pilipinas Shell in
the place sought to be searched and that such activity is probably in violation of Section 155 in
relation to Section 170 of Republic Act No. 8293.

It also ruled that Oblanca and Alajar had personal knowledge of the acts complained of since they
were the ones who monitored the activities of and conducted test-buys on MASAGANA; that the
search warrants in question are not general warrants because the compound searched are solely
used and occupied by MASAGANA, and as such, there was no need to particularize the areas within
the compound that would be searched; and that the items to be seized in the subject search
warrants were sufficiently described with particularity as the same was limited to cylinder tanks
bearing the trademarks GASUL and SHELLANE.

As regards the Order denying the motion of MASAGANA for the return of its motor compressor and
LPG refilling machine, the RTC resolved that MASAGANA cannot be considered a third party
claimant whose rights were violated as a result of the seizure since the evidence disclosed that
petitioners are stockholders of MASAGANA and that they conduct their business through the same
juridical entity. It maintained that to rule otherwise would result in the misapplication and
debasement of the veil of corporate fiction. It also stated that the veil of corporate fiction cannot be
used as a refuge from liability.
Further, the RTC ratiocinated that ownership by another person or entity of the seized items is not a
ground to order its return; that in seizures pursuant to a search warrant, what is important is that the
seized items were used or intended to be used as means of committing the offense complained of;
that by its very nature, the properties sought to be returned in the instant case appear to be related
to and intended for the illegal activity for which the search warrants were applied for; and that the
items seized are instruments of an offense.

Petitioners filed Motions for Reconsideration of the assailed Orders,17 but these were denied by the
RTC in its Order dated 21 July 2003 for lack of compelling reasons.18

Subsequently, petitioners appealed the two Orders of the RTC to the Court of Appeals via a special
civil action for certiorari under Rule 65 of the Rules of Court.19 On 30 September 2004, the Court of
Appeals promulgated its Decision affirming the Orders of the RTC.20 It adopted in essence the bases
and reasons of the RTC in its two Orders. The decretal portion thereof reads:

Based on the foregoing, this Court finds no reason to disturb the assailed Orders of the respondent
judge. Grave abuse of discretion has not been proven to exist in this case.

WHEREFORE, the petition is hereby DISMISSED for lack of merit. The assailed orders both dated
June 5, 2003 are hereby AFFIRMED.

Petitioners filed a Motion for Reconsideration21 of the Decision of the Court of Appeals, but this was
denied in its Resolution dated 1 June 2005 for lack of merit.22

Petitioners filed the instant petition on the following grounds:

I.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PRESIDING JUDGE OF
RTC CAVITE CITY HAD SUFFICIENT BASIS IN DECLARING THE EXISTENCE OF PROBABLE
CAUSE;

II.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT NBI AGENT (RITCHIE
OBLANCA) CAN APPLY FOR THE SEARCH WARRANTS NOTHWITHSTANDING HIS LACK OF
AUTHORITY;

III.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE REQUIREMENT OF

GIVING A PARTICULAR DESCRIPTION OF THE PLACE TO BE SEARCHED WAS COMPLIED
WITH;

IV.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE APPLICATIONS AND
THE SEARCH WARRANTS THEMSELVES SHOW NO AMBIGUITY OF THE ITEMS TO BE
SEIZED;

V.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE COMPLAINT IS
DIRECTED AGAINST MASAGANA GAS CORPORATION, ACTING THROUGH ITS OFFICERS
AND DIRECTORS, HENCE MASAGANA GAS CORPORATION MAY NOT BE CONSIDERED AS
THIRD PARTY CLAIMANT WHOSE RIGHTS WERE VIOLATED AS A RESULT OF THE
SEIZURE.23

Apropos the first issue, petitioners allege that Oblanca and Alajar had no personal knowledge of the
matters on which they testified; that Oblanca and Alajar lied to Judge Sadang when they stated
under oath that they were the ones who conducted the test-buys on two different occasions; that the
truth of the matter is that Oblanca and Alajar never made the purchases personally; that the
transactions were undertaken by other persons namely, Nikko Javier and G. Villanueva as shown in
the Entry/Exit Slips of MASAGANA; and that even if it were true that Oblanca and Alajar asked Nikko
Javier and G. Villanueva to conduct the test-buys, the information relayed by the latter two to the
former was mere hearsay.24

Petitioners also contend that if Oblanca and Alajar had indeed used different names in purchasing
the LPG cylinders, they should have mentioned it in their applications for search warrants and in
their testimonies during the preliminary examination; that it was only after the petitioners had
submitted to the RTC the entry/exit slips showing different personalities who made the purchases
that Oblanca and Alajar explained that they had to use different names in order to avoid detection;
that Alajar is not connected with either of the private respondents; that Alajar was not in a position to
inform the RTC as to the distinguishing trademarks of SHELLANE and GASUL; that Oblanca was
not also competent to testify on the marks allegedly infringed by petitioners; that Judge Sadang
failed to ask probing questions on the distinguishing marks of SHELLANE and GASUL; that the
findings of the Brand Protection Committee of Pilipinas Shell were not submitted nor presented to
the RTC; that although Judge Sadang examined Oblanca and Alajar, the former did not ask
exhaustive questions; and that the questions Judge Sadang asked were merely rehash of the
contents of the affidavits of Oblanca and Alajar.25

These contentions are devoid of merit.

Article III, Section 2, of the present Constitution states the requirements before a search warrant
may be validly issued, to wit:

Section 2. The right of the people to be secure in their persons, houses, papers, and effects against
unreasonable searches and seizures of whatever nature and for any purpose shall be inviolable, and
no search warrant or warrant of arrest shall issue except upon probable cause to be determined
personally by the judge after examination under oath or affirmation of the complainant and the
witnesses he may produce, and particularly describing the place to be searched and the persons or
things to be seized. (emphasis supplied).

Section 4 of Rule 126 of the Revised Rules on Criminal Procedure, provides with more particularity
the requisites in issuing a search warrant, viz:

SEC. 4. Requisites for issuing search warrant. – A search warrant shall not issue except upon
probable cause in connection with one specific offense to be determined personally by the judge
after examination under oath or affirmation of the complainant and the witnesses he may produce,
and particularly describing the place to be searched and the things to be seized which may be
anywhere in the Philippines.

According to the foregoing provisions, a search warrant can be issued only upon a finding of
probable cause. Probable cause for search warrant means such facts and circumstances which
would lead a reasonably discreet and prudent man to believe that an offense has been committed
and that the objects sought in connection with the offense are in the place to be searched.26

The facts and circumstances being referred thereto pertain to facts, data or information personally
known to the applicant and the witnesses he may present.27 The applicant or his witnesses must
have personal knowledge of the circumstances surrounding the commission of the offense being
complained of. "Reliable information" is insufficient. Mere affidavits are not enough, and the judge
must depose in writing the complainant and his witnesses.28

Section 155 of Republic Act No. 8293 identifies the acts constituting trademark infringement, thus:

SEC. 155. Remedies; Infringement. – Any person who shall, without the consent of the owner of the
registered mark:

155.1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered
mark or the same container or a dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including other preparatory steps necessary to
carry out the sale of any goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive; or

155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature
thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in
connection with the sale, offering for sale, distribution, or advertising of goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake, or to deceive, shall
be liable in a civil action for infringement by the registrant for the remedies hereinafter set forth:
Provided, That the infringement takes place at the moment any of the acts stated in Subsection
155.1 or this subsection are committed regardless of whether there is actual sale of goods or
services using the infringing material.

As can be gleaned in Section 155.1, mere unauthorized use of a container bearing a registered
trademark in connection with the sale, distribution or advertising of goods or services which is likely
to cause confusion, mistake or deception among the buyers/consumers can be considered as
trademark infringement.

