G.R. No. L-31061 August 17, 1976
1 The complaint, as amended on June 13, 1966,
SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC.,
NATIONAL WATERWORKS & SEWERAGE AUTHORITY,
HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF
BULACAN, defendants-appellees.
Hill & Associates Law Offices for appellant.
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo,
Office of the Government Corporate Counsel for appellee
National Waterworks & Sewerage Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.
ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff
corporation (non- stock may institute an action in behalf of its
individual members for the recovery of certain parcels of land
allegedly owned by said members; for the nullification of the
transfer certificates of title issued in favor of defendants
appellees covering the aforesaid parcels of land; for a
declaration of "plaintiff's members as absolute owners of the
property" and the issuance of the corresponding certificate of
title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed
an accion de revindicacion with the Court of First Instance of
Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against
defendants-appellees to recover the ownership and
possession of a large tract of land in San Jose del Monte,
Bulacan, containing an area of 27,982,250 square meters,
more or less, registered under the Torrens System in the
name of defendants-appellees' predecessors-in-
interest.
specifically alleged that plaintiff is a corporation organized
and existing under the laws of the Philippines, with its
principal office and place of business at San Jose del Monte,
Bulacan; that its membership is composed of natural persons
residing at San Jose del Monte, Bulacan; that the members of
the plaintiff corporation, through themselves and their
predecessors-in-interest, had pioneered in the clearing of the
fore-mentioned tract of land, cultivated the same since the
Spanish regime and continuously possessed the said
property openly and public under concept of ownership
adverse against the whole world; that defendant-appellee
Gregorio Araneta, Inc., sometime in the year 1958, through
force and intimidation, ejected the members of the plaintiff
corporation from their possession of the aforementioned vast
tract of land; that upon investigation conducted by the
members and officers of plaintiff corporation, they found out
for the first time in the year 1961 that the land in question
"had been either fraudulently or erroneously included, by
direct or constructive fraud, in Original Certificate of Title No.
466 of the Land of Records of the province of Bulacan",
issued on May 11, 1916, which title is fictitious, non-existent
and devoid of legal efficacy due to the fact that "no original
survey nor plan whatsoever" appears to have been submitted
as a basis thereof and that the Court of First Instance of
Bulacan which issued the decree of registration did not
acquire jurisdiction over the land registration case because
no notice of such proceeding was given to the members of
the plaintiff corporation who were then in actual possession
of said properties; that as a consequence of the nullity of the
original title, all subsequent titles derived therefrom, such as
Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was
subsequently cancelled by Transfer Certificate of Title No.
7573 in the name of Gregorio Araneta, Inc., Transfer
Certificate of Title No. 4988 issued in the name of, the
National Waterworks & Sewerage Authority (NWSA), Transfer
Certificate of Title No. 4986 issued in the name of Hacienda
Caretas, Inc., and another transfer certificate of title in the
name of Paradise Farms, Inc., are therefore void. Plaintiff-
appellant consequently prayed (1) that Original Certificate of
Title No. 466, as well as all transfer certificates of title issued
and derived therefrom, be nullified; (2) that "plaintiff's
members" be declared as absolute owners in common of said
property and that the corresponding certificate of title be
issued to plaintiff; and (3) that defendant-appellee Gregorio
Araneta, Inc. be ordered to pay to plaintiff the damages
therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta,
Inc. filed a motion to dismiss the amended complaint on the
grounds that (1) the complaint states no cause of action; and
(2) the cause of action, if any, is barred by prescription and
laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed
motions to dismiss based on the same grounds. Appellee
National Waterworks & Sewerage Authority did not file any
motion to dismiss. However, it pleaded in its answer as
special and affirmative defenses lack of cause of action by
the plaintiff-appellant and the barring of such action by
prescription and laches.
During the pendency of the motion to dismiss, plaintiff-
appellant filed a motion, dated October 7, 1966, praying that
the case be transferred to another branch of the Court of First
Instance sitting at Malolos, Bulacan, According to defendants-
appellees, they were not furnished a copy of said motion,
hence, on October 14, 1966, the lower court issued an Order
requiring plaintiff-appellant to furnish the appellees copy of
said motion, hence, on October 14, 1966, defendant-
appellant's motion dated October 7, 1966 and, consequently,
prayed that the said motion be denied for lack of notice and
for failure of the plaintiff-appellant to comply with the Order
of October 14, 1966. Similarly, defendant-appellee paradise
Farms, Inc. filed, on December 2, 1966, a manifestation
information the court that it also did not receive a copy of the
afore-mentioned of appellant. On January 24, 1967, the trial
court issued an Order dismissing the amended complaint.
On February 14, 1967, appellant filed a motion to reconsider
the Order of dismissal on the grounds that the court had no
jurisdiction to issue the Order of dismissal, because its
request for the transfer of the case from the Valenzuela
Branch of the Court of First Instance to the Malolos Branch of
the said court has been approved by the Department of
Justice; that the complaint states a sufficient cause of action
because the subject matter of the controversy in one of
common interest to the members of the corporation who are
so numerous that the present complaint should be treated as
a class suit; and that the action is not barred by the statute
of limitations because (a) an action for the reconveyance of
property registered through fraud does not prescribe, and (b)
an action to impugn a void judgment may be brought any
time. This motion was denied by the trial court in its Order
dated February 22, 1967. From the afore-mentioned Order of
dismissal and the Order denying its motion for
reconsideration, plaintiff-appellant appealed to the Court of
Appeals.
On September 3, 1969, the Court of Appeals, upon finding
that no question of fact was involved in the appeal but only
questions of law and jurisdiction, certified this case to this
Court for resolution of the legal issues involved in the
controversy.
I
Appellant contends, as a first assignment of error, that the
trial court acted without authority and jurisdiction in
dismissing the amended complaint when the Secretary of
Justice had already approved the transfer of the case to any
one of the two branches of the Court of First Instance of
Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue
of cases with the assignment of cases in the different
branches of the same Court of First Instance. Jurisdiction
implies the power of the court to decide a case, while venue
the place of action. There is no question that respondent
court has jurisdiction over the case. The venue of actions in
the Court of First Instance is prescribed in Section 2, Rule 4 of
the Revised Rules of Court. The laying of venue is not left to
the caprice of plaintiff, but must be in accordance with the
aforesaid provision of the rules. 2The mere fact that a request
for the transfer of a case to another branch of the same court
has been approved by the Secretary of Justice does not
divest the court originally taking cognizance thereof of its
jurisdiction, much less does it change the venue of the
action. As correctly observed by the trial court, the
indorsement of the Undersecretary of Justice did not order
the transfer of the case to the Malolos Branch of the Bulacan
Court of First Instance, but only "authorized" it for the reason
given by plaintiff's counsel that the transfer would be
convenient for the parties. The trial court is not without
power to either grant or deny the motion, especially in the
light of a strong opposition thereto filed by the defendant. We
hold that the court a quo acted within its authority in denying
the motion for the transfer the case to Malolos
notwithstanding the authorization" of the same by the
Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of
dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to
dismiss refer to the lack of personality of plaintiff to file the
instant action. Essentially, the term 'cause of action' is
composed of two elements: (1) the right of the plaintiff and
(2) the violation of such right by the defendant. (Moran, Vol.
1, p. 111). For these reasons, the rules require that every
action must be prosecuted and defended in the name of the
real party in interest and that all persons having an interest
in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In the
amended complaint, the people whose rights were alleged to
have been violated by being deprived and dispossessed of
their land are the members of the corporation and not the
corporation itself. The corporation has a separate. and
distinct personality from its members, and this is not a mere
technicality but a matter of substantive law. There is no
allegation that the members have assigned their rights to the
corporation or any showing that the corporation has in any
way or manner succeeded to such rights. The corporation
evidently did not have any rights violated by the defendants
for which it could seek redress. Even if the Court should find
against the defendants, therefore, the plaintiff corporation
would not be entitled to the reliefs prayed for, which are
recoveries of ownership and possession of the land, issuance
of the corresponding title in its name, and payment of
damages. Neither can such reliefs be awarded to the
members allegedly deprived of their land, since they are not
parties to the suit. It appearing clearly that the action has not
been filed in the names of the real parties in interest, the
complaint must be dismissed on the ground of lack of cause
of action. 3
Viewed in the light of existing law and jurisprudence, We find
that the trial court correctly dismissed the amended
complaint.
It is a doctrine well-established and obtains both at law and
in equity that a corporation is a distinct legal entity to be
considered as separate and apart from the individual
stockholders or members who compose it, and is not affected
by the personal rights, obligations and transactions of its
stockholders or members. 4 The property of the corporation is
its property and not that of the stockholders, as owners,
although they have equities in it. Properties registered in the
name of the corporation are owned by it as an entity
separate and distinct from its members. 5 Conversely, a
corporation ordinarily has no interest in the individual
property of its stockholders unless transferred to the
corporation, "even in the case of a one-man
corporation. 6 The mere fact that one is president of a
corporation does not render the property which he owns or
possesses the property of the corporation, since the
president, as individual, and the corporations are separate
similarities. 7 Similarly, stockholders in a corporation engaged
in buying and dealing in real estate whose certificates of
stock entitled the holder thereof to an allotment in the
distribution of the land of the corporation upon surrender of
their stock certificates were considered not to have such
legal or equitable title or interest in the land, as would
support a suit for title, especially against parties other than
the corporation. 8
It must be noted, however, that the juridical personality of
the corporation, as separate and distinct from the persons
composing it, is but a legal fiction introduced for the purpose
of convenience and to subserve the ends of justice. 9 This
separate personality of the corporation may be disregarded,
or the veil of corporate fiction pierced, in cases where it is
used as a cloak or cover for fraud or illegality, or to work -an
injustice, or where necessary to achieve equity. 10
Thus, when "the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, ...
the law will regard the corporation as an association of
persons, or in the case of two corporations, merge them into
one, the one being merely regarded as part or
instrumentality of the other. 11 The same is true where a
corporation is a dummy and serves no business purpose and
is intended only as a blind, or an alter ego or business
conduit for the sole benefit of the stockholders. 12 This
doctrine of disregarding the distinct personality of the
corporation has been applied by the courts in those cases
when the corporate entity is used for the evasion of
taxes 13 or when the veil of corporate fiction is used to
confuse legitimate issue of employer-employee
relationship, 14 or when necessary for the protection of
creditors, in which case the veil of corporate fiction may be
pierced and the funds of the corporation may be garnished to
satisfy the debts of a principal stockholder. 15 The aforecited
principle is resorted to by the courts as a measure protection
for third parties to prevent fraud, illegality or injustice. 16
It has not been claimed that the members have assigned or
transferred whatever rights they may have on the land in
question to the plaintiff corporation. Absent any showing of
interest, therefore, a corporation, like plaintiff-appellant
herein, has no personality to bring an action for and in behalf
of its stockholders or members for the purpose of recovering
property which belongs to said stockholders or members in
their personal capacities.
