G.R. No. L-64013 November 28, 1983 UNION GLASS & CONTAINER CORPORATION and CARLOS PALANCA, JR.

, in his capacity as President of Union Glass & Container Corporation, petitioners, vs. THE SECURITIES AND EXCHANGE COMMISSION and CAROLINA HOFILENA, respondents. ESCOLIN, J.: This petition for certiorari and prohibition seeks to annul and set aside the Order of the Securities and Exchange Commission, dated September 25, 1981, upholding its jurisdiction in SEC Case No. 2035, entitled "Carolina Hofilea, Complainant, versus Development Bank of the Philippines, et al., Respondents." Private respondent Carolina Hofilea, complainant in SEC Case No. 2035, is a stockholder of Pioneer Glass Manufacturing Corporation, Pioneer Glass for short, a domestic corporation engaged in the operation of silica mines and the manufacture of glass and glassware. Since 1967, Pioneer Glass had obtained various loan accommodations from the Development Bank of the Philippines [DBP], and also from other local and foreign sources which DBP guaranteed. As security for said loan accommodations, Pioneer Glass mortgaged and/or assigned its assets, real and personal, to the DBP, in addition to the mortgages executed by some of its corporate officers over their personal assets. The proceeds of said financial exposure of the DBP were used in the construction of a glass plant in Rosario, Cavite, and the operation of seven silica mining claims owned by the corporation. It appears that through the conversion into equity of the accumulated unpaid interests on the various loans amounting to P5.4 million as of January 1975, and subsequently increased by another P2.2 million in 1976, the DBP was able to gain control of the outstanding shares of common stocks of Pioneer Glass, and to get two, later three, regular seats in the corporation's board of directors. Sometime in March, 1978, when Pioneer Glass suffered serious liquidity problems such that it could no longer meet its financial obligations with DBP, it entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full satisfaction of the corporation's obligations in the total amount of P59,000,000.00. Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which DBP leased and subsequently sold to herein petitioner Union Glass and Container Corporation, hereinafter referred to as Union Glass. On April 1, 1981, Carolina Hofilea filed a complaint before the respondent Securities and Exchange Commission against the DBP, Union Glass and Pioneer Glass, docketed as SEC Case No. 2035. Of the five causes of action pleaded therein, only the first cause of action concerned petitioner Union Glass as transferee and possessor of the glass plant. Said first cause of action was based on the alleged illegality of the aforesaid dacion en pago resulting from: [1] the supposed unilateral

and unsupported undervaluation of the assets of Pioneer Glass covered by the agreement; [2] the self-dealing indulged in by DBP, having acted both as stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when the same had already been converted into equity. Thus, with respect to said first cause of action, respondent Hofilea prayed that the SEC issue an order: 1. Holding that the so called dacion en pago conveying all the assets of Pioneer Glass and the Hofilea personal properties to Union Glass be declared null and void on the ground that the said conveyance was tainted with.t.hqw A. Self-dealing on the part of DBP which was acting both as a controlling stockholder/director and as secured creditor of the Pioneer Glass, all to its advantage and to that of Union Glass, and to the gross prejudice of the Pioneer Glass, B. That the dacion en pago is void because there was gross undervaluation of the assets included in the so-called dacion en pago by more than 100% to the prejudice of Pioneer Glass and to the undue advantage of DBP and Union Glass; C. That the DBP unduly favored Union Glass over another buyer, San Miguel Corporation, notwithstanding the clearly advantageous terms offered by the latter to the prejudice of Pioneer Glass, its other creditors and so-called 'Minority stockholders.' 2. Holding that the assets of the Pioneer Glass taken over by DBP and part of which was delivered to Union Glass particularly the glass plant to be returned accordingly. 3. That the DBP be ordered to accept and recognize the appraisal conducted by the Asian Appraisal Inc. in 1975 and again in t978 of the asset of Pioneer Glass. 1 In her common prayer, Hofilea asked that DBP be sentenced to pay Pioneer Glass actual, consequential, moral and exemplary damages, for its alleged illegal acts and gross bad faith; and for DBP and Union Glass to pay her a reasonable amount as attorney's fees. 2 On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981, petitioners moved for dismissal of the case on the ground that the SEC had no jurisdiction over the subject matter or nature of the suit. Respondent Hofilea filed her opposition to said motion, to which herein petitioners filed a rejoinder. On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom the case was assigned, granted the motion to dismiss for lack of jurisdiction. However, on September 25, 1981, upon motion for reconsideration filed by respondent Hofilea, Hearing Officer Reyes reversed his original order by upholding the SEC's jurisdiction

over the subject matter and over the persons of petitioners. Unable to secure a reconsideration of the Order as well as to have the same reviewed by the Commission En Banc, petitioners filed the instant petition for certiorari and prohibition to set aside the order of September 25, 1981, and to prevent respondent SEC from taking cognizance of SEC Case No. 2035. The issue raised in the petition may be propounded thus: Is it the regular court or the SEC that has jurisdiction over the case? In upholding the SEC's jurisdiction over the case Hearing Officer Reyes rationalized his conclusion thus: As correctly pointed out by the complainant, the present action is in the form of a derivative suit instituted by a stockholder for the benefit of the corporation, respondent Pioneer Glass and Manufacturing Corporation, principally against another stockholder, respondent Development Bank of the Philippines, for alleged illegal acts and gross bad faith which resulted in the dacion en pago arrangement now being questioned by complainant. These alleged illegal acts and gross bad faith came about precisely by virtue of respondent Development Bank of the Philippine's status as a stockholder of co-respondent Pioneer Glass Manufacturing Corporation although its status as such stockholder, was gained as a result of its being a creditor of the latter. The derivative nature of this instant action can also be gleaned from the common prayer of the complainant which seeks for an order directing respondent Development Bank of the Philippines to pay corespondent Pioneer Glass Manufacturing Corporation damages for the alleged illegal acts and gross bad faith as above-mentioned. As far as respondent Union Glass and Container Corporation is concerned, its inclusion as a party-respondent by virtue of its being an indispensable party to the present action, it being in possession of the assets subject of the dacion en pago and, therefore, situated in such a way that it will be affected by any judgment thereon, 3 In the ordinary course of things, petitioner Union Glass, as transferee and possessor of the glass plant covered by the dacion en pago agreement, should be joined as party-defendant under the general rule which requires the joinder of every party who has an interest in or lien on the property subject matter of the dispute. 4 Such joinder of parties avoids multiplicity of suits as well as ensures the convenient, speedy and orderly administration of justice. But since petitioner Union Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as party-defendant in SEC Case No. 2035 brings the cause of action asserted against it outside the jurisdiction of the respondent SEC. The jurisdiction of the SEC is delineated by Section 5 of PD No. 902-A as follows: Sec. 5. In addition to the regulatory and adjudicative function of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under

existing laws and devices, it shall have original and exclusive jurisdiction to hear and decide cases involving: a] Devices and schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or the stockholders, partners, members of associations or organizations registered with the Commission b] Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership, or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; c] Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. This grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter "absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the Philippines ... " The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development.
5

It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly specified and delimited its jurisdiction to matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with the internal affairs of such corporations, partnerships or associations. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [a] between the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners, members, or officers; [c] between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; and [d] among the stockholders, partners or associates themselves. The fact that the controversy at bar involves the rights of petitioner Union Glass who has no intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. This view is in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction 6 and, as such, could wield only such powers as are specifically granted to them by their enabling statutes. 7 As We held in Sunset View Condominium Corp. vs. Campos, Jr.: 8

Inasmuch as the private respondents are not shareholders of the petitioner condominium corporation, the instant cases for collection cannot be a 'controversy arising out of intra-corporate or partnership relations between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively,' which controversies are under the original and exclusive jurisdiction of the Securities & Exchange Commission, pursuant to Section 5 [b] of P.D. No. 902-A. ... As heretofore pointed out, petitioner Union Glass is involved only in the first cause of action of Hofileas complaint in SEC Case No, 2035. While the Rules of Court, which applies suppletorily to proceedings before the SEC, allows the joinder of causes of action in one complaint, such procedure however is subject to the rules regarding jurisdiction, venue and joinder of parties. 9 Since petitioner has no intracorporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule or jurisdiction. Hofileas complaint against petitioner for cancellation of the sale of the glass plant should therefore be brought separately before the regular court But such action, if instituted, shall be suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of the dacion en pago posed in the last mentioned case is a prejudicial question, the resolution of which is a logical antecedent of the issue involved in the action against petitioner Union Glass. Thus, Hofileas complaint against the latter can only prosper if final judgment is rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP. WHEREFORE, the instant petition is hereby granted, and the questioned Orders of respondent SEC, dated September 25, 1981, March 25, 1982 and May 28, 1982, are hereby set aside. Respondent Commission is ordered to drop petitioner Union Glass from SEC Case No. 2035, without prejudice to the filing of a separate suit before the regular court of justice. No pronouncement as to costs. SO ORDERED. Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova and Gutierrez, Jr., JJ., concur. Fernando, C.J. and Makasiar, J., join Aquino, J., dissent. Separate Opinions TEEHANKEE, J., concurring: I concur in the Court's judgment penned by Mr. Justice Escolin setting aside the questioned orders of respondent SEC and ordering that petitioner Union Glass be dropped from SEC Case No. 2035 for lack of SEC jurisdiction over it as a third party purchaser of the glass plant acquired by the DBP by dacion en pago from Pioneer Glass, without prejudice to Hofilea filing a separate suit in the regular courts of justice against Union Glass for recovery and cancellation of the said sale of the glass plant in favor of Union Glass.