In his sworn affidavits,29 Oblanca stated that before conducting an investigation on the alleged illegal
activities of MASAGANA, he reviewed the certificates of trademark registrations issued by the
Philippine Intellectual Property Office in favor of Petron and Pilipinas Shell; that he confirmed from
Petron and Pilipinas Shell that MASAGANA is not authorized to sell, use, refill or distribute GASUL
and SHELLANE LPG cylinder containers; that he and Alajar monitored the activities of MASAGANA
in its refilling plant station located within its compound at Governor’s Drive, Barangay Lapidario,
Trece Martires, Cavite City; that, using different names, they conducted two test-buys therein where
they purchased LPG cylinders bearing the trademarks GASUL and SHELLANE; that the said
GASUL and SHELLANE LPG cylinders were refilled in their presence by the MASAGANA
employees; that while they were inside the MASAGANA compound, he noticed stock piles of multi-
branded cylinders including GASUL and SHELLANE LPG cylinders; and that they observed delivery
trucks loaded with GASUL and SHELLANE LPG cylinders coming in and out of the MASAGANA
compound and making deliveries to various retail outlets. These allegations were corroborated by
Alajar in his separate affidavits.

In support of the foregoing statements, Oblanca also submitted the following documentary and
object evidence:
1. Certified true copy of the Certificate of Registration No. 44046 for "SHELL (DEVICE)" in the name
of Shell International;

2. Certified true copy of the Certificate of Registration No. 41789 for "SHELL (DEVICE)’ in the name
of Shell International;

3. Certified true copy of the Certificate of Registration No. 37525 for "SHELL (DEVICE) in the name
of Shell International;

4. Certified true copy of the Certificate of Registration No. R-2813 for "SHELL" in the name of Shell
International;

5. Certified true copy of the Certificate of Registration No. 31443 for "SHELLANE" in the name of
Shell International;

6. Certified true copy of the Certificate of Registration No. 57945 for the mark "GASUL" in the name
of Petron;

7. Certified true copy of the Certificate of Registration No. C-147 for "GASUL CYLINDER
CONTAINING LIQUEFIED PETROLEUM GAS" in the name of Petron;

8. Certified true copy of the Certificate of Registration No. 61920 for the mark "GASUL AND
DEVICE" in the name of Petron;

9. Certified true copy of the Articles of Incorporation of Masagana;

10. Certified true copy of the By-laws of Masagana;

11. Certified true copy of the latest General Information Sheet of Masagana on file with the
Securities and Exchange Commission;

12. Pictures of delivery trucks coming in and out of Masagana while it delivered Gasul and Shellane
LPG;

13. Cash Invoice No. 56210 dated 13 February 2003 issued by Masagana for the Gasul and
Shellane LPG purchased by Agent Oblanca and witness Alajar;

14. Pictures of the Shellane and Gasul LPG’’s covered by Cash Invoice No. 56210 purchased from
Masagana by Agent Oblanca and witness Alajar;

15. Cash Invoice No. 56398 dated 27 February 2003 issued by Masagana for the Gasul and
Shellane LPG purchased by Agent Oblanca and witness Alajar; and

16. Pictures of the Shellane and Gasul LPG’s covered by Cash Invoice No. 56398 purchased from
Masagana by Agent Oblanca and witness Alajar.30

Extant from the foregoing testimonial, documentary and object evidence is that Oblanca and Alajar
have personal knowledge of the fact that petitioners, through MASAGANA, have been using the
LPG cylinders bearing the marks GASUL and SHELLANE without permission from Petron and
Pilipinas Shell, a probable cause for trademark infringement. Both Oblanca and Alajar were clear
and insistent that they were the very same persons who monitored the activities of MASAGANA; that
they conducted test-buys thereon; and that in order to avoid suspicion, they used different names
during the test-buys. They also personally witnessed the refilling of LPG cylinders bearing the marks
GASUL and SHELLANE inside the MASAGANA refilling plant station and the deliveries of these
refilled containers to some outlets using mini-trucks.

Indeed, the aforesaid facts and circumstances are sufficient to establish probable cause. It should be
borne in mind that the determination of probable cause does not call for the application of the rules
and standards of proof that a judgment of conviction requires after trial on the merits. As the term
implies, "probable cause" is concerned with probability, not absolute or even moral certainty. The
standards of judgment are those of a reasonably prudent man, not the exacting calibrations of a
judge after a full blown trial.31

The fact that Oblanca and Alajar used different names in the purchase receipts do not negate
personal knowledge on their part. It is a common practice of the law enforcers such as NBI agents
during covert investigations to use different names in order to conceal their true identities. This is
reasonable and understandable so as not to endanger the life of the undercover agents and to
facilitate the lawful arrest or apprehension of suspected violators of the law.

Petitioners’ contention that Oblanca and Alajar should have mentioned the fact that they used
different names in their respective affidavits and during the preliminary examination is puerile. The
argument is too vacuous to merit serious consideration. There is nothing in the provisions of law
concerning the issuance of a search warrant which directly or indirectly mandates that the applicant
of the search warrant or his witnesses should state in their affidavits the fact that they used different
names while conducting undercover investigations, or to divulge such fact during the preliminary
examination. In the light of other more material facts which needed to be established for a finding of
probable cause, it is not difficult to believe that Oblanca and Alajar failed to mention that they used
aliases in entering the MASAGANA compound due to mere oversight.

It cannot be gainfully said that Oblanca and Alajar are not competent to testify on the trademarks
infringed by the petitioners. As earlier discussed, Oblanca declared under oath that before
conducting an investigation on the alleged illegal activities of MASAGANA, he reviewed the
certificates of trademark registrations issued by the Philippine Intellectual Property Office in favor of
Petron and Pilipinas Shell. These certifications of trademark registrations were attached by Oblanca
in his applications for the search warrants. Alajar, on the other hand, works as a private investigator
and, in fact, owns a private investigation and research/consultation firm. His firm was hired and
authorized, pursuant to the Brand Protection Program of Petron and Pilipinas Shell, to verify reports
that MASAGANA is involved in the illegal sale and refill of GASUL and SHELLANE LPG
cylinders.32 As part of the job, he studied and familiarized himself with the registered trademarks of
GASUL and SHELLANE, and the distinct features of the LPG cylinders bearing the same
trademarks before conducting surveillance and test-buys on MASAGANA.33 He also submitted to
Oblanca several copies of the same registered trademark registrations and accompanied Oblanca
during the surveillance and test-buys.

As to whether the form and manner of questioning made by Judge Sadang complies with the
requirements of law, Section 5 of Rule 126 of the Revised Rules on Criminal Procedure, prescribes
the rules in the examination of the complainant and his witnesses when applying for search warrant,
to wit:

SEC. 5. Examination of complainant; record.- The judge must, before issuing the warrant, personally
examine in the form of searching questions and answers, in writing under oath, the complainant and
the witnesses he may produce on facts personally known to them and attach to the record their
sworn statements, together with the affidavits submitted.
The searching questions propounded to the applicant and the witnesses depend largely on the
discretion of the judge. Although there is no hard-and–fast rule governing how a judge should
conduct his investigation, it is axiomatic that the examination must be probing and exhaustive, not
merely routinary, general, peripheral, perfunctory or pro forma. The judge must not simply rehash
the contents of the affidavit but must make his own inquiry on the intent and justification of the
application.34

After perusing the Transcript of Stenographic Notes of the preliminary examination, we found the
questions of Judge Sadang to be sufficiently probing, not at all superficial and perfunctory.35 The
testimonies of Oblanca and Alajar were consistent with each other and their narration of facts was
credible. As correctly found by the Court of Appeals:

This Court is likewise not convinced that respondent Judge failed to ask probing questions in his
determination of the existence of probable cause. This Court has thoroughly examined the
Transcript of Stenographic Notes taken during the investigation conducted by the respondent Judge
and found that respondent Judge lengthily inquired into the circumstances of the case. For instance,
he required the NBI agent to confirm the contents of his affidavit, inquired as to where the "test-buys"
were conducted and by whom, verified whether PSPC and PETRON have registered trademarks or
tradenames, required the NBI witness to explain how the "test-buys" were conducted and to describe
the LPG cylinders purchased from Masagana Gas Corporation, inquired why the applications for
Search Warrant were filed in Cavite City considering that Masagana Gas Corporation was located in
Trece Martires, Cavite, inquired whether the NBI Agent has a sketch of the place and if there was
any distinguishing sign to identify the place to be searched, and inquired about their alleged tailing
and monitoring of the delivery trucks. x x x.36

Since probable cause is dependent largely on the opinion and findings of the judge who conducted
the examination and who had the opportunity to question the applicant and his witnesses, the
findings of the judge deserves great weight. The reviewing court can overturn such findings only
upon proof that the judge disregarded the facts before him or ignored the clear dictates of
reason.37 We find no compelling reason to disturb Judge Sadang’s findings herein.