It is fundamental that there cannot be a cause of action
'without an antecedent primary legal right conferred' by law
upon a person. 17 Evidently, there can be no wrong without a
corresponding right, and no breach of duty by one person
without a corresponding right belonging to some other
person. 18 Thus, the essential elements of a cause of action
are legal right of the plaintiff, correlative obligation of the
defendant, an act or omission of the defendant in violation of
the aforesaid legal right. 19 Clearly, no right of action exists in
favor of plaintiff corporation, for as shown heretofore it does
not have any interest in the subject matter of the case which
is material and, direct so as to entitle it to file the suit as a
real party in interest.
III
Appellant maintains, however, that the amended complaint
may be treated as a class suit, pursuant to Section 12 of Rule
3 of the Revised Rules of Court.
In order that a class suit may prosper, the following requisites
must be present: (1) that the subject matter of the
controversy is one of common or general interest to many
persons; and (2) that the parties are so numerous that it is
impracticable to bring them all before the court. 20
Under the first requisite, the person who sues must have an
interest in the controversy, common with those for whom he
sues, and there must be that unity of interest between him
and all such other persons which would entitle them to
maintain the action if suit was brought by them jointly. 21
As to what constitutes common interest in the subject matter
of the controversy, it has been explained in Scott v.
Donald 22 thus:
The interest that will allow parties to join in a bill of
complaint, or that will enable the court to dispense with the
presence of all the parties, when numerous, except a
determinate number, is not only an interest in the
question, but one in common in the subject Matter of the
suit; ... a community of interest growing out of the nature and
condition of the right in dispute; for, although there may not
be any privity between the numerous parties, there is G.R. No. L-48627 June 30, 1987
a common title out of which the question arises, and which
lies at the foundation of the proceedings ... [here] the only FERMIN Z. CARAM, JR. and ROSA O. DE CARAM,
matter in common among the plaintiffs, or between them petitioners
and the defendants, is an interest in the Question involved vs.
which alone cannot lay a foundation for the joinder of parties. THE HONORABLE COURT OF APPEALS and ALBERTO V.
There is scarcely a suit at law, or in equity which settles a ARELLANO, respondents.
Principle or applies a principle to a given state of facts, or in
which a general statute is interpreted, that does not involved
a Question in which other parties are interested. ... (Emphasis
supplied ) CRUZ, J.:

Here, there is only one party plaintiff, and the plaintiff
corporation does not even have an interest in the subject
matter of the controversy, and cannot, therefore, represent
its members or stockholders who claim to own in their
individual capacities ownership of the said property.
Moreover, as correctly stated by the appellees, a class suit
does not lie in actions for the recovery of property where
several persons claim Partnership of their respective portions
of the property, as each one could alleged and prove his
respective right in a different way for each portion of the
land, so that they cannot all be held to have Identical title
through acquisition prescription. 23
Having shown that no cause of action in favor of the plaintiff
exists and that the action in the lower court cannot be
considered as a class suit, it would be unnecessary and an
Idle exercise for this Court to resolve the remaining issue of
whether or not the plaintiffs action for reconveyance of real
property based upon constructive or implied trust had
already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with
costs against the plaintiff-appellant.
Fernando, C.J., Barredo, Aquino and Concepcion, Jr., JJ.,
concur.
We gave limited due course to this petition on the question of
the solidary liability of the petitioners with their co-
defendants in the lower court 1 because of the challenge to
the following paragraph in the dispositive portion of the
decision of the respondent court: *
1. Defendants are hereby ordered to jointly and severally pay
the plaintiff the amount of P50,000.00 for the preparation of
the project study and his technical services that led to the
organization of the defendant corporation, plus P10,000.00
attorney's fees; 2
The petitioners claim that this order has no support in fact
and law because they had no contract whatsoever with the
private respondent regarding the above-mentioned services.
Their position is that as mere subsequent investors in the
corporation that was later created, they should not be held
solidarily liable with the Filipinas Orient Airways, a separate
juridical entity, and with Barretto and Garcia, their co-
defendants in the lower court, ** who were the ones who
requested the said services from the private respondent. 3
We are not concerned here with the petitioners' co-
defendants, who have not appealed the decision of the
respondent court and may, for this reason, be presumed to
have accepted the same. For purposes of resolving this case
before us, it is not necessary to determine whether it is the
promoters of the proposed corporation, or the corporation
itself after its organization, that shall be responsible for the
expenses incurred in connection with such organization.
The only question we have to decide now is whether or not
the petitioners themselves are also and personally liable for
such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent
court in its decision in this wise:
As to the 4th assigned error we hold that as to the
remuneration due the plaintiff for the preparation of the
project study and the pre-organizational services in the
amount of P50,000.00, not only the defendant corporation
but the other defendants including defendants Caram should
be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and
Garcia that plaintiff handled the preparation of the project
study which project study was presented to defendant Caram
so the latter was convinced to invest in the proposed airlines.
The project study was revised for purposes of presentation to
financiers and the banks. It was on the basis of this study
that defendant corporation was actually organized and
rendered operational. Defendants Garcia and Caram, and
Barretto became members of the Board and/or officers of
defendant corporation. Thus, not only the defendant
corporation but all the other defendants who were involved in
the preparatory stages of the incorporation, who caused the
preparation and/or benefited from the project study and the
technical services of plaintiff must be liable. 4
It would appear from the above justification that the
petitioners were not really involved in the initial steps that
finally led to the incorporation of the Filipinas Orient Airways.
Elsewhere in the decision, Barretto was described as "the
moving spirit." The finding of the respondent court is that the
project study was undertaken by the private respondent at
the request of Barretto and Garcia who, upon its completion,
presented it to the petitioners to induce them to invest in the
proposed airline. The study could have been presented to
other prospective investors. At any rate, the airline was
eventually organized on the basis of the project study with
the petitioners as major stockholders and, together with
Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth
considering:
... Since defendant Barretto was the moving spirit in the pre-
organization work of defendant corporation based on his
experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock
not as industrial partner but more for his technical services
that brought to fruition the defendant corporation. By the
same token, We find no reason why the plaintiff should not
be similarly compensated not only for having actively
participated in the preparation of the project study for
several months and its subsequent revision but also in his
having been involved in the pre-organization of the
defendant corporation, in the preparation of the franchise, in
inviting the interest of the financiers and in the training and
screening of personnel. We agree that for these special
services of the plaintiff the amount of P50,000.00 as
compensation is reasonable. 5
The above finding bolsters the conclusion that the petitioners
were not involved in the initial stages of the organization of
the airline, which were being directed by Barretto as the
main promoter. It was he who was putting all the pieces
together, so to speak. The petitioners were merely among
the financiers whose interest was to be invited and who were
in fact persuaded, on the strength of the project study, to
invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient
Airways was a fictitious corporation and did not have a
separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for
its obligations. As a bona fide corporation, the Filipinas Orient
Airways should alone be liable for its corporate acts as duly
authorized by its officers and directors.
In the light of these circumstances, we hold that the
petitioners cannot be held personally liable for the
compensation claimed by the private respondent for the
services performed by him in the organization of the
corporation. To repeat, the petitioners did not contract such
services. It was only the results of such services that Barretto
and Garcia presented to them and which persuaded them to
invest in the proposed airline. The most that can be said is
that they benefited from such services, but that surely is no
justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation,
including those who came in later, and regardless of the
amount of their share holdings, would be equally and
personally liable also with the petitioners for the claims of the
private respondent.
The petition is rather hazy and seems to be flawed by an
ambiguous ambivalence. Our impression is that it is opposed
to the imposition of solidary responsibility upon the Carams
but seems to be willing, in a vague, unexpressed offer of
compromise, to accept joint liability. While it is true that it
does here and there disclaim total liability, the thrust of the
petition seems to be against the imposition of solidary
liability only rather than against any liability at all, which is
what it should have categorically argued.
Categorically, the Court holds that the petitioners are not
liable at all, jointly or jointly and severally, under the first
paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at
this time the rules on solidary obligations, which the parties-
needlessly, as it turns out have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are
declared not liable under the challenged decision, which is
hereby modified accordingly. It is so ordered.
Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and
Sarmiento, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 70789 October 19, 1992
RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.
TANTOCO, SR., and ROMEO S. VERGARA, petitioners,
vs.
THE INTERMEDIATE APPELLATE COURT and ILIGAN
DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and
ROBERTO G. BORROMEO, respondents.
MELO, J.:
When petitioners informed herein private respondents to stop
the delivery of pulp wood supplied by the latter pursuant to a
contract of sale between them, private respondents sued for
breach of their covenant. The court of origin dismissed the
complaint but at the same time enjoined petitioners to
respect the contract of sale if circumstances warrant the full
operation in a commercial scale of petitioners' Baloi plant
and to continue accepting and paying for deliveries of pulp
wood products from Romeo Lluch (page 14, Petition; page 20,
Rollo). On appeal to the then Intermediate Appellate Court,
Presiding Justice Ramon G. Gaviola, Jr., who spoke for the First
Civil Cases Division, with Justices Caguioa, Quetulio-Losa, and
Luciano, concurring, modified the judgment by directing
herein petitioners to pay private respondents, jointly and
severally, the sum of P30,000.00 as moral damages and
P15,000.00 as attorney's fees (pages 48-58, Rollo).
In the petition at bar, it is argued that the Appellate Court
erred;
A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE
CONTRACT OF SALE PETITIONER TANTOCO WHO SIGNED
MERELY AS REPRESENTATIVE OF PETITIONER RUSTAN, AND
PETITIONER VERGARA WHO DID NOT SIGN AT ALL;
B. . . . IN HOLDING THAT PETITIONER RUSTAN'S DECISION TO
SUSPEND TAKING DELIVERY OF PULP WOOD FROM
RESPONDENT LLUCH, WHICH WAS PROMPTED BY SERIOUS
AND UNFORESEEN DEFECTS IN THE MILL, WAS NOT IN THE
LAWFUL EXERCISE OF ITS RIGHTS UNDER THE CONTRACT OF
SALE; and
C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEY'S
FEES IN THE ABSENCE OF FRAUD OR BAD FAITH.