I concur also with the statement in the Court's opinion that the final outcome of SEC Case No. 2035 with regard to the validity of the dacion en pago is a prejudicial case. If Hofilea's complaint against said dacion en pago fails in the SEC, then it clearly has no cause of action against Union Glass for cancellation of DBP's sale of the plant to Union Glass. The purpose of this brief concurrence is with reference to the statement in the Court's opinion that "Thus, Hofileas complaint against the latter can only prosper if final judgment is rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP," to erase any impression that a favorable judgment secured by Hofilea in SEC Case No. 2035 against the DBP and Pioneer Glass would necessarily mean that its action against Union Glass in the regular courts of justice for recovery and cancellation of the DBP sale of the glass plant to Union Glass would necessarily prosper. It must be borne in mind that as already indicated, the SEC has no jurisdiction over Union Glass as an outsider. The suit in the regular courts of justice that Hofilea might bring against Union Glass is of course subject to all defenses as to the validity of the sale of the glass plant in its favor as a buyer in good faith and should it successfully substantiate such defenses, then Hofileas action against it for cancellation of the sale might fail as a consequence. AQUINO, J., dissenting: I dissent with due deference to Justice Escolin's opinion. What are belatedly assailed in this certiorari and prohibition case filed on May 17, 1983 are the order of September 25, 1981 of Eugenio E. Reyes, a SEC hearing officer, and the orders of March 25 and May 28, 1982 of Antonio R. Manabat, another SEC hearing officer. Although a jurisdictional issue is raised and jurisdiction over the subject matter may be raised at any stage of the case, nevertheless, the petitioners are guilty of laches and nonexhaustion of the remedy of appeal with the Securities and Exchange Commission en banc. The petitioners resorted to the special civil actions of certiorari and prohibition because they assail the orders of mere SEC hearing officers. This is not a review of the order, decision or ruling of the SEC sitting en banc which, according to section 6 of Presidential Decree No. 902-A (1976), may be made by this Court "in accordance with the pertinent provisions of the Rules of Court." Rule 43 of the Rules of Court used to allow review by this Court of the SEC order, ruling or decision. Republic Act 5434 (1968) substituted the Court of Appeals for this Court in line with the policy of lightening our heavy jurisdictional burden. But this Court seems to have been restored as the reviewing authority by Presidential Decree No. 902-A. However, section 9 of the Judiciary Reorganization Law returned to the Intermediate Appellate Court the exclusive jurisdiction to review the ruling, order or decision of the SEC as a quasi-judicial agency. The same section 9 granted to the Appellate Court jurisdiction in certiorari and prohibition cases over the SEC although not exclusive.

In this case, the SEC seems to have adopted the orders of the two hearing officers as its own orders as shown by the stand taken by the Solicitor General in defending the SEC. If that were so, that is, if the orders of the hearing officers should be treated as the orders of the SEC itself en banc, this Court would have no jurisdiction over this case. It should be the Appellate Court that should exercise the power of review. Carolina Hofilea has been a stockholder since 1958 of the Pioneer Glass Manufacturing Corporation. Her personal assets valued at P6,804,810 were apparently or supposedly mortgaged to the DBP to secure the obligations of Pioneer Glass (p. 32, Rollo). Pioneer Glass became indebted to the Development Bank of the Philippines in the total sum of P59,000,000. Part of the loan was used by Pioneer Glass to establish its glass plant in Rosario, Cavite. The unpaid interest on the loan amounting to around seven million pesos became the DBP's equity in Pioneer Glass. The DBP became a substantial stockholder of Pioneer Glass. Three members of the Pioneer Glass' board of directors were from the DBP. The glass plant commenced operations in 1977. At that time, Pioneer Glass was heavily indebted to the DBP. Instead of foreclosing its mortgage, DBP maneuvered to have the mortgaged assets of Pioneer Glass, including the glass plant, transferred to the DBP by way of dacion en pago. This transaction was alleged to be an "auto contract" or a case of the DBP contracting with itself since the DBP had a dominant position in Pioneer Glass. Hofilea alleged that although the debt to the DBP of Pioneer Glass amounted to P59,000,000, the glass plant in 1977 had a "sound value" of P77,329,000 and a "reproduction cost" of P90,403,000. She further alleged that San Miguel Corporation was willing to buy the glass plant for P40,000,000 cash, whereas it was actually sold to Union Glass & Container Corporation for the same amount under a 25-year term of payment (pp. 32-34, Rollo). On March 31, 1981; Carmen Hofilea filed with the SEC a complaint against the DBP, Union Glass, Pioneer Glass and Rafael Sison as chairman of the DBP and Pioneer Glass boards of directors. Union Glass filed a motion to dismiss on the ground that jurisdiction over the case is lodged in the Court of First Instance. Hofilea opposed the motion. Hearing Officer Reyes in his order of July 23, 1981 dismissed the complaint on the ground that the case is beyond the jurisdiction of the SEC. Hofilea filed a motion for reconsideration which was opposed by Union Glass. Hearing Officer Reyes in his order of September 25, 1981 reconsidered his dismissal order and ruled that Union Glass is an indispensable party because it is the transferee of the controverted assets given by way of dacion en pago to the DBP. He ruled that the SEC has jurisdiction over the case. Union Glass filed a motion for reconsideration. Hearing Officer Antonio R. Manabat denied the motion on the ground "that the present action is an intra-corporate dispute involving stockholders of the same corporation (p. 26, Rollo).

Union Glass filed a second motion for reconsideration with the prayer that the SEC should decide the motion en banc. The hearing officer ruled that the remedy of Union Glass was to file a timely appeal. Hence, its second motion for reconsideration was denied by the hearing officer. (This ruling is a technicality which hinders substantial justice.) It is clear that Union Glass has no cause of action for certiorari and prohibition. Its recourse was to appeal to the SEC en banc the denial of its first motion for reconsideration. There is no question that the SEC has jurisdiction over the intra-corporate dispute between Hofilea and the DBP, both stockholders of Pioneer Glass, over the dacion en pago. Now, does the SEC lose jurisdiction because of the joinder of Union Glass which has privity with the DBP since it was the transferee of the assets involved in the dacion en pago? Certainly, the joinder of Union Glass does not divest the SEC of jurisdiction over the case. The joinder of Union Glass is necessary because the DBP, its transfer or, is being sued regarding the dacion en pago. The defenses of Union Glass are tied up with the defenses of the DBP in the intra-corporate dispute. Hofileas cause of action should not be split. It would not be judicious and expedient to require Hofilea to sue the DBP and Union Glass in the Regional Trial Court. The SEC is more competent than the said court to decide the intra-corporate dispute. The SEC, as the agency enforcing Presidential Decree No. 902-A, is in the best position to know the extent of its jurisdiction. Its determination that it has jurisdiction in this case has persuasive weight. Footnotes 1 p. 38. Rollo. 2 p. 40, Rollo. 3 p. 24, Rollo. 4 59 Am. Jur. 2d 530. 5 Vide, Whereas Clauses of P.D. 902-A. 6 2 Am. Jur. 2d. 150. 7 2 Am., Jur. 2d. 21.

8 104 SCRA 295. 9 Section 5, Rule 2 of the Rules of Court.

2. In SEC Case No. 02379, they prayed for mandamus from the SEC ordering Norberto Braga, as corporate secretary of Pocket Bell to register in their names the transfer and sale of the aforesaid 196,000 Pocket Bell shares (of the Abejos 1 and Virginia Braga 2 , cancel the surrendered certificates as duly endorsed and to issue new certificates in their names. 3. In SEC Case No. 02395, they prayed for injunction and a temporary restraining order that the SEC enjoin the Bragas from disbursing or disposing funds and assets of Pocket Bell and from performing such other acts pertaining to the functions of corporate officers. 4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion to Dismiss the mandamus case (SEC Case No. 02379) contending that the SEC has no jurisdiction over the nature of the action since it does not involve an intracorporate controversy between stockholders, the principal petitioners therein, Telectronics, not being a stockholder of record of Pocket Bell. 5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay denied the motion. On January 14, 1983, the corporate secretary filed a Motion for Reconsideration. On March 21, 1983, SEC Hearing Officer Joaquin Garaygay issued an order granting Braga's motion for reconsideration and dismissed SEC Case No. 02379. 6. On February 11, 1983, the Bragas filed their Motion to Dismiss the injunction case, SEC Case No. 02395. On April 8, 1985, the SEC Director, Eugenio Reyes, acting upon the Abejos' ex-parte motion, created a three-man committee composed of Atty. Emmanuel Sison as Chairman and Attys. Alfredo Oca and Joaquin Garaygay as members, to hear and decide the two SEC cases (Nos. 02379 and 02395). 7. On April 13, 1983, the SEC three-man committee issued an order reconsidering the aforesaid order of March 21, 1983 of the SEC Hearing Officer Garaygay (dismissing the mandamus petition SEC Case No. 02379) and directing corporate secretary Norberto Braga to file his answer to the petitioner therein. B. BRAGAS' ACTION IN SEC 8. On December 12, 1983, the Bragas filed a petition for certiorari, prohibition and mandamus with the SEC en banc, SEC Case No. EB #049, seeking the dismissal of SEC Cases Nos. 02379 and 02395 for lack of jurisdiction of the Commission and the setting aside of the various orders issued by the SEC three-man committee in the course of the proceedings in the two SEC cases. 9. On May 15, 1984, the SEC en banc issued an order dismissing the Bragas' petition in SEC Case No. EB #049 for lack of merit and at the same time ordering the SEC Hearing Committee to continue with the hearings of the Abejos and Telectronics SEC Cases Nos. 02379 and 02395, ruling that the "issue is not the ownership of shares but rather the non-performance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary." 10. On May 15, 1984 the Bragas filed a motion for reconsideration but the SEC en banc denied the same on August 9, 1984. C. BRAGAS' ACTION IN CFI (NOW RTC)