Anent the second issue, petitioners argue that Judge Sadang failed to require Oblanca to show his
authority to apply for search warrants; that Oblanca is a member of the Anti-Organized Crime and
not that of the Intellectual Property Division of the NBI; that all complaints for infringement should be
investigated by the Intellectual Property Division of the NBI; that it is highly irregular that an agent
not assigned to the Intellectual Property Division would apply for a search warrant and without
authority from the NBI Director; that the alleged letter-complaint of Atty. Bienvenido Somera, Jr. of
Villaraza and Angangco Law Office was not produced in court; that Judge Sadang did not require
Oblanca to produce the alleged letter-complaint which is material and relevant to the determination
of the existence of probable cause; and that Petron and Pilipinas Shell, being two different
corporations, should have issued a board resolution authorizing the Villaraza and Angangco Law
Office to apply for search warrant in their behalf.38

We reject these protestations.

The authority of Oblanca to apply for the search warrants in question is clearly discussed and
explained in his affidavit, viz:

[That] on 11 February 2003, the National Bureau of Investigation (NBI) received a letter-complaint
from Atty. Bienvenido I. Somera, Jr. of Villaraza and Angangco, on behalf of among others, Petron
Corporation (PETRON) [and Pilipinas Shell Petroleum Corporation (PSPC), the authorized
representative of Shell International Petroleum Company Limited (SHELL INTERNATIONAL)]
requesting assistance in the investigation and, if warranted, apprehension and prosecution of certain
persons and/or establishments suspected of violating the intellectual property rights of PETRON
[and of PSPC and Shell International.]

11. [That] on the basis of the letter-complaint, I, together with Agent Angelo Zarzoso, was assigned
as the NBI agent on the case.39

The fact that Oblanca is a member of the Anti-Organized Crime Division and not that of the
Intellectual Property Division does not abrogate his authority to apply for search warrant. As aptly
stated by the RTC and the Court of Appeals, there is nothing in the provisions on search warrant
under Rule 126 of the Revised Rules on Criminal Procedure, which specifically commands that the
applicant law enforcer must be a member of a division that is assigned or related to the subject
crime or offense before the application for search warrant may be acted upon. The petitioners did
not also cite any law, rule or regulation mandating such requirement. At most, petitioners may only
be referring to the administrative organization and/or internal rule or practice of the NBI. However,
not only did petitioners failed to establish the existence thereof, but they also did not prove that such
administrative organization and/or internal rule or practice are inviolable.

Neither is the presentation of the letter-complaint of Atty. Somera and board resolutions from Petron
and Pilipinas Shell required or necessary in determining probable cause. As heretofore discussed,
the affidavits of Oblanca and Alajar, coupled with the object and documentary evidence they
presented, are sufficient to establish probable cause. It can also be presumed that Oblanca, as an
NBI agent, is a public officer who had regularly performed his official duty.40 He would not have
initiated an investigation on MASAGANA without a proper complaint. Furthermore, Atty. Somera did
not step up to deny his letter-complaint.

Regarding the third issue, petitioners posit that the applications for search warrants of Oblanca did
not specify the particular area to be searched, hence, giving the raiding team wide latitude in
determining what areas they can search. They aver that the search warrants were general warrants,
and are therefore violative of the Constitution. Petitioners also assert that since the MASAGANA
compound is about 10,000.00 square meters with several structures erected on the lot, the search
warrants should have defined the areas to be searched.

The long standing rule is that a description of the place to be searched is sufficient if the officer with
the warrant can, with reasonable effort, ascertain and identify the place intended and distinguish it
from other places in the community. Any designation or description known to the locality that points
out the place to the exclusion of all others, and on inquiry leads the officers unerringly to it, satisfies
the constitutional requirement.41

Moreover, in the determination of whether a search warrant describes the premises to be searched
with sufficient particularity, it has been held that the executing officer’s prior knowledge as to the
place intended in the warrant is relevant. This would seem to be especially true where the executing
officer is the affiant on whose affidavit the warrant had been issued, and when he knows that the
judge who issued the warrant intended the compound described in the affidavit.42

The search warrants in question commanded any peace officer to make an immediate search on
MASAGANA compound located at Governor’s Drive, Barangay Lapidario, Trece Martires, Cavite
City. It appears that the raiding team had ascertained and reached MASAGANA compound without
difficulty since MASAGANA does not have any other offices/plants in Trece Martires, Cavite City.
Moreover, Oblanca, who was with the raiding team, was already familiar with the MASAGANA
compound as he and Alajar had monitored and conducted test-buys thereat.
Even if there are several structures inside the MASAGANA compound, there was no need to
particularize the areas to be searched because, as correctly stated by Petron and Pilipinas Shell,
these structures constitute the essential and necessary components of the petitioners’ business and
cannot be treated separately as they form part of one entire compound. The compound is owned
and used solely by MASAGANA. What the case law merely requires is that, the place to be
searched can be distinguished in relation to the other places in the community. Indubitably, this
requisite was complied with in the instant case.

As to the fourth issue, petitioners asseverate that the search warrants did not indicate with
particularity the items to be seized since the search warrants merely described the items to be
seized as LPG cylinders bearing the trademarks GASUL and SHELLANE without specifying their
sizes.

A search warrant may be said to particularly describe the things to be seized when the description
therein is as specific as the circumstances will ordinarily allow; or when the description expresses a
conclusion of fact not of law by which the warrant officer may be guided in making the search and
seizure; or when the things described are limited to those which bear direct relation to the offense for
which the warrant is being issued.43

While it is true that the property to be seized under a warrant must be particularly described therein
and no other property can be taken thereunder, yet the description is required to be specific only in
so far as the circumstances will ordinarily allow. The law does not require that the things to be seized
must be described in precise and minute details as to leave no room for doubt on the part of the
searching authorities; otherwise it would be virtually impossible for the applicants to obtain a search
warrant as they would not know exactly what kind of things they are looking for. Once described,
however, the articles subject of the search and seizure need not be so invariant as to require
absolute concordance, in our view, between those seized and those described in the warrant.
Substantial similarity of those articles described as a class or specie would suffice.44

Measured against this standard, we find that the items to be seized under the search warrants in
question were sufficiently described with particularity. The articles to be confiscated were restricted
to the following: (1) LPG cylinders bearing the trademarks GASUL and SHELLANE; (2) Machines
and equipments used or intended to be used in the illegal refilling of GASUL and SHELLANE
cylinders. These machines were also specifically enumerated and listed in the search warrants; (3)
Documents which pertain only to the production, sale and distribution of the GASUL and SHELLANE
LPG cylinders; and (4) Delivery trucks bearing Plate Nos. WTE-527, XAM-970 and WFC-603,
hauling trucks, and/or other delivery trucks or vehicles or conveyances being used or intended to be
used for the purpose of selling and/or distributing GASUL and SHELLANE LPG cylinders.45

Additionally, since the described items are clearly limited only to those which bear direct relation to
the offense, i.e., violation of section 155 of Republic Act No. 8293, for which the warrant was issued,
the requirement of particularity of description is satisfied.

Given the foregoing, the indication of the accurate sizes of the GASUL and SHELLANE LPG
cylinders or tanks would be unnecessary.

Finally, petitioners claim that MASAGANA has the right to intervene and to move for the return of the
seized items; that the items seized by the raiding team were being used in the legitimate business of
MASAGANA; that the raiding team had no right to seize them under the guise that the same were
being used in refilling GASUL and SHELLANE LPG cylinders; and that there being no action for
infringement filed against them and/or MASAGANA from the seizure of the items up to the present, it
is only fair that the seized articles be returned to the lawful owner in accordance with Section 20 of
A.M. No. 02-1-06-SC.