(page 18, Petition; page 24, Rollo)
The generative facts of the controversy, as gathered from the
pleadings, are fairly simple.
Sometime in 1966, petitioner Rustan established a pulp and
paper mill in Baloi, Lano del Norte. On March 20, 1967,
respondent Lluch, who is a holder of a forest products
license, transmitted a letter to petitioner Rustan for the
supply of raw materials by the former to the latter. In
response thereto, petitioner Rustan proposed, among other
things, in the letter-reply:
2. That the contract to supply is not exclusive because
Rustan shall have the option to buy from other suppliers who
are qualified and holder of appropriate government authority
or license to sell and dispose pulp wood.
These prefatory business proposals culminated in the
execution, during the month of April, 1968, of a contract of
sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp
and Paper Mill, Inc. undertook to pay the price of P30.00 per
cubic meter of pulp wood raw materials to be delivered at the
buyer's plant in Baloi, Lanao del Norte. Of pertinent
significance to the issue at hand are the following stipulations
in the bilateral undertaking:
3. That BUYER shall have the option to buy from other
SELLERS who are equally qualified and holders of appropriate
government authority or license to sell or dispose, that
BUYER shall not buy from any other seller whose pulp woods
being sold shall have been established to have emanated
from the SELLER'S lumber and/or firewood concession. . . .
And that SELLER has the priority to supply the pulp wood
materials requirement of the BUYER;
xxx xxx xxx
7. That the BUYER shall have the right to stop delivery of the
said raw materials by the seller covered by this contract
when supply of the same shall become sufficient until such
time when need for said raw materials shall have become
necessarily provided, however, that the SELLER is given
sufficient notice.
(pages 8-9, Petition; pages 14-15, Rollo)
In the installation of the plant facilities, the technical staff of
Rustan Pulp and Paper Mills, Inc. recommended the
acceptance of deliveries from other suppliers of the pulp
wood materials for which the corresponding deliveries were
made. But during the test run of the pulp mill, the machinery
line thereat had major defects while deliveries of the raw
materials piled up, which prompted the Japanese supplier of
the machinery to recommend the stoppage of the deliveries.
The suppliers were informed to stop deliveries and the letter
of similar advice sent by petitioners to private respondents
reads:
Attention: Mr. Romeo A. Lluch
Dear Mr. Lluch:
This is to inform you that the supply of raw materials to us
has become sufficient and we will not be needing further
delivery from you. As per the terms of our contract, please
stop delivery thirty (30) days from today.
Private respondent Romeo Lluch sought to clarify the tenor of
the letter as to whether stoppage of delivery or termination
of the contract of sale was intended, but the query was not
answered by petitioners. This alleged ambiguity
notwithstanding, Lluch and the other suppliers resumed
deliveries after the series of talks between Romeo S. Vergara
and Romeo Lluch.
On January 23, 1969, the complaint for contractual breach
was filed which, as earlier noted, was dismissed. In the
process of discussing the merits of the appeal interposed
therefrom, respondent Court clarified the eleven errors
assigned below by herein petitioners and it seems that
petitioners were quite satisfied with the Appellate Court's in
seriatim response since petitioners trimmed down their
discourse before this Court to three basic matters, relative to
the nature of liability, the propriety of the stoppage, and the
feasibility of awarding moral damages including attorney's
fees.
Respondent Court found it ironic that petitioners had to
exercise the prerogative regarding the stoppage of deliveries
via the letter addressed to Iligan Diversified Project, Inc. on
September 30, 1968 because petitioners never really
stopped accepting deliveries from private respondents until
December 23, 1968. Petitioner's paradoxial stance portrayed
in this manner:
. . . We cannot accept the reasons given by appellees as to
why they were stopping deliveries of pulp wood materials.
First, We find it preposterous for a business company like the
appellee to accumulate stockpiles of cut wood even after its
letter to appellants dated September 30, 1968 stopping the
deliveries because the supply of raw materials has become
sufficient. The fact that appellees were buying and accepting
pulp wood materials from other sources other than the
appellants even after September 30, 1968 belies that they
have more than sufficient supply of pulp wood materials, or
that they are unable to go into full commercial operation or
that their machineries are defective or even that the pulp
wood materials coming from appellants are sub-
standard. Second, We likewise find the court a quo's finding
that "even with one predicament in which defendant Rustan
found itself wherein commercial operation was delayed, it
accommodated all its suppliers of raw materials, including
plaintiff, Romeo Lluch, by allowing them to deliver all its
stockpiles of cut wood" (Decision, page 202, Record on
Appeal) to be both illogical and inconsistent. Illogical,
because as appellee Rustan itself claimed "if the plant could
not be operated on a commercial scale, it would then be
illogical for defendant Rustan to continue accepting deliveries
of raw materials." Inconsistent because this kind of "concern"
or "accommodation" is not usual or consistent with ordinary
business practice considering that this would mean adequate
losses to the company. More so, if We consider that appellee
is a new company and could not therefore afford to absorb
more losses than it already allegedly incurred by the
consequent defects in the machineries.
Clearly therefore, this is a breach of the contract entered into
by and between appellees and appellants which warrants the
intervention of this Court.
xxx xxx xxx
. . . The letter of September 30, 1968, Exh. "D" shows that
defendants were terminating the contract of sale (Exh. "A"),
and refusing any future or further delivery whether on the
ground that they had sufficient supply of pulp wood materials
or that appellants cannot meet the standard of quality of
pulp wood materials that Rustan needs or that there were
defects in appellees' machineries resulting in an inability to
continue full commercial operations.
Furthermore, there is evidence on record that appellees have
been accepting deliveries of pulp wood materials from other
sources, i.e. Salem Usman, Fermin Villanueva and Pacasum
even after September 30, 1968.
Lastly, it would be unjust for the court a quo to rule that the
contract of sale be temporarily suspended until Rustan, et al.,
are ready to accept deliveries from appellants. This would
make the resumption of the contract purely dependent on
the will of one party the appellees, and they could always
claim, as they did in the instant case, that they have more
than sufficient supply of pulp wood when in fact they have
been accepting the same from other sources. Added to this,
the court a quo was imposing a new condition in the contract,
one that was not agreed upon by the parties.
(Pages B-10, Decision; Pages 55-57, Rollo)
The matter of Tantoco's and Vergara's joint and several
liability as a result of the alleged breach of the contract is
dependent, first of all, on whether Rustan Pulp and Paper
Mills may legally exercise the right of stoppage should there
be a glut of raw materials at its plant.
And insofar as the express discretion on the part of
petitioners is concerned regarding the right of stoppage, we
feel that there is cogent basis for private respondent's
apprehension on the illusory resumption of deliveries
inasmuch as the prerogative suggests a condition solely
dependent upon the will of petitioners. Petitioners can stop
delivery of pulp wood from private respondents if the supply
at the plant is sufficient as ascertained by petitioners, subject
to re-delivery when the need arises as determined likewise
by petitioners. This is our simple understanding of the literal
import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated
from the face of the contract without affecting the rest of the
stipulations considering that the condition relates to the
fulfillment of an already existing obligation and not to its
inception (Civil Code Annotated, by Padilla, 1987 Edition,
Volume 4, Page 160). It is, of course, a truism in legal
jurisprudence that a condition which is both potestative (or
facultative) and resolutory may be valid, even though the
saving clause is left to the will of the obligor like what this
Court, through Justice Street, said in Taylor vs. Uy Tieng Piao
and Tan Liuan (43 Phil. 873; 879; cited in Commentaries and
Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991
edition, page 152). But the conclusion drawn from the Taylor
case, which allowed a condition for unilateral cancellation of
the contract when the machinery to be installed on the
factory did not arrive in Manila, is certainly inappropriate for
application to the case at hand because the factual milieu in
the legal tussle dissected by Justice Street conveys that the
proviso relates to the birth of the undertaking and not to the
fulfillment of an existing obligation.
In support of the second ground for allowance of the petition,
petitioners are of the impression that the letter dated
September 30, 1968 sent to private respondents is well
within the right of stoppage guaranteed to them by
paragraph 7 of the contract of sale which was construed by
petitioners to be a temporary suspension of deliveries. There
is no doubt that the contract speaks loudly about petitioners'
prerogative but what diminishes the legal efficacy of such
right is the condition attached to it which, as aforesaid, is
dependent exclusively on their will for which reason, We have
no alternative but to treat the controversial stipulation as
inoperative (Article 1306, New Civil Code). It is for this same
reason that we are not inclined to follow the interpretation of
petitioners that the suspension of delivery was merely
temporary since the nature of the suspension itself is again
conditioned upon petitioner's determination of the sufficiency
of supplies at the plant.
Neither are we prepared to accept petitioners' exculpation
grounded on frustration of the commercial object under
Article 1267 of the New Civil Code, because petitioners
continued accepting deliveries from the suppliers. This
conduct will estop petitioners from claiming that the
breakdown of the machinery line was an extraordinary
obstacle to their compliance to the prestation. It was indeed
incongruous for petitioners to have sent the letters calling for
suspension and yet, they in effect disregarded their own
advice by accepting the deliveries from the suppliers. The
demeanor of petitioners along this line was sought to be
justified as an act of generous accommodation, which
entailed greater loss to them and "was not motivated by the
usual businessman's obsession with profit" (Page 34, Petition;
Page 40, Rollo). Altruism may be a noble gesture but
petitioners' stance in this respect hardly inspires belief for
such an excuse is inconsistent with a normal business
enterprise which takes ordinary care of its concern in cutting Republic of the Philippines
down on expenses (Section 3, (d), Rule 131, Revised Rules of SUPREME COURT
Court). Knowing fully well that they will encounter difficulty in Manila
producing output because of the defective machinery line,
petitioners opted to open the plant to greater loss, thus THIRD DIVISION
compounding the costs by accepting additional supply to the
stockpile. Verily, the petitioner's action when they Adm. Matter No. R-181-P July 31, 1987
acknowledged that "if the plant could not be operated on a
commercial scale, it would then be illogical for defendant ADELIO C. CRUZ, complainant,
Rustan to continue accepting deliveries of raw materials." vs.