SPOUSES JOSE ABEJO AND AURORA ABEJO, TELECTRONIC SYSTEMS, INC., petitioners, vs. HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT (NATIONAL CAPITAL JUDICIAL REGION, BRANCH CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA BRAGA, VIRGILIO BRAGA AND NORBERTO BRAGA, respondents.1987 May 191st DivisionG.R. No. L-63558D E C ISION TEEHANKEE, C.J: These two cases, jointly heard, are jointly herein decided. They involve the question of who, between the Regional Trial Court and the Securities and Exchange Commission (SEC), has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging corporation," namely, the spouses Jose Abejo and Aurora Abejo (hereinafter referred to as the Abejos) and the purchaser, Telectronic Systems, Inc. (hereinafter referred to as Telectronics) of their 133,000 minority shareholdings (for P5 million) and of 63,000 shares registered in the name of Virginia Braga and covered by five stock certificates endorsed in blank by her (for P1,674,450.00), and the spouses Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile majority stockholders. With the said purchases, Telectronics would become the majority stockholder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell. With the said purchases in 1982, Telectronics requested the corporate secretary of the corporation, Norberto Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of stock in its name and those of its nominees. Norberto Braga, the corporate secretary and son of the Bragas, refused to register the aforesaid transfer of shares in the corporate books, asserting that the Bragas claim pre-emptive rights over the 133,000 Abejo shares and that Virginia Braga never transferred her 63,000 shares to Telectronics but had lost the five stock certificates representing those shares. This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute, which were to culminate in the filing of the two cases at bar. The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and Exchange Commission, while the Abejos claim the contrary. A summary of the actions resorted to by the parties follows: A. ABEJOS' ACTIONS IN SEC 1. The Abejos and Telectronics and the latter's nominees, as new majority shareholders, filed SEC Cases Nos. 02379 and 02395 against the Bragas on December 17, 1982 and February 14, 1983, respectively.

11. On November 25, 1982, following the corporate secretary's refusal to register the transfer of the shares in question, the Bragas filed a complaint against the Abejos and Telectronics in the Court of First Instance of Pasig, Branch 21 (now the Regional Trial Court, Branch 160) docketed as Civil Case No. 48746 for: (a) rescission and annulment of the sale of the shares of stock in Pocket Bell made by the Abejos in favor of Telectronics on the ground that it violated the Bragas' alleged pre-emptive right over the Abejos' shareholdings and an alleged perfected contract with the Abejos to sell the same shares in their (Bragas) favor, (1st cause of action); plus damages for bad faith; and (b) declaration of nullity of any transfer, assignment or endorsement of Virginia Bragas' stock certificates for 63,000 shares in Pocket Bell to Telectronics for want of consent and consideration, alleging that said stock certificates, which were intended as security for a loan application and were thus endorsed by her in blank, had been lost (2nd cause of action). 12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint on the ground that it is the SEC that is vested under PD 902-A with original and exclusive jurisdiction to hear and decide cases involving, among others, controversies "between and among stockholders" and that the Bragas' suit is such a controversy as the issues involved therein are the stockholders" alleged pre-emptive rights, the validity of the transfer and endorsement of certificates of stock, the election of corporate officers and the management and control of the corporation's operations. The dismissal motion was granted by Presiding Judge G. Pineda on January 14, 1983. 13. On January 24, 1983, the Bragas filed a motion for reconsideration. The Abejos opposed. Meanwhile, respondent Judge Rafael de la Cruz was appointed presiding judge of the court (renamed Regional Trial Court) in place of Judge G. Pineda. 14. On February 14, 1983, respondent Judge de la Cruz issued an order rescinding the January 14, 1983 order and reviving the temporary restraining order previously issued on December 23, 1982 restraining Telectronics' agents or representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their functions. 15. On March 2, 1983, the Abejos filed a motion for reconsideration, which motion was duly opposed by the Bragas. On March 11, 1983, respondent Judge denied the motion for reconsideration. D. ABEJOS' PETITION AT BAR 16. On March 26, 1983, the Abejos, alleging that the acts of respondent Judge in refusing to dismiss the complaint despite clear lack of jurisdiction over the action and in refusing to reconsider his erroneous position were performed without jurisdiction and with grave abuse of discretion, filed their herein Petition for Certiorari and Prohibition with Preliminary Injunction. They prayed that the challenged orders of respondent Judge dated February 14, 1983 and March 11, 1983 be set aside for lack of jurisdiction and that he be ordered to permanently desist from further proceedings in Civil Case No. 48746. Respondent judge desisted from further proceedings in the case, dispensing with the need of issuing any restraining order. E. BRAGAS' PETITION AT BAR

17. On August 29, 1984, the Bragas, alleging in turn that the SEC has no jurisdiction over SEC Cases Nos. 02379 and 02395 and that it acted arbitrarily, whimsically and capriciously in dismissing their petition (in SEC Case No. EB #049) for dismissal of the said cases, filed their herein Petition for Certiorari and Prohibition with Preliminary Injunction or TRO. The petitioner seeks the reversal and/or setting aside of the SEC Order dated May 15, 1984 dismissing their petition in said SEC Case No. EB #049 and sustaining its jurisdiction over SEC Cases Nos. 02379 and 02395, filed by the Abejos. On September 24, 1984, this Court issued a temporary restraining order to maintain the status quo and restrained the SEC and/or any of its officers or hearing committees from further proceeding with the hearings in SEC Cases Nos. 02379 and 02395 and from enforcing any and all orders and or resolutions issued in connection with the said cases. The cases, having been given due course, were jointly heard by the Court on March 27, 1985 and the parties thereafter filed on April 16, 1985 their respective memoranda in amplification of oral argument on the points of law that were crystallized during the hearing. The Court rules that the SEC has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell, namely, the Abejos and Telectronics, the purchasers of the 56% majority stock (supra, at page 2) on the one hand, and the Bragas, erstwhile majority stockholders, on the other, and that the SEC, through its en banc Resolution of May 15, 1984 correctly ruled in dismissing the Bragas' petition questioning its jurisdiction, that "the issue is not the ownership of shares but rather the non-performance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the Corporation of which he is secretary." 1. The SEC ruling upholding its primary and exclusive jurisdiction over the dispute is correctly premised on, and fully supported by, the applicable provisions of P.D. No. 902-A which reorganized the SEC with additional powers "in line with the government's policy of encouraging investments, both domestic and foreign, and more active public participation in the affairs of private corporations and enterprises through which desirable activities may be pursued for the promotion of economic development; and, to promote a wider and more meaningful equitable distribution of wealth," and accordingly provided that: "SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines; . . . "SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devices or schemes employed by or any acts, of the board of directors, business associations, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission. b) Controversies arising out of intracorporate or partnership relations, between and among stockholders, members, or associates; between any and/or all of them and the corporation, partnership or association of which they are stockholders, members

or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations." 3 Section 6 further grants the SEC "in order to effectively exercise such jurisdiction," the power, inter alia, "to issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply." 2. Basically and indubitably, the dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary, backed up by his parents as erstwhile majority shareholders, to perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of Telectronics as the purchaser thereof. Mandamus in the SEC to compel the corporate secretary to register the transfers and issue new certificates in favor of Telectronics and its nominees was properly resorted to under Rule XXI, Section 1 of the SEC's New Rules of Procedure, 4 which provides for the filing of such petitions with the SEC. Section 3 of said Rules further authorizes the SEC to "issue orders expediting the proceedings . . . and also [to] grant a preliminary injunction for the preservation of the rights of the parties pending such proceedings." The claims of the Bragas, which they assert in their complaint in the Regional Trial Court, praying for rescission and annulment of the sale made by the Abejos in favor of Telectronics on the ground that they had an alleged perfected pre-emptive right over the Abejos' shares as well as for annulment of sale to Telectronics of Virginia Braga's shares covered by street certificates duly endorsed by her in blank, may in no way deprive the SEC of its primary and exclusive jurisdiction to grant or not the writ of mandamus ordering the registration of the shares so transferred. The Bragas' contention that the question of ordering the recording of the transfers ultimately hinges on the question of ownership or right thereto over the shares notwithstanding, the jurisdiction over the dispute is clearly vested in the SEC. 3. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged pre-emptive rights in the case of the Abejos' shares and alleged loss of the certificates and lack of consent and consideration in the case of Virginia Braga's shares. Such dispute clearly involves controversies "between and among stockholders," as to the Abejos' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with the right to elect the corporate officers and the management and control of its operations. Such a dispute and case clearly fall within the original and exclusive jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A, above-quoted. The restraining order issued by the Regional Trial Court restraining Telectronics agents and representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their functions patently encroached upon the SEC's exclusive jurisdiction over such specialized corporate controversies calling for its special competence. As stressed by the Solicitor General on behalf of the SEC, the Court has held that