It is an elementary and fundamental principle of corporation law that a corporation is an entity

separate and distinct from its stockholders, directors or officers. However, when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons, or in the case of two corporations merge them
into one.46 In other words, the law will not recognize the separate corporate existence if the
corporation is being used pursuant to the foregoing unlawful objectives. This non-recognition is
sometimes referred to as the doctrine of piercing the veil of corporate entity or disregarding the
fiction of corporate entity. Where the separate corporate entity is disregarded, the corporation will be
treated merely as an association of persons and the stockholders or members will be considered as
the corporation, that is, liability will attach personally or directly to the officers and stockholders.47

As we now find, the petitioners, as directors/officers of MASAGANA, are utilizing the latter in
violating the intellectual property rights of Petron and Pilipinas Shell. Thus, petitioners collectively
and MASAGANA should be considered as one and the same person for liability purposes.
Consequently, MASAGANA’s third party claim serves no refuge for petitioners.

Even if we were to sustain the separate personality of MASAGANA from that of the petitioners, the
effect will be the same. The law does not require that the property to be seized should be owned by
the person against whom the search warrants is directed. Ownership, therefore, is of no
consequence, and it is sufficient that the person against whom the warrant is directed has control or
possession of the property sought to be seized.48 Hence, even if, as petitioners claimed, the
properties seized belong to MASAGANA as a separate entity, their seizure pursuant to the search
warrants is still valid.

Further, it is apparent that the motor compressor, LPG refilling machine and the GASUL and SHELL
LPG cylinders seized were the corpus delicti, the body or substance of the crime, or the evidence of
the commission of trademark infringement. These were the very instruments used or intended to be
used by the petitioners in trademark infringement. It is possible that, if returned to MASAGANA,
these items will be used again in violating the intellectual property rights of Petron and Pilipinas
Shell.49 Thus, the RTC was justified in denying the petitioners’ motion for their return so as to prevent
the petitioners and/or MASAGANA from using them again in trademark infringement.

Petitioners’ reliance on Section 20 of A.M. No. 02-1-06-SC,50 is not tenable. As correctly observed by
the Solicitor General, A.M. 02-1-06-SC is not applicable in the present case because it governs only
searches and seizures in civil actions for infringement of intellectual property rights.51 The offense
complained of herein is for criminal violation of Section 155 in relation to Section 17052 of Republic
Act No. 8293.

WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals in CA-
G.R. SP No. 79256, dated 30 September 2004 and 1 June 2005, respectively, are hereby
AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc.,respondents.

Claro M. Recto for petitioners.

Ramon Diokno and Jose W. Diokno for respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance
of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged
in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized
to engage in a general lumber business to carry on as general contractors, operators and managers,
etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the corporation described in a
list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental
office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed
before the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et
al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of
bitter dissension among the members, mismanagement and fraud by the managers and heavy
financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and
at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the
receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation
but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that the
Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law). The
complaining associates have not represented to the others that they were incorporated any more
than the latter had made similar representations to them. And as nobody was led to believe anything
to his prejudice and damage, the principle of estoppel does not apply. Obviously this is not an
instance requiring the enforcement of contracts with the corporation through the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies,
and therefore the court had not jurisdiction to take cognizance of said civil case number 381. Section
19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation

under this Act and its right to exercise corporate powers shall not be inquired into collaterally
in any private suit to which the corporation may be a party, but such inquiry may be had at
the suit of the Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders —
may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry which
calls a corporation into being. The immunity if collateral attack is granted to corporations
"claiming in good faith to be a corporation under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a total or substantial disregard of the law.
Unless there has been an evident attempt to comply with the law the claim to be a
corporation "under this act" could not be made "in good faith." (Fisher on the Philippine Law
of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders
of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its dissolution between stockholders, without
the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution;1 but
that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject
to review on appeal. Whkch brings us to one principal reason why this petition may not prosper,
namely: the petitioners have their remedy by appealing the order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be admitted
that receivership is proper in proceedings for dissolution of a company or corporation, and it was no
error to reject the counter-bond, the court having declared the dissolution. As to the amount of the
bond to be demanded of the receiver, much depends upon the discretion of the trial court, which in
this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore
issued will be dissolved.

G.R. No. 150416 July 21, 2006

SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN PHILIPPINES, INC.,
and/or represented by MANASSEH C. ARRANGUEZ, BRIGIDO P. GULAY, FRANCISCO M.
LUCENARA, DIONICES O. TIPGOS, LORESTO C. MURILLON, ISRAEL C. NINAL, GEORGE G.
SOMOSOT, JESSIE T. ORBISO, LORETO PAEL and JOEL BACUBAS, petitioners,
vs.
NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST, INC., and/or
represented by JOSUE A. LAYON, WENDELL M. SERRANO, FLORANTE P. TY and JETHRO
CALAHAT and/or SEVENTH DAY ADVENTIST CHURCH [OF] NORTHEASTERN MINDANAO
MISSION,* Respondents.

DECISION

CORONA, J.:

This petition for review on certiorari assails the Court of Appeals (CA) decision1 and resolution2 in
CA-G.R. CV No. 41966 affirming, with modification, the decision of the Regional Trial Court (RTC) of
Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.

This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT) No. 4468 in
Bayugan, Agusan del Sur originally owned by Felix Cosio and his wife, Felisa Cuysona.

On April 21, 1959, the spouses Cosio donated the land to the South Philippine Union Mission of
Seventh Day Adventist Church of Bayugan Esperanza, Agusan (SPUM-SDA Bayugan).3 Part of the
deed of donation read:

KNOW ALL MEN BY THESE PRESENTS:

That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age, [h]usband and wife,
both are citizen[s] of the Philippines, and resident[s] with post office address in the Barrio of
Bayugan, Municipality of Esperanza, Province of Agusan, Philippines, do hereby grant, convey and
forever quit claim by way of Donation or gift unto the South Philippine [Union] Mission of Seventh
Day Adventist Church of Bayugan, Esperanza, Agusan, all the rights, title, interest, claim and
demand both at law and as well in possession as in expectancy of in and to all the place of land and
portion situated in the Barrio of Bayugan, Municipality of Esperanza, Province of Agusan,
Philippines, more particularly and bounded as follows, to wit:

1. a parcel of land for Church Site purposes only.

2. situated [in Barrio Bayugan, Esperanza].

3. Area: 30 meters wide and 30 meters length or 900 square meters.

4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.

5. Bounded Areas

North by National High Way; East by Bricio Gerona; South by Serapio Abijaron and West by Feliz
Cosio xxx. 4

The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh Day Adventist
Church, on behalf of the donee.
Twenty-one years later, however, on February 28, 1980, the same parcel of land was sold by the
spouses Cosio to the Seventh Day Adventist Church of Northeastern Mindanao Mission (SDA-
NEMM).5 TCT No. 4468 was thereafter issued in the name of SDA-NEMM.6

Claiming to be the alleged donee’s successors-in-interest, petitioners asserted ownership over the
property. This was opposed by respondents who argued that at the time of the donation, SPUM-SDA
Bayugan could not legally be a donee

because, not having been incorporated yet, it had no juridical personality. Neither were petitioners
members of the local church then, hence, the donation could not have been made particularly to
them.

On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a suit for
cancellation of title, quieting of ownership and possession, declaratory relief and reconveyance with
prayer for preliminary injunction and damages), in the RTC of Bayugan, Agusan del Sur. After trial,
the trial court rendered a decision7 on November 20, 1992 upholding the sale in favor of
respondents.

On appeal, the CA affirmed the RTC decision but deleted the award of moral damages and
attorney’s fees.8Petitioners’ motion for reconsideration was likewise denied. Thus, this petition.

The issue in this petition is simple: should SDA-NEMM’s ownership of the lot covered by TCT No.
4468 be upheld?9We answer in the affirmative.

The controversy between petitioners and respondents involves two supposed transfers of the lot
previously owned by the spouses Cosio: (1) a donation to petitioners’ alleged predecessors-in-
interest in 1959 and (2) a sale to respondents in 1980.

Donation is undeniably one of the modes of acquiring ownership of real property. Likewise,
ownership of a property may be transferred by tradition as a consequence of a sale.

Petitioners contend that the appellate court should not have ruled on the validity of the donation
since it was not among the issues raised on appeal. This is not correct because an appeal generally
opens the entire case for review.

We agree with the appellate court that the alleged donation to petitioners was void.

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor
of another personwho accepts it. The donation could not have been made in favor of an entity yet
inexistent at the time it was made. Nor could it have been accepted as there was yet no one to
accept it.