(Page 202, Record on Appeal; Page 8, Decision; Page 55, QUITERIO L. DALISAY, Deputy Sheriff, RTC,
Rollo). Manila, respondents.

Petitioners argue next that Tantoco and Vergara should not RESOLUTION
have been adjudged to pay moral damages and attorney's
fees because Tantoco merely represented the interest of FERNAN, J.:
Rustan Pulp and Paper Mills, Inc. while Romeo S. Vergara was
not privy to the contract of sale. On this score, We have to
In a sworn complaint dated July 23, 1984, Adelio C. Cruz
agree with petitioners' citation of authority to the effect that
charged Quiterio L. Dalisay, Senior Deputy Sheriff of Manila,
the President and Manager of a corporation who entered into
with "malfeasance in office, corrupt practices and serious
and signed a contract in his official capacity, cannot be made
irregularities" allegedly committed as follows:
liable thereunder in his individual capacity in the absence of
stipulation to that effect due to the personality of the
1. Respondent sheriff attached and/or levied the money
corporation being separate and distinct from the person
belonging to complainant Cruz when he was not himself the
composing it (Bangued Generale Belge vs. Walter Bull and
judgment debtor in the final judgment of NLRC NCR Case No.
Co., Inc., 84 Phil. 164). And because of this precept, Vergara's
8-12389-91 sought to be enforced but rather the company
supposed non-participation in the contract of sale although
known as "Qualitrans Limousine Service, Inc.," a duly
he signed the letter dated September 30, 1968 is completely
registered corporation; and,
immaterial. The two exceptions contemplated by Article 1897
of the New Civil Code where agents are directly responsible
are absent and wanting. 2. Respondent likewise caused the service of the alias writ of
execution upon complainant who is a resident of Pasay City,
despite knowledge that his territorial jurisdiction covers
WHEREFORE, the decision appealed from is hereby MODIFIED
Manila only and does not extend to Pasay City.
in the sense that only petitioner Rustan Pulp and Paper Mills
is ordered to pay moral damages and attorney's fees as
awarded by respondent Court. In his Comments, respondent Dalisay explained that when he
garnished complainant's cash deposit at the Philtrust bank,
he was merely performing a ministerial duty. While it is true
SO ORDERED.
that said writ was addressed to Qualitrans Limousine Service,
Inc., yet it is also a fact that complainant had executed an
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
affidavit before the Pasay City assistant fiscal stating that he
is the owner/president of said corporation and, because of
that declaration, the counsel for the plaintiff in the labor case
advised him to serve notice of garnishment on the Philtrust
bank.
On November 12, 1984, this case was referred to the
Executive Judge of the Regional Trial Court of Manila for
investigation, report and recommendation.
Prior to the termination of the proceedings, however,
complainant executed an affidavit of desistance stating that
he is no longer interested in prosecuting the case against
respondent Dalisay and that it was just a "misunderstanding"
between them. Upon respondent's motion, the Executive
Judge issued an order dated May 29, 1986 recommending the
dismissal of the case.
It has been held that the desistance of complainant does not
preclude the taking of disciplinary action against respondent.
Neither does it dissuade the Court from imposing the
appropriate corrective sanction. One who holds a public
position, especially an office directly connected with the
administration of justice and the execution of judgments,
must at all times be free from the appearance of
impropriety.1
We hold that respondent's actuation in enforcing a judgment
against complainant who is not the judgment debtor in the
case calls for disciplinary action. Considering the ministerial
nature of his duty in enforcing writs of execution, what is
incumbent upon him is to ensure that only that portion of a
decision ordained or decreed in the dispositive part should be
the subject of execution.2 No more, no less. That the title of
the case specifically names complainant as one of the
respondents is of no moment as execution must conform to
that directed in the dispositive portion and not in the title of
the case.
The tenor of the NLRC judgment and the implementing writ is
clear enough. It directed Qualitrans Limousine Service, Inc. to
reinstate the discharged employees and pay them full
backwages. Respondent, however, chose to "pierce the veil
of corporate entity" usurping a power belonging to the court
and assumed improvidently that since the complainant is the
owner/president of Qualitrans Limousine Service, Inc., they
are one and the same. It is a well-settled doctrine both in law
and in equity that as a legal entity, a corporation has a
personality distinct and separate from its individual
stockholders or members. The mere fact that one is president
of a corporation does not render the property he owns or
possesses the property of the corporation, since the
president, as individual, and the corporation are separate
entities.3
Anent the charge that respondent exceeded his territorial
jurisdiction, suffice it to say that the writ of execution sought
to be implemented was dated July 9, 1984, or prior to the
issuance of Administrative Circular No. 12 which restrains a
sheriff from enforcing a court writ outside his territorial
jurisdiction without first notifying in writing and seeking the
assistance of the sheriff of the place where execution shall
take place.
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L.
Dalisay NEGLIGENT in the enforcement of the writ of
execution in NLRC Case-No. 8-12389-91, and a fine
equivalent to three [3] months salary is hereby imposed with
a stern warning that the commission of the same or similar
offense in the future will merit a heavier penalty. Let a copy
of this Resolution be filed in the personal record of the
respondent.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-56076 September 21, 1983
PALAY, INC. and ALBERT ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive Assistant
NATIONAL HOUSING AUTHORITY and NAZARIO
DUMPIT respondents.
Santos, Calcetas-Santos & Geronimo Law Office for
petitioner.
Wilfredo E. Dizon for private respondent.
MELENCIO-HERRERA, J.:
The Resolution, dated May 2, 1980, issued by Presidential
Executive Assistant Jacobo Clave in O.P. Case No. 1459,
directing petitioners Palay, Inc. and Alberto Onstott jointly
and severally, to refund to private respondent, Nazario
Dumpit, the amount of P13,722.50 with 12% interest per
annum, as resolved by the National Housing Authority in its
Resolution of July 10, 1979 in Case No. 2167, as well as the
Resolution of October 28, 1980 denying petitioners' Motion
for Reconsideration of said Resolution of May 2, 1980, are
being assailed in this petition.
On March 28, 1965, petitioner Palay, Inc., through its
President, Albert Onstott executed in favor of private
respondent, Nazario Dumpit, a Contract to Sell a parcel of
Land (Lot No. 8, Block IV) of the Crestview Heights
Subdivision in Antipolo, Rizal, with an area of 1,165 square
meters, - covered by TCT No. 90454, and owned by said
corporation. The sale price was P23,300.00 with 9% interest
per annum, payable with a downpayment of P4,660.00 and
monthly installments of P246.42 until fully paid. Paragraph 6
of the contract provided for automatic extrajudicial rescission
upon default in payment of any monthly installment after the
lapse of 90 days from the expiration of the grace period of
one month, without need of notice and with forfeiture of all
installments paid.
Respondent Dumpit paid the downpayment and several
installments amounting to P13,722.50. The last payment was
made on December 5, 1967 for installments up to September
1967.
On May 10, 1973, or almost six (6) years later, private
respondent wrote petitioner offering to update all his overdue
accounts with interest, and seeking its written consent to the
assignment of his rights to a certain Lourdes Dizon. He
followed this up with another letter dated June 20, 1973
reiterating the same request. Replying petitioners informed
respondent that his Contract to Sell had long been rescinded
pursuant to paragraph 6 of the contract, and that the lot had
already been resold.
Questioning the validity of the rescission of the contract,
respondent filed a letter complaint with the National Housing
Authority (NHA) for reconveyance with an altenative prayer
for refund (Case No. 2167). In a Resolution, dated July 10,
1979, the NHA, finding the rescission void in the absence of
either judicial or notarial demand, ordered Palay, Inc. and
Alberto Onstott in his capacity as President of the
corporation, jointly and severally, to refund immediately to
Nazario Dumpit the amount of P13,722.50 with 12% interest
from the filing of the complaint on November 8, 1974.
Petitioners' Motion for Reconsideration of said Resolution was
denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation
that the NHA Resolution was contrary to law (O.P. Case No.
1459), respondent Presidential Executive Assistant, on May 2,
1980, affirmed the Resolution of the NHA. Reconsideration
sought by petitioners was denied for lack of merit. Thus, the
present petition wherein the following issues are raised:
I
Whether notice or demand is not mandatory under the
circumstances and, therefore, may be dispensed with by
stipulation in a contract to sell.
II
Whether petitioners may be held liable for the refund of the
installment payments made by respondent Nazario M.
Dumpit.
III
Whether the doctrine of piercing the veil of corporate fiction
has application to the case at bar.
IV
Whether respondent Presidential Executive Assistant
committed grave abuse of discretion in upholding the
decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by
respondent Nazario M. Dumpit thereby denying substantial
justice to the petitioners, particularly petitioner Onstott
We issued a Temporary Restraining Order on Feb 11, 1981
enjoining the enforcement of the questioned Resolutions and
of the Writ of Execution that had been issued on December 2,
1980. On October 28, 1981, we dismissed the petition but
upon petitioners' motion, reconsidered the dismissal and
gave due course to the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in
cancelling the contract to sell without prior notice or demand
upon respondent in view of paragraph 6 thereof which
provides-
6. That in case the BUYER falls to satisfy any monthly
installment or any other payments herein agreed upon, the
BUYER shall be granted a month of grace within which to
make the payment of the t in arrears together with the one
corresponding to the said month of grace. -It shall be
understood, however, that should the month of grace herein
granted to the BUYER expire, without the payment &
corresponding to both months having been satisfied, an
interest of ten (10%) per cent per annum shall be charged on
the amounts the BUYER should have paid; it is understood
further, that should a period of NINETY (90) DAYS elapse to
begin from the expiration of the month of grace hereinbefore
mentioned, and the BUYER shall not have paid all the
amounts that the BUYER should have paid with the
corresponding interest up to the date, the SELLER shall have
the right to declare this contract cancelled and of no effect
without notice, and as a consequence thereof, the SELLER
may dispose of the lot/lots covered by this Contract in favor
of other persons, as if this contract had never been entered
into. In case of such cancellation of this Contract, all the
amounts which may have been paid by the BUYER in
accordance with the agreement, together with all the
improvements made on the premises, shall be considered as
rents paid for the use and occupation of the above
mentioned premises and for liquidated damages suffered by
virtue of the failure of the BUYER to fulfill his part of this
agreement : and the BUYER hereby renounces his right to
demand or reclaim the return of the same and further
obligates peacefully to vacate the premises and deliver the
same to the SELLER.