"Nowhere does the law [PD 902-A] empower any Court of First Instance [now Regional Trial Court] to interfere with the orders of the Commission," 5 and consequently "any ruling by the trial court on the issue of ownership of the shares of stock is not binding on the Commission" 6 for want of jurisdiction. 4. The dispute therefore clearly falls within the general classification of cases within the SEC's original and exclusive jurisdiction to hear and decide, under the aforequoted governing section 5 of the law. Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and misrepresentation employed by them to keep themselves in control of the corporation to the detriment of Telectronics (as buyer and substantial investor in the corporate stock) and the Abejos (as substantial stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy between and among the majority and minority stockholders as to the transfer and disposition of the controlling shares of the corporation, falling under paragraph (b). As stressed by the Court in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., 7 "Considering the announced policy of PD 902-A, the expanded jurisdiction of the respondent Securities and Exchange Commission under said decree extends exclusively to matters arising from contracts involving investments in private corporations, partnerships and associations." The dispute also concerns the fundamental issue of whether the Bragas or Telectronics have the right to elect the corporate directors and officers and manage its business and operations, which falls under paragraph (c). 5. Most of the cases that have come to this Court involve those under paragraph (b), i e. whether the controversy is an intra-corporate one, arising "between and among stockholders" or "between any or all of them and the corporation." The parties have focused their arguments on this question. The Bragas' contention in his field must likewise fail. In Philex Mining Corp. v. Reyes, 8 the Court spelled out that "an intra-corporate controversy is one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations. The issue of whether or not a corporation is bound to replace a stockholder's lost certificate of stock is a matter purely between a stockholder and the corporation. It is a typical intra-corporate dispute. The question of damages raised is merely incidental to that main issue." The Court rejected the stockholders' theory of excluding his complaint (for replacement of a lost stock [dividend] certificate which he claimed to have never received) from the classification of intracorporate controversies as one that "does not square with the intent of the law, which is to segregate from the general jurisdiction of regular Courts controversies involving corporations and their stockholders and to bring them to the SEC for exclusive resolution, in much the same way that labor disputes are now brought to the Ministry of Labor and Employment (MOLE) and the National Labor Relations Commission (NLRC), and not to the Courts." (a) The Bragas contend that Telectronics, as buyer-transferee of the 56% majority shares is not a registered stockholder, because they, through their son the corporate secretary, appear to have refused to perform "the ministerial duty of recording transfers of shares of stock of the corporation of which he is the secretary," and that the dispute is therefore, not an intracorporate one. This contention begs the question which must properly be resolved by the SEC, but which they would prevent by their own act, through their son, of blocking the due recording of the transfer and cannot be sanctioned. It can be seen from their very complaint in the regular courts that they with their two sons constituting the

plaintiffs are all stockholders while the defendants are the Abejos who are also stockholders whose sale of the shares to Telectronics they would annul. (b) There can be no question that the dispute between the Abejos and the Bragas as to the sale and transfer of the former's shares to Telectronics for P5 million is an intracorporate one under section 5 (b), prescinding from the applicability of section 5 (a) and (c), (supra, par. 4) It is the SEC which must resolve the Bragas' claim in their own complaint in the court case filed by them of an alleged pre-emptive right to buy the Abejos' shares by virtue of "on-going negotiations," which they may submit as their defense to the mandamus petition to register the sale of the shares to Telectronics. But asserting such pre-emptive rights and asking that the same be enforced is a far cry from the Bragas' claim that "the case relates to questions of ownership" over the shares in question. 9 (Not to mention, as pointed out by the Abejos, that the corporation is not a close corporation, and no restriction over the free transferability of the shares appears in the Articles of Incorporation, as well as in the by-laws 10 and the certificates of stock themselves, as required by law for the enforcement of such restriction. See Go Soc & Sons, etc. v. IAC, G.R. No. 72342, Resolution of February 19, 1987.) (c) The dispute between the Bragas and Telectronics as to the sale and transfer for P1,674,450.00 of Virginia Braga's 63.000 shares covered by Street certificates duly endorsed in blank by her is within the special competence and jurisdiction of the SEC, dealing as it does with the free transferability of corporate shares, particularly street certificates, 11 as guaranteed by the Corporation Code and its proclaimed policy of encouraging foreign and domestic investments in Philippine private corporations and more active public participation therein for the promotion of economic development. Here again, Virginia Braga's claim of loss of her street certificates or theft thereof (denounced by Telectronics as "perjurious" 12 ) must be pleaded by her as a defense against Telectronics' petition for mandamus and recognition now as the controlling stockholder of the corporation in the light of the joint affidavit of General Cerefino S. Carreon of the National Telecommunications Commission and private respondent Jose Luis Santiago of Telectronics narrating the facts and circumstances of how the former sold and delivered to Telectronics on behalf of his compadres, the Bragas, Virginia Braga's street certificates for 63,000 shares equivalent to 18% of the corporation's outstanding stock and received the cash price thereof. 13 But as to the sale and transfer of the Abejos' shares, the Bragas cannot oust the SEC of its original and exclusive jurisdiction to hear and decide the case, by blocking through the corporate secretary, their son, the due recording of the transfer and sale of the shares in question and claiming that Telectronics is not a stockholder of the corporation which is the very issue that the SEC is called upon to resolve. As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder." 14 This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure. Furthermore, as stated in the SEC order of April 13, 1983, notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration: "Whether the refusal of the (corporation) to effect the

same is valid or not is still subject to the outcome of the hearing on the merits of the case." 15 6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction ..the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regulatory statute administered." 16 In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]'" 17 The Court in the earlier case of Ebon vs. De Guzman, 18 noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently, . . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim." 7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC with the Rule making power in the discharge of its task of implementing the provisions of the Code and particularly charges it with the duty of preventing fraud and abuses on the part of controlling stockholders, directors and officers, as follows: "SEC. 143. Rule-making power of the Securities and Exchange Commission. The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers." mphasis supplied) The dispute between the contending parties for control of the corporation manifestly falls within the primary and exclusive jurisdiction of the SEC in whom the law has reserved such jurisdiction as an administrative agency of special competence to deal promptly and expeditiously therewith. As the Court stressed in Union Glass & Container Corp. v. SEC, 19 "This grant of jurisdiction [in Section 5] must be viewed in the light of the nature and functions of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter 'absolute

jurisdiction, supervision, and control over all corporations, partnerships or associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the Philippines . . ..' The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development. "It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly specified and delimited its jurisdiction to matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with the internal affairs of such corporations, partnerships or associations. "Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [a] between the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners, members, or officers; [c] between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; and [d] among the stockholders, partners or associates themselves." 20 Parenthetically, the cited case of Union Glass illustrates by way of contrast what disputes do not fall within the special jurisdiction of the SEC. In this case, the SEC had properly assumed jurisdiction over the dissenting stockholders' complaint against the corporation Pioneer Glass questioning its dacion en pago of its glass plant and all its assets in favor of the DBP which was clearly an intra-corporate controversy dealing with its internal affairs. But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp., impleaded as third party purchaser of the plant from DBP in the action to annul the dacion en pago. The Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the regular courts only if and when the SEC rendered final judgment annulling the dacion en pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith. Similarly, in the DMRC case, therein petitioner's complaint for collection of the amounts due to it as payment of rentals for the lease of its heavy equipment in the form mainly of cash and part in shares of stock of the debtor-defendant corporation was held to be not covered by the SEC's exclusive jurisdiction over intracorporate disputes, since "to pass upon a money claim under a lease contract would be beyond the competence of the Securities and Exchange Commission and to separate the claim for money from the claim for shares of stock would be splitting a single cause of action resulting in a multiplicity of suits." 21 Such an action for collection of a debt does not involve enforcement of rights and obligations under the Corporation Code nor the internal or intracorporate affairs of the debtor corporation. But in all disputes affecting and dealing with the interests of the corporation and its stockholders, following the trend and clear legislative intent of entrusting all disputes of a specialized nature to administrative agencies possessing the requisite competence, special knowledge, experience and services and facilities to expeditiously resolve them and determine the essential facts including technical and intricate matters, as in labor and public utilities rates disputes, the SEC has been given "the original and exclusive jurisdiction to hear and decide" them (under Section 5 of P.D. 902-A) "in addition to [its] regulatory and adjudicative functions" (under Section 3, vesting in it "absolute jurisdiction, supervision and control over all corporations" and the Ruler-making power granted it in Section 143 of the Corporation Code, supra). As stressed by the Court in the Philex case, supra, "(T)here is no distinction, qualification, nor any exemption

whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations." It only remains now to deal with the Order dated April 15, 1983 (Annex H, Petition) 22 of the SEC's three-member Hearing Committee granting Telectronics' motion for creation of a receivership or management committee with the ample powers therein enumerated for the preservation pendente lite of the corporation's assets and in discharge of its "power and duty to preserve the rights of the parties, the stockholders, the public availing of the corporation's services and the rights of creditors," as well as 'for reasons of equity and justice .. (and) to prevent possible paralization of corporate business." The said Order has not been implemented notwithstanding its having been upheld per the SEC en banc's Order of May 15, 1984 (Annex "V", Petition) dismissing for lack of merit the petition for certiorari, prohibition and mandamus with prayer for restraining order or injunction filed by the Bragas seeking the disbandment of the Hearing Committee and the setting aside of its Orders, and its Resolution of August 9, 1984, denying reconsideration (Annex "X", Petition), due to the Bragas' filing of the petition at bar. Prescinding from the great concern of damage and prejudice expressed by Telectronics due to the Bragas having remained in control of the corporation and having allegedly committed acts of gross mismanagement and misapplication of funds, the Court finds that under the facts and circumstances of record, it is but fair and just that the SEC's order creating a receivership committee be implemented forthwith, in accordance with its terms, as follows: "The three-man receivership committee shall be composed of a representative from the commission, in the person of the Director, Examiners and Appraisers Department or his designated representative, and a representative from the petitioners and a representative of the respondent. "The petitioners and respondent are therefore directed to submit to the Commission the name of their designated representative within three (3) days from receipt of this order. The Commission shall appoint the other representatives if either or both parties fail to comply with the requirement within the stated time." ACCORDINGLY, judgment is hereby rendered: (a) Granting the petition in G.R. No. 63558, annulling the challenged Orders of respondent Judge dated February 14, 1983 and March 11, 1983 (Annexes "L" and "P" of the Abejos' petition) and prohibiting respondent Judge from further proceeding in Civil Case No. 48746 filed in his Court other than to dismiss the same for lack or jurisdiction over the subject-matter; (b) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary restraining order issued on September 24, 1984, effective immediately upon promulgation hereof; (c) Directing the SEC through its Hearing Committee to proceed immediately with hearing and resolving the pending mandamus petition for recording in the corporate books the transfer to Telectronics and its nominees of the majority (56%) shares of stock of the corporation Pocket Bell pertaining to the Abejos and Virginia Braga and all related issues, taking into consideration, without need of resubmittal to it, the pleadings, annexes and exhibits filed by the contending parties in the cases at bar; and

(d) Likewise directing the SEC through its Hearing Committee to proceed immediately with the implementation of its receivership or management committee Order of April 15, 1983 in SEC Case No. 2379 and for the purpose, the contending parties are ordered to submit to said Hearing Committee the name of their designated representatives in the receivership/management committee within three (3) days from receipt of this decision, on pain of forfeiture of such right in case of failure to comply herewith, as provided in the said Order; and ordering the Bragas to perform only caretaker acts in the corporation pending the organization of such receivership/management committee and assumption of its functions. This decision shall be immediately executory upon its promulgation. SO ORDERED. Yap, Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur. Footnotes 1. The Abejo's certificates are numbered 001, 012, 017, 018, 022, 026 and 029 totalling 133,000 shares. 2. Virginia Braga's certificates are numbered 003, 008, 013, 023 and 027 totalling 63,000 shares. 3. Emphasis supplied. 4. The cited Rule reads: "SECTION 1. Petition for Mandamus. When any corporation, board or person unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from an office, trust or station, or unlawfully excludes another from the use and enjoyment of a right or office to which such other is entitled, and there is no other plain, speedy and adequate remedy in the ordinary course of law, the person aggrieved thereby may file a verified petition with the Commission alleging the facts with certainty and praying that judgment be rendered commanding the respondent, immediately or at some other specified time, to do the act required to be done to protect the rights of the petitioner, and to pay the damages sustained by the petitioner by reason of the wrongful acts of the respondent." 5. Phil. Pacific Fishing Co. Inc. v. Luna, 112 SCRA 604, 613. 6. Respondent SEC's Comment and Memorandum in G.R. 68450-51; Record, pp. 400 and 524. 7. 132 SCRA 293 (1984), per Gutierrez, J., citing Union Glass & Container Corp. v. SEC, 126 SCRA 31 (1983). 8. 118 SCRA 602, 605-606 (1982) per Melencio-Herrera, J. 9. Petitioners' Memorandum in G.R. No. 63558, page 1. 10. Section 98, Corporation Code.

11. See Santamaria v. Hongkong & Shanghai Bank, 80 Phil. 780 (1951). 12. Petitioners' printed memorandum in G.R. No. 63558, page 13. 13. Annex I of Abejos' Memorandum Record in G.R. No. 63558, pp. 287-290. 14. SEC Comment, Record, p. 398. 15. Record in G.R 68450-51, p. 91. 16. Pambujan Sur United Mine Workers v. Samar Mining Co., Inc., 94 Phil. 932, 941 (1954). 17. NFL v. Eisma, 127 SCRA 419, 428, citing precedents. 18. 113 SCRA 52, 56 (1982). 19. 126 SCRA 31, 38 (1983), cited in DMRC Enterprises v. Este Del Sol Mountain Reserve, Inc. 132 SCRA 293, 298. 20. (1984). 21. 132 SCRA at page 299. 22. Record in G.R. 68450-51, pp. 93-96.

G.R. No. 87135 May 22, 1992 ALMA MAGALAD, petitioner, vs. PREMIERE FINANCING CORP., respondent. PARAS, J.: This is an appeal originally filed with the Court of Appeals but certified to this court for disposition since it involves purely questions of law from the decision of the Regional Trial Court (RTC), Branch LXXXV, Quezon City, dated May 22, 1984, in Civil Case No. Q-40392, ordering the defendant-appellant Premiere Financing Corporation (Premiere for short) to pay to the plaintiff-appellee Alma Magalad (Magalad for short) the sum of: (a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12, 1983, until the full amount is paid; (b) P10,000.00, both for moral and exemplary damages; (c) P5,000.00, for and as attorney's fees and (d) the costs of suit. The antecedent facts of the case are as follows: Premiere is a financing company engaged in soliciting and accepting money market placements or deposits (Original Record, p. 29).

On September 12, 1983 with expired permit to issue commercial papers (Ibid., p. 8) and with intention not to pay or defraud its creditors, Premiere induced and misled Magalad into making a money market placement of P50,000.00 at 22% interest per annum for which it issued a receipt (Ibid., Exh. "B", p. 8). Aside from the receipt, Premier likewise issued two (2) post-dated checks in the total sum of P51,079.00 (Ibid., Exh. "C", p. 9) and assigned to Magalad its receivable from a certain David Saman for the same amount (Ibid., Exh. "C", p. 10). When the said checks were presented for payment on their due dates, the drawee bank dishonored the checks for lack of sufficient funds to cover the amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12). Despite demands by Magalad for the replacement of said checks with cash, Premiere, for no valid reason, failed and refused to honor such demands and due to fraudulent acts of Premiere, Magalad suffered sleepless nights, mental anguish, fright, serious anxiety, considering the fact that the money she invested is blood money and is the only source of support for her family (Ibid., p. 4). Magalad in order to seek redress and retrieve her blood money, availed of the service of counsel for which she agreed to pay twenty percent (20%) of the amount due as and for attorney's fees (Ibid.) On January 10, 1984, Magalad filed a complaint for damages with prayer for writ of preliminary attachment with the RTC, Branch LXXXV, Quezon City, docketed as Civil Case No. Q-40392 against herein Premiere (Ibid., p. 3-6). Premiere having failed to file an answer and acting on Magalad's motion, the lower court declared Premiere in default by virtue of an order dated April 5, 1984 allowing Magalad to present evidence ex-parte (Ibid., pp. 21; 22) On May 22, 1984 the lower court rendered a default judgment against Premiere, the dispositive portion of which reads: From the foregoing evidence, the court finds that plaintiff has fully established her claim that defendant had indeed acted fraudulently in incurring the obligation and considering that no evidence has been adduced by the defendant to contradict the same, judgment is hereby rendered ordering the defendant to pay plaintiff as follows: (a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12, 1983 until the full amount is paid; (b) P10,000.00 both for moral and exemplary damages; (c) P5,000.00 for and as attorney's fees; and (d) the costs of suit. SO ORDERED. (Ibid., p. 30)

Premiere filed a motion for reconsideration of the foregoing decision, based principally on a question of law alleging that the Securities and Exchange Commission (SEC) has exclusive and original jurisdiction over a corporation under a state of suspension of payments (Ibid., pp. 32-41). Magalad filed an opposition to the motion for reconsideration on January 8, 1985 alleging among others that the regular court has jurisdiction over the case to the exclusion of the SEC. (Ibid., pp. 51-53). On May 28, 1986 the lower court issued an order denying the motion for reconsideration (Ibid., p. 61). On June 11, 1986 Premiere filed his notice of appeal which led to the issuance of the order of the lower court dated July 29, 1986 elevating the case to the Court of Appeals (CA) (Ibid., pp. 62-63). The Court of Appeals in its resolution dated September 8, 1987 dismissed the case for failure of Premiere to file its brief despite the ninety-day extension granted to it, which expired on June 10, 1987 (Rollo, p. 16). An omnibus motion for reconsideration and admission of late filing of Premiere's brief was filed on September 22, 1987 (Rollo, pp. 17-19; 32). On September 30, 1987 the Court of Appeals issued a resolution which reconsidered its previous resolution dated September 5, 1987 and admitted the Premiere's brief (Rollo, p. 26). On January 31, 1989 the Court of Appeals issued a resolution certifying the instant case to this Court on the ground that the case involves a question of law, the dispositive part of which stating: ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the Judiciary Act of 1948, Sec. 17, par. 4(3) (4), the Appeal in this case is hereby certified to the Supreme Court on the ground that the only issue raised concerns the jurisdiction of the trial court and only a question of law. (Rollo, p. 33) Hence, this appeal. The pivotal issue in this case is whether or not the court a quo had jurisdiction to try the instant case. At the very core of this appeal assailing the aforesaid pronouncement of the lower court, and around which revolve the arguments of the parties, is the applicability of Presidential Decree No. 902-A (Reorganization of the SEC with Additional Powers), as amended by Presidential Decrees Nos. 1653, 1758 and 1799. Magalad submits that the legal suit which she has brought against Premiere is an ordinary action for damages with the preliminary attachment cognizable solely by the RTC. Premiere, on the other hand, espouses the original and exclusive jurisdiction of the Securities and Exchange Commission.