The deed of donation was not in favor of any informal group of SDA members but a supposed
SPUM-SDA Bayugan (the local church) which, at the time, had neither juridical personality nor
capacity to accept such gift.

Declaring themselves a de facto corporation, petitioners allege that they should benefit from the
donation.

But there are stringent requirements before one can qualify as a de facto corporation:
(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; and

(c) assumption of corporate powers.10

While there existed the old Corporation Law (Act 1459),11 a law under which SPUM-SDA Bayugan
could have been organized, there is no proof that there was an attempt to incorporate at that time.

The filing of articles of incorporation and the issuance of the certificate of incorporation are essential
for the existence of a de facto corporation.12 We have held that an organization not registered with
the Securities and Exchange Commission (SEC) cannot be considered a corporation in any concept,
not even as a corporation de facto.13 Petitioners themselves admitted that at the time of the donation,
they were not registered with the SEC, nor did they even attempt to organize14 to comply with legal
requirements.

Corporate existence begins only from the moment a certificate of incorporation is issued. No such
certificate was ever issued to petitioners or their supposed predecessor-in-interest at the time of the
donation. Petitioners obviously could not have claimed succession to an entity that never came to
exist. Neither could the principle of separate juridical personality apply since there was never any
corporation15 to speak of. And, as already stated, some of the representatives of petitioner Seventh
Day Adventist Conference Church of Southern Philippines, Inc. were not even members of the local
church then, thus, they could not even claim that the donation was particularly for them.16

"The de facto doctrine thus effects a compromise between two conflicting public interest[s]—the one
opposed to an unauthorized assumption of corporate privileges; the other in favor of doing justice to
the parties and of establishing a general assurance of security in business dealing with
corporations."17

Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not to
favor the defective or non-existent corporation.18

In view of the foregoing, petitioners’ arguments anchored on their supposed de facto status hold no
water. We are convinced that there was no donation to petitioners or their supposed predecessor-in-
interest.

On the other hand, there is sufficient basis to affirm the title of SDA-NEMM. The factual findings of
the trial court in this regard were not convincingly disputed. This Court is not a trier of facts. Only
questions of law are the proper subject of a petition for review on certiorari.19

Sustaining the validity of respondents’ title as well as their right of ownership over the property, the
trial court stated:

[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx he acknowledged
that the same was his xxx but that it was not his intention to sell the controverted property because
he had previously donated the same lot to the South Philippine Union Mission of SDA Church of
Bayugan-Esperanza. Cosio avouched that had it been his intendment to sell, he would not have
disposed of it for a mere P2,000.00 in two installments but for P50,000.00 or P60,000.00. According
to him, the P2,000.00 was not a consideration of the sale but only a form of help extended.
A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale disclosed that it
has the essential requisites of contracts pursuant to xxx Article 1318 of the Civil Code, except
that the consideration of P2,000.00 is somewhat insufficient for a [1,069-square meter] land. Would
then this inadequacy of the consideration render the contract invalid?

Article 1355 of the Civil Code provides:

Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence.

No evidence [of fraud, mistake or undue influence] was adduced by [petitioners].

xxx

Well-entrenched is the rule that a Certificate of Title is generally a conclusive evidence of

[ownership] of the land. There is that strong and solid presumption that titles were legally issued
and that they are valid. It is irrevocable and indefeasible and the duty of the Court is to see to it that
the title is maintained and respected unless challenged in a direct proceeding. xxx The title shall be
received as evidence in all the Courts and shall be conclusive as to all matters contained therein.

[This action was instituted almost seven years after the certificate of title in respondents’ name was
issued in 1980.]20

According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be transferred to the
vendee upon the actual or constructive delivery thereof. On this, the noted author Arturo Tolentino
had this to say:

The execution of [a] public instrument xxx transfers the ownership from the vendor to the vendee
who may thereafter exercise the rights of an owner over the same21

Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made upon constructive
delivery of the property on February 28, 1980 when the sale was made through a public
instrument.22 TCT No. 4468 was thereafter issued and it remains in the name of SDA-NEMM.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.

G.R. No. 119002 October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.

DECISION

KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel agency
to the latter.1 The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the
South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of
China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received,
the Federation made two partial payments, both in September of 1989, in the total amount of
P176,467.50.2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter
requesting for the amount of P265,894.33.3 On 30 October 1989, the Federation, through the Project
Gintong Alay, paid the amount of P31,603.00.4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation.5 Thereafter, no further payments were made
despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued
Henri Kahn in his personal capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation.6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation
owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred
that the petitioner has no cause of action against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he did not guarantee payment but
merely acted as an agent of the Federation which has a separate and distinct juridical personality.7

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial
court.8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling,
the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his
Answer. Being the President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the
plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to
ratify, a contract. The contract entered into by its officers or agents on behalf of such association is
not binding on, or enforceable against it. The officers or agents are themselves personally liable.
x x x9

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

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal
sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date
the complaint was filed, until the principal obligation is fully liquidated; and another sum of
P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the trial court, the decretal portion of said decision
reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET
ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn.11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It
rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has a separate and distinct
personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation
be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution
of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the
Philippine Football Federation is not a party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due process clause, let alone the fact
that the judgment dismissing the complaint against it, had already become final by virtue of the
plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.12

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors:13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER

HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE
ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE
ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND
 CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT
AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY

LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE
OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as
the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604
as the laws from which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall
have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with
the executive committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which
shall be submitted to the Department and any amendment thereto shall take effect upon
approval by the Department: Provided, however, That no team, school, club, organization, or
entity shall be admitted as a voting member of an association unless 60 per cent of the
athletes composing said team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the
approval of the Department;
 3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the
Department;

xxx

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

The above powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may be
accorded corporate status, such does not automatically take place by the mere passage of these
laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State must give
its consent either in the form of a special law or a general enabling act. We cannot agree with the
view of the appellate court and the private respondent that the Philippine Football Federation came
into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604
any provision creating the Philippine Football Federation. These laws merely recognized the
existence of national sports associations and provided the manner by which these entities may
acquire juridical personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall
be organized for each individual sports in the Philippines in the manner hereinafter provided to
constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National
Sports' Association shall be filed with the executive committee together with, among others, a copy
of the constitution and by-laws and a list of the members of the proposed association, and a filing fee
of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association
will promote the purposes of this Act and particularly section three thereof. No application shall be
held pending for more than three months after the filing thereof without any action having been taken
thereon by the executive committee. Should the application be rejected, the reasons for such
rejection shall be clearly stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be considered as unacted upon:
Provided, however, That until the executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said executive committee
shall be dissolved upon the organization of the executive committee herein provided: Provided,
further, That the functioning executive committee is charged with the responsibility of seeing to it that
the National Sports' Associations are formed and organized within six months from and after the
passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national
sports association for each individual sport in the Philippines shall be filed with the Department
together with, among others, a copy of the Constitution and By-Laws and a list of the members of
the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially complied
with the rules and regulations of the Department: Provided, That the Department may withdraw
accreditation or recognition for violation of this Decree and such rules and regulations formulated by
it.

The Department shall supervise the national sports association: Provided, That the latter shall have
exclusive technical control over the development and promotion of the particular sport for which they
are organized.

Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the Philippine
Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for
reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football
Federation. Unfortunately, the same does not prove that said Federation has indeed been
recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of
Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is not a
national sports association within the purview of the aforementioned laws and does not have
corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for contract entered into or for
other acts performed as such agent.14 As president of the Federation, Henri Kahn is presumed to
have known about the corporate existence or non-existence of the Federation. We cannot subscribe
to the position taken by the appellate court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the Federation because it had
contracted and dealt with the Federation in such a manner as to recognize and in effect admit its
existence.15 The doctrine of corporation by estoppel is mistakenly applied by the respondent court to
the petitioner. The application of the doctrine applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the irrelevant ground of defective
incorporation.16 In the case at bar, the petitioner is not trying to escape liability from the contract but
rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.

G.R. No. 141994 January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,

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

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 4 January 1999 Decision2 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 Decision3 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, attorney’s fees
and costs of suit.