Well settled is the rule, as held in previous
jurisprudence, 2 that judicial action for the rescission of a
contract is not necessary where the contract provides that it
may be revoked and cancelled for violation of any of its
terms and conditions. However, even in the cited cases,
there was at least a written notice sent to the defaulter
informing him of the rescission. As stressed in University of
the Philippines vs. Walfrido de los Angeles 3 the act of a party
in treating a contract as cancelled should be made known to
the other. We quote the pertinent excerpt:
Of course, it must be understood that the act of a party in
treating a contract as cancelled or resolved in account of
infractions by the other contracting party must be made
known to the other and is always provisional being ever
subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified it is free to
resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted,
the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated
may consider it resolved or rescinded, and act accordingly,
without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether the
action taken was or was not correct in law. But the law
definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach
will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages
(Civil Code, Article 2203).
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring
that judicial action is necessary for the resolution of a
reciprocal obligation (Ocejo Perez & Co., vs. International
Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan
De Dios, et al., 84 Phil 820) since in every case where the
extrajudicial resolution is contested only the final award of
the court of competent jurisdiction can conclusively settle
whether the resolution was proper or not. It is in this sense
that judicial action win be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to
judicial invalidation unless attack thereon should become
barred by acquiescense, estoppel or prescription.
Fears have been expressed that a stipulation providing for a
unilateral rescission in case of breach of contract may render
nugatory the general rule requiring judicial action (v.
Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV,
page 140) but, as already observed, in case of abuse or error
by the rescinder the other party is not barred from
questioning in court such abuse or error, the practical effect
of the stipulation being merely to transfer to the defaulter
the initiative of instituting suit, instead of the
rescinder (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante 4, reading:
A stipulation entitling one party to take possession of the
land and building if the other party violates the contract does
not ex propio vigore confer upon the former the right to take
possession thereof if objected to without judicial intervention
and determination.
This was reiterated in Zulueta vs. Mariano 5 where we held
that extrajudicial rescission has legal effect where the other
party does not oppose it. 6 Where it is objected to, a judicial
determination of the issue is still necessary.
In other words, resolution of reciprocal contracts may be
made extrajudicially unless successfully impugned in Court. If
the debtor impugns the declaration, it shall be subject to
judicial determination. 7
In this case, private respondent has denied that rescission is
justified and has resorted to judicial action. It is now for the
Court to determine whether resolution of the contract by
petitioners was warranted.
We hold that resolution by petitioners of the contract was
ineffective and inoperative against private respondent for
lack of notice of resolution, as held in the U.P. vs. Angeles
case, supra
Petitioner relies on Torralba vs. De los Angeles 8 where it was
held that "there was no contract to rescind in court because
from the moment the petitioner defaulted in the timely
payment of the installments, the contract between the
parties was deemed ipso facto rescinded." However, it should
be noted that even in that case notice in writing was made to
the vendee of the cancellation and annulment of the contract
although the contract entitled the seller to immediate
repossessing of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was
to be later underscored in Republic Act No. 6551 entitled "An
Act to Provide Protection to Buyers of Real Estate on
Installment Payments." which took effect on September 14,
1972, when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take
place after thirty days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract
by a notarial act and upon full payment of the cash surrender
value to the buyer. (Emphasis supplied).
The contention that private respondent had waived his right
to be notified under paragraph 6 of the contract is neither
meritorious because it was a contract of adhesion, a standard
form of petitioner corporation, and private respondent had no
freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only
where liberty of choice has been fully accorded. 9 Moreover, it
is a matter of public policy to protect buyers of real estate on
installment payments against onerous and oppressive
conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment
payments.
Regarding the second issue on refund of the installment
payments made by private respondent. Article 1385 of the
Civil Code provides:
ART. 1385. Rescission creates the obligation to return the
things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
Neither sham rescission take place when the things which are
the object of the contract are legally in the possession of
third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from
the person causing the loss.
As a consequence of the resolution by petitioners, rights to
the lot should be restored to private respondent or the same
should be replaced by another acceptable lot. However,
considering that the property had already been sold to a third
person and there is no evidence on record that other lots are
still available, private respondent is entitled to the refund of
installments paid plus interest at the legal rate of 12%
computed from the date of the institution of the action. 10 It
would be most inequitable if petitioners were to be allowed to
retain private respondent's payments and at the same time
appropriate the proceeds of the second sale to another.
We come now to the third and fourth issues regarding the
personal liability of petitioner Onstott who was made jointly
and severally liable with petitioner corporation for refund to
private respondent of the total amount the latter had paid to
petitioner company. It is basic that a corporation is invested
by law with a personality separate and distinct from those of
the persons composing it as wen as from that of any other
legal entity to which it may be related. 11 As a general rule, a
corporation may not be made to answer for acts or liabilities
of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of
corporate fiction may be pierced when it is used as a shield
to further an end subversive of justice 12 ; or for purposes
that could not have been intended by the law that created
it 13 ; or to defeat public convenience, justify wrong, protect
fraud, or defend crime. 14 ; or to perpetuate fraud or confuse
legitimate issues 15 ; or to circumvent the law or perpetuate
deception 16 ; or as an alter ego, adjunct or business conduit
for the sole benefit of the stockholders. 17
We find no badges of fraud on petitioners' part. They had
literally relied, albeit mistakenly, on paragraph 6 (supra) of
its contract with private respondent when it rescinded the
contract to sell extrajudicially and had sold it to a third
person.
In this case, petitioner Onstott was made liable because he
was then the President of the corporation and he a to be the
controlling stockholder. No sufficient proof exists on record
that said petitioner used the corporation to defraud private
respondent. He cannot, therefore, be made personally liable
just because he "appears to be the controlling stockholder".
Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding
the separate corporate personality. 18 In this respect then, a
modification of the Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public
official, dated May 2, 1980, is hereby modified. Petitioner
Palay, Inc. is directed to refund to respondent Nazario M.
Dumpit the amount of P13,722.50, with interest at twelve
(12%) percent per annum from November 8, 1974, the date
of the filing of the Complaint. The temporary Restraining
Order heretofore issued is hereby lifted.
No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of the Court
of First Instance of Manila dismissing the action in its Civil
Case No. 48925 brought by the herein plaintiff-appellant
Philippine First Insurance Co., Inc. to the Court of Appeals
which could, upon finding that the said appeal raises purely
questions of law, declared itself without jurisdiction to
entertain the same and, in its resolution dated 15 July 1966,
certified the records thereof to this Court for proper
determination.
The antecedent facts are set forth in the pertinent portions of
the resolution of the Court of Appeals referred to as follows:
According to the complaint, plaintiff was originally organized
as an insurance corporation under the name of 'The Yek Tong
Lin Fire and Marine Insurance Co., Ltd.' The articles of
incorporation originally presented before the Security and
Exchange Commissioner and acknowledged before Notary
Public Mr. E. D. Ignacio on June 1, 1953 state that the name
of the corporation was 'The Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' On May 26, 1961 the articles of
incorporation were amended pursuant to a certificate of the
Board of Directors dated March 8, 1961 changing the name
of the corporation to 'Philippine First Insurance Co., Inc.'.

The complaint alleges that the plaintiff Philippine First

G.R. No. L-26370 July 31, 1970 Insurance Co., Inc., doing business under the name of 'The
Yek Tong Lin Fire and Marine Insurance Co., Lt.' signed as co-
PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff- maker together with defendant Maria Carmen Hartigan, CGH,
appellant, a promissory note for P5,000.00 in favor of the China Banking
vs. Corporation payable within 30 days after the date of the
MARIA CARMEN HARTIGAN, CGH, and O. promissory note with the usual banking interest; that the
ENGKEE, defendants-appellees. plaintiff agreed to act as such co-maker of the promissory
note upon the application of the defendant Maria Carmen
Hartigan, CGH, who together with Antonio F. Chua and Chang
Bausa, Ampil & Suarez for plaintiff-appellant.
Ka Fu, signed an indemnity agreement in favor of the
plaintiff, undertaking jointly and severally, to pay the plaintiff
Nicasio E. Martin for defendants-appellees.
damages, losses or expenses of whatever kind or nature,
including attorney's fees and legal costs, which the plaintiff
may sustain as a result of the execution by the plaintiff and
co-maker of Maria Carmen Hartigan, CGH, of the promissory
note above-referred to; that as a result of the execution of
the promissory note by the plaintiff and Maria Carmen
Hartigan, CGH, the China Banking Corporation delivered to
the defendant Maria Carmen Hartigan, CGH, the sum of
P5,000.00 which said defendant failed to pay in full, such that
on August 31, 1961 the same was. renewed and as of
November 27, 1961 there was due on account of the
promissory note the sum of P4,559.50 including interest. The
complaint ends with a prayer for judgment against the
defendants, jointly and severally, for the sum of P4,559.50
with interest at the rate of 12% per annum from November
23, 1961 plus P911.90 by way of attorney's fees and costs.
Although O. Engkee was made as party defendant in the
caption of the complaint, his name is not mentioned in the
body of said complaint. However, his name Appears in the
Annex A attached to the complaint which is the counter
indemnity agreement supposed to have been signed
according to the complaint by Maria Carmen Hartigan, CGH,
Antonio F. Chua and Chang Ka Fu.
In their answer the defendants deny the allegation that the
plaintiff formerly conducted business under the name and
style of 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.'
They admit the execution of the indemnity agreement but
they claim that they signed said agreement in favor of the
Yek Tong Lin Fire and Marine Insurance Co., Ltd.' and not in
favor of the plaintiff. They likewise admit that they failed to
pay the promissory note when it fell due but they allege that
since their obligation with the China Banking Corporation
based on the promissory note still subsists, the surety who
co-signed the promissory note is not entitled to collect the
value thereof from the defendants otherwise they will be
liable for double amount of their obligation, there being no
allegation that the surety has paid the obligation to the
creditor.