Presidential Decree No. 902-A, Section 3, provides: Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines; and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement agencies of the government, civil or military as well as any private institution, corporation, firm, association or person. (As amended by Presidential Decree No. 1758). Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with Sec. 5 of the same law, providing: Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devises or schemes employed by or any acts of the Board of Directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the public and/or to the stockholders, partners, members of associations or organizations registered with the Commission. (Emphasis supplied) Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of money paid to said corporation, the recovery of which would ordinarily fall within the jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a category of relationship within the SEC jurisdiction. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987). In this case, the recitals of the complaint sufficiently allege that devices or schemes amounting to fraud and misrepresentation detrimental to the interest of the public have been resorted to by Premiere Corporation. It can not but be conceded, therefore, that the SEC may exercise its adjudicative powers pursuant to Sec. 5(a) of Pres. Decree No. 902-A (Supra).

The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the interest of the investing public. That Magalad's money placements were in the nature of investments in Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from moneys she had paid to Premiere. Unfortunately, however, she was the victim of alleged fraud and misrepresentation. Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 SCRA 293) and Union Glass & Container Corp. v. SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts was upheld, is misplaced for, as explicitly stated in those cases, nowhere in the complaints therein is found any averment of fraud or misrepresentation committed by the respective corporations involved. The causes of action, therefore, were nothing more than simple money claims. Further bolstering the jurisdiction of the SEC in this case is the fact that said agency had already appointed a Rehabilitation Receiver for Premiere and has directed all proceedings or claims against it be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment of a . . . rehabilitation receiver . . . all actions for claims against corporations . . . under receivership pending before any court, tribunal, board or body shall be suspended accordingly." By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving: a) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities but is under the management of a Rehabilitation Receiver or Management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. (Section 5(d) of Pres. Decree No. 902-A as added by Pres. Decree 1758). In fine, the adjudicative powers of the SEC being clearly defined by law, its jurisdiction over this case has to be upheld. PREMISES CONSIDERED, the instant appeal is GRANTED, and the order of the Presiding Judge of the Regional Trial Court, Quezon City, Branch LXXXV dated May 22, 1984, in Civil Case No. Q-40392 is REVERSED and SET ASIDE, without prejudice to the filing by Alma Magalad of the appropriate complaint against Premiere Financing Corporation with the Securities and Exchange Commission. SO ORDERED. Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur. G.R. No. L-12719 May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. THE CLUB FILIPINO, INC. DE CEBU, respondent. PAREDES, J.: This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant. As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.). The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The barrestaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the revaluation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums: As percentage tax on its gross receipts during the tax years 1946 to 1951 Surcharge therein As fixed tax for the years 1946 to 1952 Compromise penalty

The dominant issues involved in this case are twofold: 1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the periods mentioned above; and 2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty. Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960). Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above). It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector

P9,599.07 2,399.77 70.00 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review.

of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1wph1.t It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, non-stock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal. Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty. WHEREFORE, the decision appealed from is affirmed without costs. Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ., concur. Bengzon, C.J., is on leave. G.R. No. 91889 August 27, 1993 MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO REDOVAN, petitioners, vs. THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO, respondents. NOCON, J.:

This is a petition for review on certiorari to annul and set aside the decision 1 of the Court of Appeals affirming the decision 2 of the Regional Trial Court of Pasay, Branch 114 Civil Cases Nos. 8198-P, and 2880-P, the dispositive portion of which reads, as follows: Wherefore, in view of all the foregoing considerations, in this Court hereby renders judgment, as follows: In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay for annulment or declaration of nullity of the decision of the Metropolitan Trial Court, Branch 46, Pasay City, in its Civil Case No. 38-81 entitled "Edgardo D. Pabalan, et al., vs. Spouses Florentino Manalastas, et al.," is dismissed for lack of merits; In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay Enterprises, Inc. for cancellation of title of Manuel A. Torres, Jr. (TCT No. 24799 of the Register of Deeds of Pasay City) and reconveyance, is dismissed for lack or merit, and, In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay are ordered to surrender and deliver possession of the parcel of land, together with all the improvements thereon, described in Transfer Certificate of Title No. 24799 of the Register of Deeds of Pasay City, in favor of therein plaintiffs Manuel A. Torres, Jr. as owner and Edgardo D. Pabalan as real estate administrator of said Manuel A. Torres, Jr.; to account for and return to said plaintiffs the rentals from dwelling unit No. 8-A of the apartment building (Dulay Apartment) from June 1980 up to the present, to indemnify plaintiffs, jointly and severally, expenses of litigation in the amount of P4,000.00 and attorney's fees in the sum of P6,000.00, for all the three (3) cases. Co-defendant Nepomuceno Redovan is ordered to pay the current and subsequent rentals on the premises leased by him to plaintiffs. The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay Enterprises, Inc. and N. Redovan, dismissed for lack of merit. With costs against the three (3) aforenamed defendants. 3 The facts as found by the trial court are as follows: Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the following as members of its Board of Directors: Manuel R. Dulay with 19,960 shares and designated as president, treasurer and general manager, Atty. Virgilio E. Dulay with 10 shares and designated as vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 shares and designated as secretary, owned a property covered by TCT No. 17880 4 and known as Dulay Apartment consisting of sixteen (16) apartment units on a six hundred eighty-nine (689) square meters lot, more or less, located at Seventh Street (now Buendia Extension) and F.B. Harrison Street, Pasay City. Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its hotel project, Dulay Continental Hotel (now Frederick

Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject property since 1973 while at the same time managing the Dulay Apartment at his shareholdings in the corporation was subsequently increased by his father. 5 On December 23, 1976, Manuel Dulay by virtue of Board Resolution No 18 6 of petitioner corporation sold the subject property to private respondents spouses Maria Theresa and Castrense Veloso in the amount of P300,000.00 as evidenced by the Deed of Absolute Sale. 7 Thereafter, TCT No. 17880 was cancelled and TCT No. 23225 was issued to private respondent Maria Theresa Veloso. 8 Subsequently, Manuel Dulay and private respondents spouses Veloso executed a Memorandum to the Deed of Absolute Sale of December 23, 1976 9 dated December 9, 1977 giving Manuel Dulay within (2) years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was, however, not annotated either in TCT No. 17880 or TCT No. 23225. On December 24, 1976, private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of P250,000.00 which was duly annotated as Entry No. 68139 in TCT No. 23225. 10 Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the subject property was sold on April 5, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure sale as evidenced by the Certificate of Sheriff's Sale 11 issued on April 20, 1978. On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem 12 in favor of Manuel Dulay assigning her right to repurchase the subject property from private respondent Torres as a result of the extra sale held on April 25, 1978. As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject property within the one year statutory period for redemption, private respondent Torres filed an Affidavit of Consolidation of Ownership 13 with the Registry of Deeds of Pasay City and TCT No. 24799 14 was subsequently issued to private respondent Manuel Torres on April 23, 1979. On October 1, 1979, private respondent Torres filed a petition for the issuance of a writ of possession against private respondents spouses Veloso and Manuel Dulay in LRC Case No. 1742-P. However, when petitioner Virgilio Dulay was never authorized by the petitioner corporation to sell or mortgage the subject property, the trial court ordered private respondent Torres to implead petitioner corporation as an indispensable party but the latter moved for the dismissal of his petition which was granted in an Order dated April 8, 1980. On June 20, 1980, private respondent Torres and Edgardo Pabalan, real estate administrator of Torres, filed an action against petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a tenant of Dulay Apartment Unit No. 8-A for the recovery of possession, sum of money and damages with preliminary injunction in Civil Case, No. 8198-P with the then Court of First Instance of Rizal.