The Antecedents

"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’ Rima ("Rima") and Hermogenes
‘Jun’ Alegre ("Alegre").5 Exposé is aired every morning over DZRC-AM which is owned by Filipinas
Broadcasting Network, Inc. ("FBNI"). "Exposé" 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 AMEC’s College of Medicine, filed a complaint for
damages7 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 AMEC’s 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 you’ll 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, isn’t 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 latter’s 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 I’m 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. Don’t 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 – that’s 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. xxx9 (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the supposed
exposés, 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 Answer10 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 Dismiss11 on FBNI’s 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 Decision12 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 Rima’s only participation was when he
agreed with Alegre’s exposé. The trial court found Rima’s 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 ₱300,000.00 moral damages, plus ₱30,000.00 reimbursement of attorney’s 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 court’s
judgment with modification. The appellate court made Rima solidarily liable with FBNI and Alegre.
The appellate court denied Ago’s claim for damages and attorney’s 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 court’s 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 Alegre’s 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 AMEC’s 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 Ago’s claim for damages and attorney’s 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, attorney’s fees and
costs of suit.
1awphi1.nét

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 ATTORNEY’S FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT
OF MORAL DAMAGES, ATTORNEY’S FEES AND COSTS OF SUIT.
The Court’s 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 AMEC’s cause of action is based on Articles 30 and 33 of the Civil Code.
Article 3018 authorizes a separate civil action to recover civil liability arising from a criminal offense.
On the other hand, Article 3319 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
1920 of the Civil Code to justify its claim for damages. AMEC cites Articles 217621 and 218022 of the
Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I.

Whether the broadcasts are libelous

A libel23 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 Alegre’s remarks such
as "greed for money on the part of AMEC’s 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 AMEC’s side and gave Ago the opportunity
to defend AMEC and its administrators. FBNI concludes that since there is no malice, there is no
libel.

FBNI’s 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 exposé,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 Alegre’s reckless disregard of whether their report was true or
not.

Contrary to FBNI’s 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 republisher’s 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.

FBNI’s 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 AMEC’s 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.
l^vvphi1.n et

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 Code35 of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. ("Radio Code"). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

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

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

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

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

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code
of ethical conduct governing practitioners in the radio broadcast industry. The Radio Code is a
voluntary code of conduct imposed by the radio broadcast industry on its own members. The Radio
Code is a public warranty by the radio broadcast industry that radio broadcast practitioners are
subject to a code by which their conduct are measured for lapses, liability and sanctions.

The public has a right to expect and demand that radio broadcast practitioners live up to the code of
conduct of their profession, just like other professionals. A professional code of conduct provides the
standards for determining whether a person has acted justly, honestly and with good faith in the
exercise of his rights and performance of his duties as required by Article 1937 of the Civil Code. A
professional code of conduct also provides the standards for determining whether a person who
willfully causes loss or injury to another has acted in a manner contrary to morals or good customs
under Article 2138 of the Civil Code.

II.

Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a corporation.39

A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.40 The Court of Appeals cites Mambulao Lumber Co. v. PNB, et
al.41 to justify the award of moral damages. However, the Court’s statement in Mambulao that "a
corporation may have a good reputation which, if besmirched, may also be a ground for the award of
moral damages" is an obiter dictum.42

Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 221943 of the Civil Code.
This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any
other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical
person. Therefore, a juridical person such as a corporation can validly complain for libel or any other
form of defamation and claim for moral damages.44

Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes only in
mitigation of damages.46 Neither in such a case is the plaintiff required to introduce evidence of
actual damages as a condition precedent to the recovery of some damages.47 In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

However, we find the award of ₱300,000 moral damages unreasonable. The record shows that even
though the broadcasts were libelous per se, AMEC has not suffered any substantial or material
damage to its reputation. Therefore, we reduce the award of moral damages from ₱300,000 to
₱150,000.
 III.

Whether the award of attorney’s fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of
attorney’s fees. FBNI adds that the instant case does not fall under the enumeration in Article
220848 of the Civil Code.

The award of attorney’s fees is not proper because AMEC failed to justify satisfactorily its claim for
attorney’s fees. AMEC did not adduce evidence to warrant the award of attorney’s fees. Moreover,
both the trial and appellate courts failed to explicitly state in their respective decisions the rationale
for the award of attorney’s 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 counsel’s fees are not to be awarded every time a party wins a suit. The power of the
court to award attorney’s 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 attorney’s fees.51 (Emphasis supplied)

While it mentioned about the award of attorney’s 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, attorney’s fees and costs
of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and
attorney’s 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 Alegre’s 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." Rima’s accreditation lapsed due to his non-payment of the KBP
annual fees while Alegre’s 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.

FBNI’s 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.53Thus, AMEC correctly anchored its cause of action
against FBNI on Articles 2176 and 2180 of the Civil Code. 1a\^/phi1.net

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 FBNI’s radio program Exposé 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 andsupervision 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. FBNI’s 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 industry’s 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 FBNI’s "regimented process" of application. Furthermore,
FBNI admits that Rima and Alegre had deficiencies in their KBP accreditation,56 which is one of
FBNI’s requirements before it hires a broadcaster. Significantly, membership in the KBP, while
voluntary, indicates the broadcaster’s strong commitment to observe the broadcast industry’s rules
and regulations. Clearly, these circumstances show FBNI’s lack of diligence in
selecting andsupervising 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 ₱300,000 to ₱150,000 and the
award of attorney’s fees is deleted. Costs against petitioner.

SO ORDERED.

G.R. No. 118692 July 28, 2006

COASTAL PACIFIC TRADING, INC., petitioner,

vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated Steel Corporation),
FAR EAST BANK & TRUST COMPANY, PHILIPPINE COMMERCIAL INDUSTRIAL 1 BANK,
EQUITABLE BANKING CORPORATION, PRUDENTIAL BANK, BOARD OF TRUSTEES-
CONSORTIUM OF BANKS-VISCO, UNITED COCONUT PLANTERS BANK, CITYTRUST
BANKING CORPORATION, ASSOCIATED BANK, INSULAR BANK OF ASIA AND AMERICA,
INTERNATIONAL CORPORATE BANK, COMMER-CIAL BANK OF MANILA, BANK OF THE
PHILIPPINE ISLANDS, NATIONAL STEEL CORPORA-TION, THE PROVINCIAL SHERIFF OF
BOHOL, and DEPUTY SHERIFF JOVITO DIGAL,2 respondents.

DECISION

PANGANIBAN, C.J.:

Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When these
directors sit on the board as representatives of shareholders who are also major creditors, they
cannot be allowed to use their offices to secure undue advantage for those shareholders, in fraud of
other creditors who do not have a similar representation in the board of directors.

The Case

Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing the September 27,
1994 Decision4and the January 5, 1995 Resolution5 of the Court of Appeals (CA) in CA-GR CV No.
39385. The challenged Decision disposed as follows:

"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in toto."6

The challenged Resolution denied reconsideration.

The Facts

Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of engaging in a
steel processing business. It was later renamed Visayan Integrated Steel Corporation (VISCO).7

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 VISCO's three (3) parcels of land, including all the machineries and equipment found there.8

On August 15, 1963, VISCO entered into a Loan Agreement9 with respondent banks (later referred
to as "Consortium"10) 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 mortgage11 over the
same land, machineries and equipment in favor of respondent banks. This second mortgage
remained unrecorded.12

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.13 This case was eventually dismissed for
failure to prosecute.14

Afterwards, negotiations were conducted between VISCO and respondent banks for the conversion
of the unpaid loan into equity in the corporation.15 Vicente Garcia, vice-president of VISCO and of
Far East Bank and Trust Company (FEBTC),16 testified that sometime in 1966, the creditor banks
were given management of and control over VISCO.17 In time,18 in order to reorganize it, its principal
creditors agreed to group themselves into a creditors' consortium.19 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 P16,123,918.02.20

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.21 The
fact that petitioner was among the major creditors of VISCO was recognized by the latter's vice-
president, Vicente Garcia.22 Indeed, on October 9, 1970, it forwarded to petitioner a proposal for a
Compromise Agreement.23 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
FEBTC24 and director of VISCO,25 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 VISCO's 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."26

According to a notation on this letter, an FEBTC assistant cashier named Silverio duly complied with
the above request.27 Indeed, events would later reveal that the bank held a deposit account in the
name of the "Board of Trustees-Consortium of Banks."28