By way of special defense, defendants claim that there is no
privity of contract between the plaintiff and the defendants
and consequently, the plaintiff has no cause of action against
them, considering that the complaint does not allege that the
plaintiff and the 'Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' are one and the same or that the plaintiff has acquired
the rights of the latter. The parties after the admission of
Exhibit A which is the amended articles of incorporation and
Exhibit 1 which is a demand letter dated August 16, 1962
signed by the manager of the loans and discount department
of the China Banking Corporation showing that the
promissory note up to said date in the sum of P4,500.00 was
still unpaid, submitted the case for decision based on the
pleadings.
Under date of 6 October 1962, the Court of First Instance of
Manila rendered the decision appealed. It dismissed the
action with costs against the plaintiff Philippine First
Insurance Co., Inc., reasoning as follows:
... With these undisputed facts in mind, the parties correctly
concluded that the issues for resolution by this Court are as
follows:
(a) Whether or not the plaintiff is the real party in interest
that may validly sue on the indemnity agreement signed by
the defendants and the Yek Tong Lin Fire & Marine Insurance
Co., Ltd. (Annex A to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or reimbursement
may under said indemnity agreement prosper without
plaintiff having yet paid the amount due under said
promissory note.
In the first place, the change of name of the Yek Tong Lin Fire
& Marine Insurance Co., Ltd. to the Philippines First Insurance
Co., Inc. is of dubious validity. Such change of name in effect
dissolved the original corporation by a process of dissolution
not authorized by our corporation law (see Secs. 62 and 67,
inclusive, of our Corporation Law). Moreover, said change of
name, amounting to a dissolution of the Yek Tong Lin Fire &
Marine Insurance Co., Ltd., does not appear to have been
effected with the written note or assent of stockholders
representing at least two-thirds of the subscribed capital
stock of the corporation, a voting proportion required not
only for the dissolution of a corporation but also for any
amendment of its articles of incorporation (Secs. 18 and 62,
Corporation Law). Furthermore, such change of corporate
name appears to be against public policy and may be
effected only by express authority of law (Red Line
Transportation Co. v. Rural Transit Co., Ltd., 60 Phil. 549, 555;
Cincinnati Cooperage Co., Ltd. vs. Vate, 26 SW 538, 539;
Pilsen Brewing Co. vs. Wallace, 125 NE 714), but there is
nothing in our corporation law authorizing the change of
corporate name in this jurisdiction.
In the second place, assuming that the change of name of
the Yek Tong Lin Fire & Marine Insurance Co. Ltd., to
Philippines pine First Insurance Co., Inc., as accomplished on
March 8, 1961, is valid, that would mean that the original
corporation, the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd., became dissolved and of no further existence since
March 8, 1961, so that on May 15, 1961, the date the
indemnity agreement, Annex A, was executed, said original
corporation bad no more power to enter into any agreement
with the defendants, and the agreement entered into by it
was ineffective for lack of capacity of said dissolved
corporation to enter into said agreement. At any rate, even if
we hold that said change of name is valid, the fact remains
that there is no evidence showing that the new entity, the
Philippine First Insurance Co., Inc. has with the consent of the
original parties, assumed the obligations or was assigned the
rights of action in the original corporation, the Yek Tong Lin
Fire & Marine Insurance Co., Ltd. In other words, there is no
evidence of conventional subrogation of the Plaintiffs in the
rights of the Yek Tong Lin Fire & Marine Insurance Co., Ltd.
under said indemnity agreement (Arts. 1300, 1301, New Civil
Code). without such subrogation assignment of rights, the
herein plaintiff has no cause of action against the
defendants, and is, therefore, not the right party in interest
as plaintiff.
Last, but not least, assuming that the said change of name
was legal and operated to dissolve the original corporation,
the dissolved corporation, must pursuant to Sec. 77 of our
corporation law, be deemed as continuing as a body
corporate for three (3) years from March 8, 1961 for the
purpose of prosecuting and defending suits. It is, therefore,
the Yek Tong Lin Fire & Marine Insurance Co., Ltd. that is the
proper party to sue the defendants under said indemnity
agreement up to March 8, 1964.
Having arrived at the foregoing conclusions, this Court need
not squarely pass upon issue (b) formulated above.
WHEREFORE, plaintiff's action is hereby dismissed, with costs
against the plaintiff.
In due time, the Philippine First Insurance Company, Inc.
moved for reconsideration of the decision aforesaid, but said
motion was denied on December 3, 1962 in an order worded
thus:
The motion for reconsideration, dated November 8, 1962,
raises no new issue that we failed to consider in rendering
our decision of October 6, 1962. However, it gives us an
opportunity to amplify our decision as regards the question of
change of name of a corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing a change
of name of a corporation organized pursuant to its provisions.
Sec. 18 of the Corporation Law authorizes, in our opinion,
amendment to the Articles of Incorporation of a corporation
only as to matters other than its corporate name. Once a
corporation is organized in this jurisdiction by the execution
and registration of its Articles of Incorporation, it shall
continue to exist under its corporate name for the lifetime of
its corporate existence fixed in its Articles of Incorporation,
unless sooner legally dissolved (Sec. 11, Corp. Law).
Significantly, change of name is not one of the methods of
dissolution of corporations expressly authorized by our
Corporation Law. Also significant is the fact that the power to
change its corporate name is not one of the general powers
conferred on corporations in this jurisdiction (Sec. 13, Corp.
Law). The enumeration of corporate powers made in our
Corporation Law implies the exclusion of all others (Thomas
v. West Jersey R. Co., 101 U.S. 71, 25 L. ed. 950). It is
obvious, in this connection, that change of name is not one of
the powers necessary to the exercise of the powers conferred
on corporations by said Sec. 13 (see Sec. 14, Corp. Law).
To rule that Sec. 18 of our Corporation Law authorizes the
change of name of a corporation by amendment of its
Articles of Incorporation is to indulge in judicial legislation.
We have examined the cases cited in Volume 13 of American
Jurisprudence in support of the proposition that the general
power to alter or amend the charter of a corporation
necessarily includes the power to alter the name of a
corporation, and find no justification for said conclusion
arrived at by the editors of American Jurisprudence. On the
contrary, the annotations in favor of plaintiff's view appear to
have been based on decisions in cases where the statute
itself expressly authorizes change of corporate name by
amendment of its Articles of Incorporation. The correct rule in
harmony with the provisions of our Corporation Law is well
expressed in an English case as follows:
After a company has been completely register without defect
or omission, so as to be incorporated by the name set forth in
the deed of settlement, such incorporated company has not
the power to change its name ... Although the King by his
prerogative might incorporate by a new name, and the newly
named corporation might retain former rights, and
sometimes its former name also, ... it never appears to be
such an act as the corporation could do by itself, but required
the same power as created the corporation. (Reg. v. Registrar
of Joint Stock Cos 10 Q.B. 839, 59 E.C.L. 839).
The contrary view appears to represent the minority doctrine,
judging from the annotations on decided cases on the matter.
The movant invokes as persuasive precedent the action of
the Securities Commissioner in tacitly approving the
Amended, Articles of Incorporation on May 26, 1961. We
regret that we cannot in good conscience lend approval to
this action of the Securities and Exchange Commissioner. We
find no justification, legal, moral, or practical, for adhering to
the view taken by the Securities and Exchange Commissioner
that the name of a corporation in the Philippines may be
changed by mere amendment of its Articles of Incorporation
as to its corporate name. A change of corporate name would
serve no useful purpose, but on the contrary would most
probably cause confusion. Only a dubious purpose could
inspire a change of a corporate. name which, unlike a natural
person's name, was chosen by the incorporators themselves;
and our Courts should not lend their assistance to the
accomplishment of dubious purposes.
WHEREFORE, we hereby deny plaintiff's motion for
reconsideration, dated November 8, 1962, for lack of merit.
In this appeal appellant contends that
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS
JURISDICTION, THERE IS NOTHING IN OUR CORPORATION LAW
AUTHORIZING THE CHANGE OF CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF
CORPORATE NAME APPEARS TO BE AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF
CORPORATE NAME HAS THE LEGAL EFFECT OF DISSOLVING
THE ORIGINAL CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF
NAME OF THE YEK TONG LIN FIRE & MARINE INSURANCE CO.,
LTD. IS OF DUBIOUS VALIDITY;
V of shares of any class, or would authorize shares with
THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT
HEREIN IS NOT THE RIGHT PARTY INTEREST TO SUE
DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above assignments of
error are well taken. The whole case, however, revolves
around only one question. May a Philippine corporation
change its name and still retain its original personality and
individuality as such?
The answer is not difficult to find. True, under Section 6 of the
Corporation Law, the first thing required to be stated in the
Articles of Incorporation of any corn corporation is its name,
but it is only one among many matters equally if not more
important, that must be stated therein. Thus, it is also
required, for example, to state the number and names of and
residences of the incorporators and the residence or location
of the principal office of the corporation, its term of
existence, the amount of its capital stock and the number of
shares into which it is divided, etc., etc.
On the other hand, Section 18 explicitly permits the articles
of incorporation to be amended thus:
Sec. 18. Any corporation may for legitimate corporate
purpose or purposes, amend its articles of incorporation by a
majority vote of its board of directors or trustees and the
vote or written assent of two-thirds of its members, if it be a
nonstock corporation or, if it be a stock corporation, by the
vote or written assent of the stockholders representing at
least two-thirds of the subscribed capital stock of the
corporation Provided, however, That if such amendment to
the articles of incorporation should consist in extending the
corporate existence or in any change in the rights of holders
preferences in any respect superior to those of outstanding
shares of any class, or would restrict the rights of any
stockholder, then any stockholder who did not vote for such
corporate action may, within forty days after the date upon
which such action was authorized, object thereto in writing
and demand Payment for his shares. If, after such a demand
by a stockholder, the corporation and the stockholder cannot
agree upon the value of his share or shares at the time such
corporate action was authorized, such values all be
ascertained by three disinterested persons, one of whom
shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The
findings of the appraisers shall be final, and if their award is
not paid by the corporation within thirty days after it is made,
it may be recovered in an action by the stockholder against
the corporation. Upon payment by the corporation to the
stockholder of the agreed or awarded price of his share or
shares, the stockholder shall forthwith transfer and assign
the share or shares held by him as directed by the
corporation: Provided, however, That their own shares of
stock purchased or otherwise acquired by banks, trust
companies, and insurance companies, should be disposed of
within six months after acquiring title thereto.
Unless and until such amendment to the articles of
incorporation shall have been abandoned or the action
rescinded, the stockholder making such demand in writing
shall cease to be a stockholder and shall have no rights with
respect to such shares, except the right to receive payment
therefor as aforesaid.