On July 21, 1980, petitioner corporation filed an action against private respondents spouses Veloso and Torres for the cancellation of the Certificate of Sheriff's Sale and TCT No. 24799 in Civil Case No. 8278-P with the then Court of First Instance of Rizal. On January 29, 1981, private respondents Pabalan and Torres filed an action against spouses Florentino and Elvira Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with petitioner corporation as intervenor for ejectment in Civil Case No. 3881 with the Metropolitan Trial Court of Pasay City which rendered a decision on April 25, 1985, dispositive portion of which reads, as follows: Wherefore, judgment is hereby rendered in favor of the plaintiff (herein private respondents) and against the defendants: 1. Ordering the defendants and all persons claiming possession under them to vacate the premises. 2. Ordering the defendants to pay the rents in the sum of P500.000 a month from May, 1979 until they shall have vacated the premises with interest at the legal rate; 3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00 and P1,000.00 as other expenses of litigation and for them to pay the costs of the suit. 15 Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed an action against the presiding judge of the Metropolitan Trial Court of Pasay City, private respondents Pabalan and Torres for the annulment of said decision with the Regional Trial Court of Pasay in Civil Case No. 2880-P. Thereafter, the three (3) cases were jointly tried and the trial court rendered a decision in favor of private respondents. Not satisfied with said decision, petitioners appealed to the Court of Appeals which rendered a decision on October 23, 1989, the dispositive portion of which reads, as follows: PREMISES CONSIDERED, the decision being appealed should be as it is hereby AFFIRMED in full. 16 On November 8, 1989, petitioners filed a Motion for Reconsideration which was denied on January 26, 1990. Hence, this petition. During the pendency of this petition, private respondent Torres died on April 3, 1991 as shown in his death certificate 17 and named Torres-Pabalan Realty & Development Corporation as his heir in his holographic will 18 dated October 31, 1986.

Petitioners contend that the respondent court had acted with grave abuse of discretion when it applied the doctrine of piercing the veil of corporate entity in the instant case considering that the sale of the subject property between private respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner corporation as Board Resolution No. 18 which authorized the sale of the subject property was resolved without the approval of all the members of the board of directors and said Board Resolution was prepared by a person not designated by the corporation to be its secretary. We do not agree. Section 101 of the Corporation Code of the Philippines provides: Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors, or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiese of all the stockholders, or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a directors' meeting is held without call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to do. It is relevant to note that although a corporation is an entity which has a personality distinct and separate from its individual stockholders or members, 19 the veil of corporate fiction may be pierced when it is used to defeat public convenience justify wrong, protect fraud or defend crime. 20 The privilege of being treated as an entity distinct and separate from its stockholder or members is therefore confined to its legitimate uses and is subject to certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person. 21 The Supreme Court had repeatedly disregarded the separate

personality of the corporation where the corporate entity was used to annul a valid contract executed by one of its members. Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and consent of the other members of the board of directors cannot be sustained. As correctly pointed out by the respondent Court of Appeals: Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never participated nor was even aware of any meeting or resolution authorizing the mortgage or sale of the subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the contrary, he is very much privy to the transactions involved. To begin with, he is a incorporator and one of the board of directors designated at the time of the organization of Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said entity is loosely referred to as a "family corporation". The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father whose name identifies their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh. "31-A"). 22 Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit 23 that he was a signatory witness to the execution of the post-dated Deed of Absolute Sale of the subject property in favor of private respondent Torres indicates that he was aware of the transaction executed between his father and private respondents and had, therefore, adequate knowledge about the sale of the subject property to private respondents. Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private respondents by Manuel Dulay is valid and binding. As stated by the trial court: . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the former and not a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and treasurer but also the general manager of the corporation. The corporation was a closed family corporation and the only non-relative in the board of directors was Atty. Plaridel C. Jose who appeared on paper as the secretary. There is no denying the fact, however, that Maria Socorro R. Dulay at times acted as secretary. . . ., the Court can not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had absolute control over the business and affairs of the corporation. 24

Moreover, the appellate courts will not disturb the findings of the trial judge unless he has plainly overlooked certain facts of substance and value that, if considered, might affect the result of the case, 25 which is not present in the instant case. Petitioners' contention that private respondent Torres never acquired ownership over the subject property since the latter was never in actual possession of the subject property nor was the property ever delivered to him is also without merit. Paragraph 1, Article 1498 of the New Civil Code provides: When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary do not appear or cannot clearly be inferred. Under the aforementioned article, the mere execution of the deed of sale in a public document is equivalent to the delivery of the property. Likewise, this Court had held that: It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3133 as amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. 26 Therefore, prior physical delivery or possession is not legally required since the execution of the Deed of Sale in deemed equivalent to delivery. Finally, we hold that the respondent appellate court did not err in denying petitioner's motion for reconsideration despite the fact that private respondents failed to submit their comment to said motion as required by the respondent appellate court from resolving petitioners' motion for reconsideration without the comment of the private respondent which was required merely to aid the court in the disposition of the motion. The courts are as much interested as the parties in the early disposition of cases before them. To require otherwise would unnecessarily clog the courts' dockets. WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED. SO ORDERED. Narvasa, C.J., Padilla and Regalado, JJ., concur.

Puno, J., took no part.

# Footnotes 1 Penned by Justice Jorge S. Imperial with the concurrence of Justice Reynato S. Puno and Justice Cezar D. Francisco. 2 Penned by Judge Fermin Martin, Jr. 3 Rollo, p. 77. 4 Exhibit "1", Records/Index of Exhibits, p. 30. 5 Rollo, pp. 31-32. 6 Exhibit "C", Records/Index of Exhibits, p. 5. 7 Exhibit "A" Records/Index of Exhibit, pp. 1-2. 8 Exhibit "B", Records/Index of Exhibits, p. 3. 9 Exhibit "17-C", Records/Index of Exhibits, pp. 96-97. 10 Exhibit "B", Records/Index of Exhibits, p. 4. 11 Exhibit "F", Records/Index of Exhibits, pp. 11-12. 12 Exhibit "H", Records/Index of Exhibits, pp. 14-15. 13 Exhibit "G", Records/Index of Exhibits, p. 13. 14 Exhibit "I", Records/Index of Exhibits, p. 16. 15 Original of Civil Case No. 2880-P, p. 84. 16 Rollo, p. 95. 17 Id., p. 171. 18 Id., p. 172. 19 Good Earth Emporium, Inc. vs. Court of Appeals, 194 SCRA 544 [1991].

20 Philippine Veterans Investment Development Corporation vs. Court of Appeals, 181 SCRA 678 [1990]. 21 Cagayan Valley Enterprises, Inc. vs. Court of Appeals, 179 SCRA 218 [1989]. 22 Rollo, p. 89. 23 Exhibit "24". Records/Index of Exhibit, p. 55. 24 Rollo, p. 74. 24 People vs. Pirreras, 179 SCRA 33 [1989]. 25 People vs. Pirreras, 179 SCRA 33 [1989]. 26 F. David Enterprises vs. Insular Bank of Asia and America, 191 SCRA 516 [1990].

and the National Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private respondent took steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same court to stop the foreclosure. The two cases were consolidated. After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative power was a violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3) the decree violated the equal protection clause. The motion for reconsideration of this decision having been denied, the present petition was filed. The petition was originally assigned to the Third Division of this Court but because of the constitutional questions involved it was transferred to the Court en banc. On August 30, 1988, the Court granted the petitioner's prayer for a temporary restraining order and instructed the respondents to cease and desist from conducting a public auction sale of the lands in question. After the Solicitor General and the private respondent had filed their comments and the petitioners their reply, the Court gave due course to the petition and ordered the parties to file simultaneous memoranda. Upon compliance by the parties, the case was deemed submitted. The petitioners contend that the private respondent is now estopped from contesting the validity of the decree. In support of this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also raised but not resolved. The Court, after noting that the petitioners had already filed their claims with the AGRIX Claims Committee created by the decree, had simply dismissed the petition on the ground of estoppel. The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres. Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get results, it sought to foreclose the real estate mortgage executed by AGRIX in its favor, which had been extinguished by the decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that the private respondent attacked the validity of the provision. At that stage, however, consistent with Mendoza, the private respondent was already estopped from questioning the constitutionality of the decree. The Court does not agree that the principle of estoppel is applicable. It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It must be noted, however, that this was done in 1980, when President Marcos was the absolute ruler of this country and his decrees were the absolute law. Any judicial challenge to them would have been futile, not to say foolhardy. The private respondent, no less than the rest of the nation, was aware of that reality and knew it had no choice under the circumstances but to conform. It is true that there were a few venturesome souls who dared to question the dictator's decisions before the courts of justice then. The record will show, however, that not a single act or issuance of President Marcos was ever declared unconstitutional, not even by the highest court, as long as he was in power. To rule

NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna, respondents.1990 December 10En BancG.R. Nos. 84132-33D E C I S I O N CRUZ, J.: This case involves the constitutionality of a presidential decree which, like all other issuances of President Marcos during his regime, was at that time regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the touchstone of the fundamental law that even then was supposed to limit presidential action. The particular enactment in question is PD. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be administered mainly by the National Development Company. The law outlined the procedure for filing claims against the Agrix companies and created a Claims Committee to process these claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished." Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baos, Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other Agrix companies that the aforementioned decree was issued by President Marcos. Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In the meantime, the New Agrix, Inc.