On September 20, 1974, respondent banks held a luncheon meeting29 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., VISCO's then chairman and concurrent FEBTC
President,30 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 VISCO's generator sets.31 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 VISCO's
indebtedness to DBP and to secure the release of the first mortgage.32 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."33

Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the FEBTC
Boardroom.34 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 Filmag's offer to purchase
VISCO's generator sets.35 The latter option was unanimously chosen36 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 VISCO's 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 Philippines."37

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.38

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court (RTC) a
Complaint39 for Recovery of Property and Damages with Preliminary Injunction and
Attachment.40 Petitioner's allegation was that VISCO had fraudulently misapplied or converted the
finished steel sheets entrusted to it.41 On June 3, 1975, Judge Pedro A. Revilla issued a Writ of
Preliminary Attachment over its properties that were not exempt from execution.42

In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the account of VISCO
in FEBTC,43which 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.
2479-1.44 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."45

While petitioner's case was pending, VISCO's vice-president (Garcia) and director (Arturo Samonte)
requested from FEBTC a cash advance of P1,342,656.88 for the full settlement of VISCO's account
with DBP.46 On June 29, 1976, FEBTC complied by issuing Check No. FE239249 for P1,342,656.88,
payable to "[DBP] for [the] account of VISCO."47 On even date, DBP executed a Deed of Assignment
of Mortgage Rights Interest and Participation48 in favor of Respondent Consortium of Banks. The
deed stated that, in consideration of the payment made, all of DBP's rights under the mortgage
agreement with VISCO were being transferred and conveyed to the Consortium.49 Thus did the latter
obtain DBP's 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.50 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, 1980.51

On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment creditor52 of
VISCO, filed Civil Case No. 3383. It was a Complaint53 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.54 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.55 But
SIP's victory was short-lived. On March 2, 1984, Civil Case No. 3383 was decided in favor of the
Consortium.56 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
VISCO's 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."57

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in CA-GR No.
03719. 58

The auction sale of VISCO's mortgaged properties took place on March 19, 1985 and the
Consortium emerged as the highest bidder.59 The Certificate of Sale60 in its favor was registered on
May 22, 1985.61

On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of Right of
Redemption62 in favor of the National Steel Corporation (NSC), in consideration of P100,000. 63 On
the same day, the Consortium sold the foreclosed real and personal properties of VISCO to the
NSC.64

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.65 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 VISCO's
other creditors.66 Thus imputing bad faith to respondent banks' actions, petitioner said that the sale
was intended to defraud VISCO's 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 Consortium's own funds.67 Petitioner offered as proof the minutes of the meeting68 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.69 Respondent insisted that it used its own funds to pay the bank.70

On August 20, 1985, a temporary restraining order (TRO)71 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, 1985.72

On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas P. Lapena, Jr.,
in favor of Coastal.73 VISCO was ordered to pay petitioner the sum of P851,316.19 with interest at
the legal rate, plus attorney's fees of P50,000.00 and costs.74 Coastal filed a Motion for
Execution,75 but the judgment has remained unsatisfied to date.
On January 5, 1992, a Decision76 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 Trading, Inc. BY WAY OF THE MAIN COMPLAINT, to wit:

"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff and the
corresponding certificate of sale executed by the defendant sheriffs on March 15,
1985 relative to the real properties of the defendant SRM/VISCO of Cortes, Bohol,
Philippines, which were registered in the Register of Deeds of Bohol, on May 22,
1985 and the Transfer of Assignment to the defendant National Steel Corporation of
any or part of the foreclosed properties arising from the extrajudicial foreclosure sale
as valid and legal;

"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant Consortium
of Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank & Trust Company,
Philippine Commercial Industrial Bank, Equitable Banking Corporation, Prudential
Bank, Board of Trustees-Consortium of Banks- [VISCO], United Coconut Planters
Bank, City Trust Banking Corporation, Associated Bank, Insular Bank of Asia and
America, International Corporate Bank, Commercial Bank of Manila, Bank of the
Philippine Islands and the National Steel Corporation in the instant case the amount
of FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing damages;

"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the defendants
the amount of FIFTEEN THOUSAND PESOS (P15,000.00) representing attorney's
fees;

"4. Dismissing the Amended Complaint of the plaintiff;

"5. Ordering the plaintiff to pay the cost; AND

"BY WAY OF CROSS CLAIM INTERPOSED

"BY THE DEFENDANT National Steel Corporation against the Consortium of Banks and
SRM/VISCO, the same is dismissed for lack of merit, without pronouncement as to cost."77

Insisting that the trial court erred in holding that it had failed to prove its case by preponderance of
evidence, Coastal filed an appeal with the CA. Allegedly, the purported insufficiency of proof was
based on the sole ground that petitioner did not file an objection when the properties were sold on
execution. It contended that the court a quo had arrived at this erroneous conclusion by relying on
inapplicable jurisprudence.78

Additionally, Coastal argued that the trial court had erred in not annulling the foreclosure
proceedings and sale for being fictitious and done to defraud petitioner as VISCO's creditor.
Supposedly, the DBP mortgage had already been extinguished by payment; thus, the bank could not
have assigned the contract to the Consortium.79

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.80

Ruling of the Court of Appeals

At the outset, the CA stressed that the validity of the Consortium's mortgage, foreclosure, and
assignments had already been upheld in CA-GR CV No. 03719, entitled Southern Industrial Projects
v. United Coconut Planters Bank81 Citing Valencia v. RTC of Quezon City, Br. 9082 and Vda. de
Cruzo v. Carriaga,83 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.84

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 VISCO's 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."85

The appellate court also rejected petitioner's contention that the Consortium's 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 DBP's assignment in its favor.86

The CA also rejected petitioner's 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.87

Petitioner's Motion for Reconsideration,88 which was received by the CA on November 15,
1994,89 was denied for lack of merit.

Hence, this Petition.90

 Issues

Petitioner raises the following issues for our consideration:

"I

"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of fraud and
collusion practised by [respondents] against [Petitioner] Coastal, erroneously sustained the
trial court's 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:"91

"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/Visco's legal right of
redemption over the foreclosed properties, for being fraudulently executed through collusion
among the [respondents] and in fraud of SRM/Visco's creditor, [Petitioner] Coastal, x x x;"92

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 VISCO's assets in fraud of the creditors

The Court's Ruling

The Petition is meritorious.

First Issue:
Res judicata

The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP and Coastal were
substantially the same parties. We distinguish.

In Valencia, the plaintiff-intervenor in the first case, Cariño, claimed Lot 4 based on an alleged
purchase of Valencia's "squatter's rights" over the property. The trial court dismissed the claim and
held that no such purchase ever took place.94 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, Carino's 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.95

The execution of the Decision in the first case was again forestalled when Llanes, Cariño's sister-in-
law who was another occupant of Lot 4, filed another suit against the same respondent. Like Cariño,
Llanes insisted on having purchased the subject lot from Valencia.96 This Court ruled that the suit
was barred by res judicata. There was a substantial identity of parties, because the right claimed by
both Cariño and Llanes were based on each one's alleged purchase of Valencia's "squatter's
rights."97

In the first case, sales of "squatter's rights" were already categorically declared null and void for
being contrary to law. Thus, Llanes' admission that she had purchased Valencia's "squatter's rights"
placed her in the same category as Cariño. The purchase could not be treated differently, because
the final and executory Decision held that allpurchases of "squatter's rights" (regardless of who the
purchasers were) were null and void.98

Further, the earlier ruling held that "the present occupants are illegal squatters." That ruling included
Llanes, who was admittedly one of the occupants.99 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 "squatter's 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 Cariño 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 Bank100 as a bar
by res judicatawith 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.101

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.102 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.103 The violation of each of these separate rights is a separate cause of action in
itself.104 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.105

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, VISCO's 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 latter's creditors.

The CA found no merit in petitioner's 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.106 In fact, rescission implies that there is a contract that, while initially
valid, produces a lesion or pecuniary damage to someone.107Thus, when the CA confined itself to the
issue of the validity of these contracts, it did not at all address the heart of petitioner's cause of
action: whether these transactions had been undertaken by the Consortium to defraud VISCO's
other creditors.