A stockholder shall not be entitled to payment for his shares
under the provisions of this section unless the value of the
corporate assets which would remain after such payment
would be at least equal to the aggregate amount of its debts
and liabilities and the aggregate par value and/or issued
value of the remaining subscribed capital stock.
A copy of the articles of incorporation as amended, duly
certified to be correct by the president and the secretary of
the corporation and a majority of the board of directors or
trustees, shall be filed with the Securities and Exchange
Commissioner, who shall attach the same to the original
articles of incorporation, on file in his office. From the time of
filing such copy of the amended articles of incorporation, the
corporation shall have the same powers and it and the
members and stockholders thereof shall thereafter be subject
to the same liabilities as if such amendment had been
embraced in the original articles of incorporation: Provided,
however, That should the amendment consist in extending
the corporate life, the extension shall not exceed 50 years in
any one instance. Provided, further, That the original articles
and amended articles together shall contain all provisions
required by law to be set out in the articles of
incorporation: And provided, further, That nothing in this
section shall be construed to authorize any corporation to
increase or diminish its capital stock or so as to effect any
rights or actions which accrued to others between the time of
filing the original articles of incorporation and the filing of the
amended articles.
The Securities and, Exchange Commissioner shall be entitled
to collect and receive the sum of ten pesos for filing said
copy of the amended articles of incorporation. Provided,
however, That when the amendment consists in extending
the term of corporate existence, the Securities and Exchange
Commissioner shall be entitled to collect and receive for the
filing of its amended articles of incorporation the same fees
collectible under existing law for the filing of articles of
incorporation. The Securities & Exchange Commissioner shall
not hereafter file any amendment to the articles of
incorporation of any bank, banking institution, or building and
loan association unless accompanied by a certificate of the
Monetary Board (of the Central Bank) to the effect that such
amendment is in accordance with law. (As further amended
by Act No. 3610, Sec. 2 and Sec. 9. R.A. No. 337 and R.A. No.
3531.)
It can be gleaned at once that this section does not only
authorize corporations to amend their charter; it also lays
down the procedure for such amendment; and, what is more
relevant to the present discussion, it contains provisos
restricting the power to amend when it comes to the term of
their existence and the increase or decrease of the capital
stock. There is no prohibition therein against the change of
name. The inference is clear that such a change is allowed,
for if the legislature had intended to enjoin corporations from
changing names, it would have expressly stated so in this
section or in any other provision of the law.
No doubt, "(the) name (of a corporation) is peculiarly
important as necessary to the very existence of a
corporation. The general rule as to corporations is that each
corporation shall have a name by which it is to sue and be
sued and do all legal acts. The name of a corporation in this
respect designates the corporation in the same manner as
the name of an individual designates the person." 1 Since an
individual has the right to change his name under certain
conditions, there is no compelling reason why a corporation
may not enjoy the same right. There is nothing sacrosanct in
a name when it comes to artificial beings. The sentimental
considerations which individuals attach to their names are
not present in corporations and partnerships. Of course, as in
the case of an individual, such change may not be made
exclusively. by the corporation's own act. It has to follow the
procedure prescribed by law for the purpose; and this is what
is important and indispensably prescribed strict adherence
to such procedure.
Local well known corporation law commentators are
unanimous in the view that a corporation may change its
name by merely amending its charter in the manner
prescribed by law. 2 American authorities which have
persuasive force here in this regard because our corporation
law is of American origin, the same being a sort of
codification of American corporate law, 3 are of the same
opinion.
A general power to alter or amend the charter of a
corporation necessarily includes the power to alter the name
of the corporation. Ft. Pitt Bldg., etc., Assoc. v. Model Plan
Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity
Mut. Aid Assoc., 12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa.
Co. Ct. 184; Wetherill Steel Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec. 7,
relating to an increase of the capital stock of a corporation, it
is provided that 'such agreement may be amended in any
other particular, excepting as provided in the following
section', which relates to a decrease of the capital stock This
section has been held to authorize a change in the name of a
corporation. Armington v. Palmer, 21 R.I. 109, 42 Atl. 308, 43,
L.R.A. 95, 79 Am. St. Rep. 786. (Vol. 19, American and English
Annotated Cases, p. 1239.)
Fletcher, a standard authority on American an corporation
law also says:
Statutes are to be found in the various jurisdictions dealing
with the matter of change in corporate names. Such statutes
have been subjected to judicial construction and have, in the
main, been upheld as constitutional. In direct terms or by
necessary implication, they authorize corporations new
names and prescribe the mode of procedure for that purpose.
The same steps must be taken under some statutes to effect
a change in a corporate name, as when any other
amendment of the corporate charter is sought .... When the
general law thus deals with the subject, a corporation can
change its name only in the manner provided. (6 Fletcher,
Cyclopedia of the Law of Private Corporations, 1968 Revised
Volume, pp. 212-213.) (Emphasis supplied)
The learned trial judge held that the above-quoted
proposition are not supported by the weight of authority
because they are based on decisions in cases where the
statutes expressly authorize change of corporate name by
amendment of the articles of incorporation. We have
carefully examined these authorities and We are satisfied of
their relevance. Even Lord Denman who has been quoted by
His Honor from In Reg. v. Registrar of Joint Stock Cos. 10,
Q.B., 59 E.C.L. maintains merely that the change of its name
never appears to be such an act as the corporation could do
for itself, but required ;the same Power as created a
corporation." What seems to have been overlooked,
therefore, is that the procedure prescribes by Section 18 of
our Corporation Law for the amendment of corporate
charters is practically identical with that for the incorporation
itself of a corporation.
In the appealed order of dismissal, the trial court, made the
observation that, according to this Court in Red Line
Transportation Co. v. Rural Transit Co., Ltd., 60 Phil, 549, 555,
change of name of a corporation is against public policy. We
must clarify that such is not the import of Our said decision.
What this Court held in that case is simply that:
We know of no law that empowers the Public Service
Commission or any court in this jurisdiction to authorize one
corporation to assume the name of another corporation as a
trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and the
very law of their creation and continued existence requires
each to adopt and certify a distinctive name. The
incorporators 'constitute a body politic and corporate under
the name stated in the certificate.' (Section 11, Act No. 1459,
as amended.) A corporation has the power 'of succession by
its corporate name.' (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It cannot
change its name except in the manner provided by the
statute. By that name alone is it authorized to transact
business. The law gives a corporation no express or implied
authority to assume another name that is unappropriated;
still less that of another corporation, which is expressly set
apart for it and protected by the law. If any corporation could
assume at pleasure as an unregistered trade name the name
of another corporation, this practice would result in confusion
and open the door to frauds and evasions and difficulties of
administration and supervision. The policy of the law as
expressed our corporation statute and the Code of
Commerce is clearly against such a practice. (Cf. Scarsdale
Pub. Co. Colonial Press vs. Carter, 116 New York
Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn.,
205 Illinois [Appellate Courts], 428, 434.)
In other words, what We have held to be contrary to public
policy is the use by one corporation of the name of another
corporation as its trade name. We are certain no one will
disagree that such an act can only "result in confusion and
open the door to frauds and evasions and difficulties of
administration and supervision." Surely, the Red Line case
was not one of change of name.
Neither can We share the posture of His Honor that the
change of name of a corporation results in its dissolution.
There is unanimity of authorities to the contrary.
An authorized change in the name of a corporation has no
more effect upon its identity as a corporation than a change
of name of a natural person has upon his identity. It does not
affect the rights of the corporation or lessen or add to its
obligations. After a corporation has effected a change in its
name it should sue and be sued in its new name .... (13 Am.
Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either by the
legislature or by the corporators or stockholders under
legislative authority, does not, generally speaking, affect the
identity of the corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or incurred by
it. Indeed, it has been said that a change of name by a
corporation has no more effect upon the identity of the
corporation than a change of name by a natural person has
upon the identity of such person. The corporation, upon such
change in its name, is in no sense a new corporation, nor the
successor of the original one, but remains and continues to
be the original corporation. It is the same corporation with a
different name, and its character is in no respect changed. ...
(6 Fletcher, Cyclopedia of the Law of Private Corporations,
224-225, citing cases.)
The change in the name of a corporation has no more effect
upon its identity as a corporation than a change of name of a
natural person has upon his identity. It does not affect the
rights of the corporation, or lessen or add to its obligations.
England. Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L. J.
Exch. 418.
United States. Metropolitan Nat. Bank v. Claggett, 141 U.S.
520, 12 S. Ct. 60, 35 U.S. (L. ed.) 841.
Alabama. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17
So. 670; North Birmingham Lumber Co. v. Sims, 157 Ala. 595,
48 So. 84.
Connecticut. Trinity Church v. Hall, 22 Com. 125.
Illinois. Mt. Palatine Academy v. Kleinschnitz 28 III, 133; St.
Louis etc. R. Co. v. Miller, 43 Ill. 199;Reading v. Wedder, 66 III.
80.
Indiana. Rosenthal v. Madison etc., Plank Road Co., 10 Ind.
358.
Kentucky. Cahill v. Bigger, 8 B. Mon. 211; Wilhite v.
Convent of Good Shepherd, 177 Ky. 251, 78 S. W. 138.
Maryland. Phinney v. Sheppard & Enoch Pratt Hospital, 88
Md. 633, 42 Atl. 58, writ of error dismissed, 177 U.S. 170, 20
S. Ct. 573, 44 U.S. (L. ed.) 720.
Missouri. Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W.
334. New York First Soc of M.E. Church v. Brownell, 5 Hun
464.
Pennsylvania. Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. South Carolina Mut Ins. Co. v. Price 67 S.C.
207, 45 S.E. 173.
Virginia. Wilson v. Chesapeake etc., R. Co., 21 Gratt
654; Wright-Caesar Tobacco Co. v. Hoen,105 Va. 327, 54 S.E.
309.
Washington. King v. Ilwaco R. etc., Co., 1 Wash. 127. 23
Pac. 924.
Wisconsin. Racine Country Bank v. Ayers, 12 Wis. 512.
The fact that the corporation by its old name makes a format
transfer of its property to the corporation by its new name
does not of itself show that the change in name has affected
a change in the identity of the corporation. Palfrey v.