now that the private respondent is estopped for having abided with the decree instead of boldly assailing it is to close our eyes to a cynical fact of life during that repressive time. This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX Claims Committee, received in settlement thereof shares of stock valued at P40,000.00 without protest or reservation. The herein private respondent has not been paid a single centavo on its claim, which was kept pending for more than seven years for alleged lack of supporting papers. Significantly, the validity of that claim was not questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by the private respondent. The petitioner limited itself to the argument that the private respondent was estopped from questioning the decree because of its earlier compliance with its provisions. Independently of these observations, there is the consideration that an affront to the Constitution cannot be allowed to continue existing simply because of procedural inhibitions that exalt form over substance. The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and other liens attaching to the assets of AGRIX. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in Subsection (iii) that "all accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not be recognized." These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person shall be deprived of life, liberty or property without due course of law nor shall any person be denied the equal protection of the law" and in Section 10 that "no law impairing the obligation of contracts shall be passed." In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation under the police power for the promotion of the common welfare. The contention is that this inherent power of the state may be exercised at any time for this purpose so long as the taking of the property right, even if based on contract, is done with due process of law. This argument is an over-simplification of the problem before us. The police power is not a panacea for all constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty or property. A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2 Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently involved to warrant the interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small investors," who would be prejudiced if the corporation were not to be assisted. However, the record does not state how many there are of

such investors, and who they are, and why they are being preferred to the private respondent and other creditors of AGRIX with vested property rights. The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the New Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole, as distinguished from those of a particular class, would be promoted or protected. The indispensable link to the welfare of the greater number has not been established. On the contrary, it would appear that the decree was issued only to favor a special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX. Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far short of the requirement that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree. The right to property in all mortgages, liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the extinction of the mortgage rights. The accrued interests and other charges are simply rejected by the decree. The right to property is dissolved by legislative fiat without regard to the private interest violated and, worse, in favor of another private interest. A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they accrue. Private property cannot simply be taken by law from one person and given to another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the Constitution. And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other liens, the decree lumps the secured creditors with the unsecured creditors and places them on the same level in the prosecution of their respective claims. In this respect, all of them are considered unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to earn interest from the date of the decree, but that still does not justify the cancellation of the interests earned before that date. Such interests, whether due to the secured or the unsecured creditors, are all extinguished by the decree. Even assuming such cancellation to be valid, we still cannot see why all kinds of creditors, regardless of security, are treated alike. Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges conferred and the obligations imposed. Conversely, all persons or things differently situated should be treated differently. In the case at bar, persons differently situated are similarly treated, in disregard of the principle that there should be equality only among equals. One may also well wonder why AGRIX was singled out for government help, among other corporations where the stockholders or investors were also swindled. It is not clear why other companies entitled to similar concern were not similarly treated. And surely, the stockholders of the private respondent, whose mortgage lien had been cancelled and legitimate claims to accrued interests rejected, were no less deserving of protection, which they did not get. The decree operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven hand."

On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of the 1973 Constitution, then in force, that: SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. 4 The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the management of the corporation, but with the obligation of making periodic reports to the Agrix board of directors. After payment of the loan, the said board can then appoint its own management. The stocks of the new corporation are to be issued to the old investors and stockholders of AGRIX upon proof of their claims against the abolished corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely private and so should have been organized under the Corporation Law in accordance with the above-cited constitutional provision. The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification. While it is true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most present-day contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be affected with public interest. There was therefore no warrant to amend their provisions and deprive the private respondent of its vested property rights. It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we sustained the preference in payment of a mortgage creditor as against the argument that the claims of laborers should take precedence over all other claims, including those of the government. In arriving at this ruling, the Court recognized the mortgage lien as a property right protected by the due process and contract clauses notwithstanding the argument that the amendment in Section 110 of the Labor Code was a proper exercise of the police power. The Court reaffirms and applies that ruling in the case at bar. Our finding, in sum, is that PD 1717 is an invalid exercise of the police power, not being in conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the secured creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government, should have been created only by general and not special law. And insofar as the decree also interferes with purely private agreements without any demonstrated connection with the public interest, there is likewise an impairment of the obligation of the contract. With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to promulgate Pres. Decree No. 1717 under

Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree must fall just the same because of its violation of the Bill of Rights. WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The temporary restraining order dated August 30, 1988, is LIFTED. Costs against the petitioners. SO ORDERED. Fernan (C.J.), Narvasa, Gutierrez, Jr., Paras, Gancayco Padilla, Bidin, Sarmiento, Grio-Aquino, Medialdea and Regalado, JJ., concur. Melencio-Herrera, J., In the result. In Dumlao v. COMELEC, 95 SCRA 392 (1980), a portion of the second paragraph of section 4 of Batas Pambansa Blg. 52 was declared null and void for being unconstitutional. Feliciano, J., is on leave. Footnotes 1. G.R. No. 62259, April 19, 1989. 2. U.S. v. Toribio, 15 Phil. 85; Fabie v. City of Manila, 21 Phil. 486; Case v. Board of Health, 24 Phil. 256; Bautista v. Juinio, 127 SCRA 329; Ynot v. IAC, 148 SCRA 659. 3. Yick Wo v. Hopkins, 118 U.S. 356. 4. Reworded in Art. XII, Sec. 16, 1987 Constitution. 5. Stone v. Mississippi, 101 U.S. 814. 6. G.R. Nos. 82763-64, March 19, 1990. G.R. No. 84197 July 28, 1989 PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents. G.R. No. 84157 July 28, 1989 JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents. GUTIERREZ, JR., J.: The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed. The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages. It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the crosscomplaints until the amount is fully paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two Cervanteses. Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's fees. xxx xxx xxx WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid. Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and costs. No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the exercise of its discretion. No damage is decided against Malayan Insurance Company, Inc., the thirdparty defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an act which is clearly within its power and which is the reason for its being, then nobody would engage in the insurance business. No further claim or counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16) In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965. On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature. On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively. Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts, On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana. In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for

recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question. After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. In all other respects the trial court's decision was affirmed. We first resolve G.R. No. 84197. Petitioner Pioneer Insurance and Surety Corporation avers that: RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10) The petitioner questions the following findings of the appellate court: We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be benefited or injured by the judgment. Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would be benefited or injured by the judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been paid by the reinsurer the sum of P295,000.00 the bulk of defendants' alleged obligation to Pioneer. In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25). The petitioner contends that:(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would recover from the coindemnitor will be paid to the reinsurer. The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties. A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were: xxx xxx xxx 1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been paid with reinsurance money? 2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157). In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer has any right to collect to the extent of the said amount. On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact. But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of that of the principal will not prosper, and this is so even where the name of the principal is disclosed in the complaint. Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name of the real party in interest.' This provision is mandatory. The real party in interest is the party who would be benefitted or injured by the judgment or is the party entitled to the avails of the suit. This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714. The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity agreement is still valid and effective. But since the amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363). The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly between the petitioner as insured and the reinsuring

company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis. In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925). The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134). Hence the applicable law is Article 2207 of the new Civil Code, to wit: Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]): Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied). It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer. Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents. Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court stated: Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of the chattel mortgage. Testimonies of defendants Francisco Cervantes and Modesto Cervantes. Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond provided that the same would be mortgaged to it, but this was not possible because the planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be cancelled. The following is averred under oath by Pioneer in the original complaint: The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the security under the chattel mortgage and there is thus no other sufficient security for the claim sought to be enforced by this action. This is judicial admission and aside from the chattel mortgage there is no other security for the claim sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised Rules of Court. Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines. Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any further action to recover any unpaid balance of the price. SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law. Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall have no further

action against the purchaser to recover any unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6. The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124. The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these defendants from any liability as alleged indemnitors. The change of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the indemnitors. The principal hereof shall be paid in eight equal successive three months interval installments, the first of which shall be due and payable 25 August 1965, the remainder of which ... shall be due and payable on the 26th day x x x of each succeeding three months and the last of which shall be due and payable 26th May 1967. However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows: The principal hereof shall be paid in eight equal successive three month interval installments the first of which shall be due and payable 4 September 1965, the remainder of which ... shall be due and payable on the 4th day ... of each succeeding months and the last of which shall be due and payable 4th June 1967. Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last installment being July 15, 1967. These restructuring of the obligations with regard to their maturity dates, effected twice, were done without the knowledge, much less, would have it believed that these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant Maglana knew of and consented to the modification of the obligations. But if that were so, there would have been the corresponding documents in the form of a written notice to as well as written conformity of these defendants, and there are no such document. The consequence of this was the extinguishment of the obligations and of the surety bond secured by the indemnity agreement which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan

Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538. Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension time referred to herein, (New Civil Code).' Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571. Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently, Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from liability from the claim. Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity. Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or became illegal. These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by reason of the filing of the instant case against them and the attachment and garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157). We find no cogent reason to reverse or modify these findings. Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious. We now discuss the merits of G.R. No. 84157. Petitioner Jacob S. Lim poses the following issues: l. What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where their contributions to the intended 'corporation' were invested not through the corporate form? This Petition presents these fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must share in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings ordering him to reimburse certain amounts given by the respondents to the petitioner as their contributions to the intended corporation, to wit: However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74. We first state the principles. While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a corporation for the development of land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee for the associates in an action between them for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to

be liable as such in an action for settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied). In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses. It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim: ... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public convenience and necessity as well as the required permits for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to incorporate his airline in accordance with their agreement and proceeded to acquire the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338). while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party complaint: Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and spare parts from Japan which the latter considered as their lawful contribution and participation in the proposed corporation to be known as SAL. Arrangements and negotiations were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form of

third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two planes and their accessories and or return the amount advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341342). Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts. WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED. SO ORDERED. Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur. Feliciano, J., took no part.