There is more than a preponderance of evidence showing the Consortium's deliberate plan to
defraud VISCO's other creditors.
Consortium Banks as Directors

It will be recalled that Respondent Consortium took over management and control of VISCO by
acquiring 90 percent of the latter's equity. Thus, 9 out of the 10 directors of the corporation were all
officials of the Consortium,108 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.109

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.110 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 corporation's 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.111 In the instant case, the Consortium miserably failed to observe its duty of fidelity towards
VISCO and its creditors.

Duty of the Consortium Banks

to VISCO's 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,112 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 petitioner's credit.

Quite the opposite, they even took steps to hide VISCO's unexpended funds. Garcia's 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.113 This express intent of the latter, under the
direction and for the benefit of the Consortium, corroborated petitioner's contention that respondent
banks had defrauded VISCO's creditors.

Assignment 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 latter's 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 respondent's mortgage. It will be recalled that this mortgage
remained unrecorded and not legally binding on the other creditors.114 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
DBP's primary lien through an assignment by allowing it to pay VISCO's 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 VISCO's assets might not be enough to meet its obligations
to several creditors,115 the intention to defraud the other creditors is even more striking. Fraud is
present when the debtor knows that its actions would cause injury.116

The assignment in favor of the Consortium was a rescissible contract for having been undertaken in
fraud of creditors.117 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 VISCO's 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 purchase, or
before they get notice of some other persons' claim of interest in the property.118

In the present case, petitioner failed to discharge its burden of proving bad faith on the part of NSC.
There is insufficient evidence on record that the latter participated in the design to defraud VISCO's
creditors. To NSC, petitioner imputes fraud from the sole fact that the former was allegedly aware
that its vendor, the Consortium, had taken control over VISCO including the corporation's
assets.119 We cannot appreciate how knowledge of the takeover would necessarily implicate anyone
in the Consortium's fraudulent designs. Besides, NSC was not shown to be privy to the information
that VISCO had no other assets to satisfy other creditors' respective claims.

The right of an innocent purchaser for value must be respected and protected, even if its vendors
obtained their title through fraud.120 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.

Award of Damages

It is essential that for damages to be awarded, a claimant must satisfactorily prove during the trial
that they have a factual basis, and that the defendant's acts have a causal connection to
them.121 Thus, the question of damages should normally call for a remand of the case to the lower
court for further proceedings. Considering, however, the length of time that petitioner's just claim has
been thwarted, we find it in 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.

Going over the records of the case, we find that petitioner has a final and executory judgment in its
favor in Civil Case No. 21272. The judgment in that case reads as follows:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering defendant

VISCO/SRM to pay the plaintiffs the sum of P851,316.19 with interest thereon at the legal
rate from the filing of this complaint, plus attorney's fees of P50,000.00 and to pay the
costs."122

The foregoing is the judgment credit that petitioner cannot enforce against VISCO because of
Respondent Consortium's fraudulent disposition of the corporation's 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 pursuant to Article 1385.

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.123 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.124 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 Consortium's 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 attorney's 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.

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a "common fund." Their contribution may be in the
form of credit or industry, not necessarily cash or fixed assets. Being partner, they are all liable for
debts incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of
an unincorporated association or ostensible corporation may lie in a person who may not have
directly transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same
is hereby affirmed. 2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the
CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to
the modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the

fishing nets covered by the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices

and computed on their respective amounts as follows:
 i. Accrued interest of P73,221.00 on Invoice No.
14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No.

14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No.

14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing

P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage

charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or
for the unpaid price of nets and floats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount P600,045.00, this Court
noted that these items were attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement of the parties, and, to
avoid further deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for which the
plaintiff was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced
the attached property as a guaranty for any judgment that plaintiff may be
able to secure in this case with the ownership and possession of the nets and
floats awarded and delivered by the sheriff to plaintiff as the highest bidder in
the public auction sale. It has also been noted that ownership of the nets
[was] retained by the plaintiff until full payment [was] made as stipulated in
the invoices; hence, in effect, the plaintiff attached its own properties. It [was]
for this reason also that this Court earlier ordered the attachment bond filed
by plaintiff to guaranty damages to defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor
of defendants.

From the foregoing, it would appear therefore that whatever judgment the
plaintiff may be entitled to in this case will have to be satisfied from the
amount of P900,000.00 as this amount replaced the attached nets and floats.
Considering, however, that the total judgment obligation as computed above
would amount to only P840,216.92, it would be inequitable, unfair and unjust
to award the excess to the defendants who are not entitled to damages and
who did not put up a single centavo to raise the amount of P900,000.00 aside
from the fact that they are not the owners of the nets and floats. For this
reason, the defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and floats and for the
reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. 3
 The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a
business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement.
The total price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were
also sold to the Corporation. 4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as
shown by a Certification from the Securities and Exchange Commission. 5 On September 20, 1990,
the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the
fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro
Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting
a reasonable time within which to pay. He also turned over to respondent some of the nets which
were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his
right to cross-examine witnesses and to present evidence on his behalf, because of his failure to
appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim
and Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial court maintained the
Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public auction.
Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales
proceeds of P900,000. 7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three 9 in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of
contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages. 10 The
Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four
(4) vessels sold in the amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full payment for
P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong
Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher
price than P5,750,000.00 whatever will be the excess will be divided
into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than

P5,750,000.00 whatever the deficiency shall be shouldered and paid
 to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua;
1/3 Peter Yao. 11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations,
but that joint liability could be presumed from the equal distribution of the profit and loss. 21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as a such for the fishing nets and floats purchased by and for
the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial fishing .
. . . Oviously, the ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is . . . . By a contract of
partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the profits among themselves
(Article 1767, New Civil Code). 13

Hence, petitioner brought this recourse before this Court. 14

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE

AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING

FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS
FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN
IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND

ATTACHMENT OF PETITIONER LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats from respondent,
the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to
have entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

 Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he
disclaims any direct participation in the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even met the representatives of the
respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao,
for the "Contract of Lease " dated February 1, 1990, showed that he had merely leased to the two
the main asset of the purported partnership — the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767
of the Civil Code which provides:

Art. 1767 — By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings: 15

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao's partner;

(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to
serve as security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to
the partnership in the amount of P1 million secured by a check, because of which,
Yao and Chua entrusted the ownership papers of two other boats, Chua's FB Lady
Anne Mel and Yao's FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua
bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest
Fishing Corporation," their purported business name.
 (8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,
Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration
of nullity of commercial documents; (b) reformation of contracts; (c) declaration of
ownership of fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a
loan secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and
to divide equally among them the excess or loss. These boats, the purchase and the repair of which
were financed with borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the sale and operation of the boats
would be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to
that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their business. It would have been inconceivable for Lim to
involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be
divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to the
rule. 16 In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the
bounds of a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership
was the Compromise Agreement. He also claims that the settlement was entered into only to end
the dispute among them, but not to adjudicate their preexisting rights and obligations. His arguments
are baseless. The Agreement was but an embodiment of the relationship extant among the parties
prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise
all relevant facts. Both lower courts have done so and have found, correctly, a preexisting
partnership among the parties. In implying that the lower courts have decided on the basis of one
piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the
history of the document and explored all the possible consequential combinations in harmony with
law, logic and fairness. Verily, the two lower courts' factual findings mentioned above nullified
petitioner's argument that the existence of a partnership was based only on the Compromise
Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua
and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of
Lease and the registration papers showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale
of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided
among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale
proved that there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and
Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the
vessels which would be used in their fishing business. The sale of the boats, as well as the division
among the three of the balance remaining after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was not his own property but an asset of the
partnership. It is not uncommon to register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a
debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee,
instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him. Again, we disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.

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.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, 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. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility
for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may
be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for
the nets it sold. The only question here is whether petitioner should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does not appear on any of the contracts
and since he never directly transacted with the respondent corporation, ergo, he cannot be held
liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the attachment
of the nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law
on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine
of corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor: 19

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 aside 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.
 Third Issue:

Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We
agree with the Court of Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of
petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats
were specifically manufactured and tailor-made according to their own design, and were bought and
used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment
of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the
nets remained with Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.