Association for Relief, etc., 110 La. 452, 34 So. 600. The fact
that a corporation organized as a state bank afterwards
becomes a national bank by complying with the provisions of
the National Banking Act, and changes its name accordingly,
has no effect on its right to sue upon obligations or liabilities
incurred to it by its former name. Michigan Ins. Bank v. Eldred
143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has been
held not to be affected by the fact that the church afterwards
took a different name. Cahill v. Bigger, 8 B. Mon (ky) 211.
A change in the name of a corporation is not a divestiture of
title or such a change as requires a regular transfer of title to
property, whether real or personal, from the corporation
under one name to the same corporation under another
name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649. (19
American and English Annotated Cases 1242-1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538,
"The changing of the name of a corporation is no more the
creation of a corporation than the changing of the name of a
natural person is the begetting of a natural person. The act,
in both cases, would seem to be what the language which we
use to designate it imports a change of name, and not a
change of being.
Having arrived at the above conclusion, We have agree with
appellant's pose that the lower court also erred in holding
that it is not the right party in interest to sue defendants-
appellees. 4 As correctly pointed out by appellant, the
approval by the stockholders of the amendment of its articles
of incorporation changing the name "The Yek Tong Lin Fire &
Marine Insurance Co., Ltd." to "Philippine First Insurance Co.,
Inc." on March 8, 1961, did not automatically change the
name of said corporation on that date. To be effective,
Section 18 of the Corporation Law, earlier quoted, requires
that "a copy of the articles of incorporation as amended, duly
certified to be correct by the president and the secretary of
the corporation and a majority of the board of directors or
trustees, shall be filed with the Securities & Exchange
Commissioner", and it is only from the time of such filing,
that "the corporation shall have the same powers and it and
the members and stockholders thereof shall thereafter be
subject to the same liabilities as if such amendment had
been embraced in the original articles of incorporation." It
goes without saying then that appellant rightly acted in its
old name when on May 15, 1961, it entered into the
indemnity agreement, Annex A, with the defendant-
appellees; for only after the filing of the amended articles of
incorporation with the Securities & Exchange Commission on
May 26, 1961, did appellant legally acquire its new name;
and it was perfectly right for it to file the present case In that
new name on December 6, 1961. Such is, but the logical
effect of the change of name of the corporation upon its
actions.
Actions brought by a corporation after it has changed its
name should be brought under the new name although for
the enforcement of rights existing at the time the change
was made. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17
So. 670: Newlan v. Lombard University, 62 III. 195; Thomas v.
Visitor of Frederick County School, 7 Gill & J (Md.)
388; Delaware, etc., R. Co. v. Trick, 23 N. J. L.
321; Northumberland Country Bank v. Eyer, 60 Pa. St.
436; Wilson v. Chesapeake etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not affect its
right to bring an action on a note given to the corporation
under its former name. Cumberland College v. Ish, 22. Cal.
641; Northwestern College v. Schwagler, 37 Ia. 577. (19
American and English Annotated Cases 1243.)
In consequence, We hold that the lower court erred in EN BANC
dismissing appellant's complaint. We take this opportunity,
however, to express the Court's feeling that it is apparent G.R. No. L-23606 July 29, 1968
that appellee's position is more technical than otherwise.
Nowhere in the record is it seriously pretended that the ALHAMBRA CIGAR & CIGARETTE MANUFACTURING
indebtedness sued upon has already been paid. If appellees COMPANY, INC., petitioner,
entertained any fear that they might again be made liable to vs.
Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to someone SECURITIES & EXCHANGE COMMISSION, respondent.
else in its behalf, a cursory examination of the records of the
Securities & Exchange Commission would have sufficed to Gamboa and Gamboa for petitioner.
clear up the fact that Yek Tong Lin had just changed its name Office of the Solicitor General for respondent.
but it had not ceased to be their creditor. Everyone should
realize that when the time of the courts is utilized for cases SANCHEZ, J.:
which do not involve substantial questions and the claim of
one of the parties, therein is based on pure technicality that
To the question May a corporation extend its life by
can at most delay only the ultimate outcome necessarily
amendment of its articles of incorporation effected during the
adverse to such party because it has no real cause on the
three-year statutory period for liquidation when its original
merits, grave injustice is committed to numberless litigants
term of existence had already expired? the answer of the
whose meritorious cases cannot be given all the needed time
Securities and Exchange Commissioner was in the negative.
by the courts. We address this appeal once more to all
Offshoot is this appeal.
members of the bar, in particular, since it is their bounden
duty to the profession and to our country and people at large
That problem emerged out of the following controlling facts:
to help ease as fast as possible the clogged dockets of the
courts. Let us not wait until the people resort to other means
to secure speedy, just and inexpensive determination of their Petitioner Alhambra Cigar and Cigarette Manufacturing
cases. Company, Inc. (hereinafter referred to simply as Alhambra)
was duly incorporated under Philippine laws on January 15,
1912. By its corporate articles it was to exist for fifty (50)
WHEREFORE, judgment of the lower court is reversed, and
years from incorporation. Its term of existence expired on
this case is remanded to the trial court for further
January 15, 1962. On that date, it ceased transacting
proceedings consistent herewith With costs against
business, entered into a state of liquidation.
appellees.
Thereafter, a new corporation. Alhambra Industries, Inc.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar,
was formed to carry on the business of Alhambra.
Castro, Fernando, Teehankee and Villamor, JJ., concur.
On May 1, 1962, Alhambra's stockholders, by resolution
named Angel S. Gamboa trustee to take charge of its
liquidation.
Republic of the Philippines
SUPREME COURT
On June 20, 1963 within Alhambra's three-year statutory
Manila
period for liquidation - Republic Act 3531 was enacted into
law. It amended Section 18 of the Corporation Law; it
empowered domestic private corporations to extend their
corporate life beyond the period fixed by the articles of
incorporation for a term not to exceed fifty years in any one
instance. Previous to Republic Act 3531, the maximum non-
extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of
directors resolved to amend paragraph "Fourth" of its articles
of incorporation to extend its corporate life for an additional
fifty years, or a total of 100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing
more than two-thirds of its subscribed capital stock, voted to
approve the foregoing resolution. The "Fourth" paragraph of
Alhambra's articles of incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist
is fifty (50) years from and after the date of
incorporation, and for an additional period of fifty (50) years
thereafter.
On October 28, 1963, Alhambra's articles of incorporation as
so amended certified correct by its president and secretary
and a majority of its board of directors, were filed with
respondent Securities and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said
amended articles of incorporation to Alhambra's counsel with
the ruling that Republic Act 3531 "which took effect only on
June 20, 1963, cannot be availed of by the said corporation,
for the reason that its term of existence had already expired
when the said law took effect in short, said law has no
retroactive effect."
On December 3, 1963, Alhambra's counsel sought
reconsideration of SEC's ruling aforesaid, refiled the amended
articles of incorporation.
On September 8, 1964, SEC, after a conference hearing,
issued an order denying the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to
overturn the conclusion below.1
1. Alhambra relies on Republic Act 3531, which amended
Section 18 of the Corporation Law. Well it is to take note of
the old and the new statutes as they are framed. Section 18,
prior to and after its modification by Republic Act 3531,
covers the subject of amendment of the articles of
incorporation of private corporations. A provision thereof
which remains unaltered is that a corporation may amend its
articles of incorporation "by a majority vote of its board of
directors or trustees and ... by the vote or written assent of
the stockholders representing at least two-thirds of the
subscribed capital stock ... "
But prior to amendment by Republic Act 3531, an explicit
prohibition existed in Section 18, thus:
... Provided, however, That the life of said corporation shall
not be extended by said amendment beyond the time fixed
in the original articles: ...
This was displaced by Republic Act 3531 which enfranchises
all private corporations to extend their corporate existence.
Thus incorporated into the structure of Section 18 are the
following:
... Provided, however, That should the amendment consist in
extending the corporate life, the extension shall not exceed
fifty years in any one instance: Provided, further, That the
original articles, and amended articles together shall contain
all provisions required by law to be set out in the articles of
incorporation: ...
As we look in retrospect at the facts, we find these: From July
15 to October 28, 1963, when Alhambra made its attempt to
extend its corporate existence, its original term of fifty years
had already expired (January 15, 1962); it was in the midst of
the three-year grace period statutorily fixed in Section 77 of
the Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body
corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually
to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the
purpose of continuing the business for which it was
established.2
Plain from the language of the provision is its meaning:
continuance of a "dissolved" corporation as a body corporate
for three years has for its purpose the final closure of its
affairs, and no other; the corporation is specifically enjoined
from "continuing the business for which it was established".
The liquidation of the corporation's affairs set forth in Section
77 became necessary precisely because its life had ended.
For this reason alone, the corporate existence and juridical
personality of that corporation to do business may no longer
be extended.
Worth bearing in mind, at this juncture, is the basic
development of corporation law.
The common law rule, at the beginning, was rigid and
inflexible in that upon its dissolution, a corporation became
legally dead for all purposes. Statutory authorizations had to
be provided for its continuance after dissolution "for limited
and specified purposes incident to complete liquidation of its
affairs".3 Thus, the moment a corporation's right to exist as
an "artificial person" ceases, its corporate powers are
terminated "just as the powers of a natural person to take
part in mundane affairs cease to exist upon his
death".4 There is nothing left but to conduct, as it were, the
settlement of the estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation
Law, is silent, it is true, as to when such act of extension may
be made. But even with a superficial knowledge of corporate
principles, it does not take much effort to reach a correct
conclusion. For, implicit in Section 77 heretofore quoted is
that the privilege given to prolongcorporate life under the
amendment must be exercised before the expiry of the term
fixed in the articles of incorporation.
Silence of the law on the matter is not hard to understand.
Specificity is not really necessary. The authority to prolong
corporate life was inserted by Republic Act 3531 into a
section of the law that deals with the power of a corporation
to amend its articles of incorporation. (For, the manner of
prolongation is through an amendment of the articles.) And it
should be clearly evident that under Section 77 no
corporation in a state of liquidation can act in any way, much
less amend its articles, "for the purpose of continuing the
business for which it was established".
All these dilute Alhambra's position that it could revivify its
corporate life simply because when it attempted to do so,
Alhambra was still in the process of liquidation. It is surely
impermissible for us to stretch the law that merely
empowers a corporation to act in liquidation to inject
therein the power to extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written:
"Since the privilege of extension is purely statutory, all of the
statutory conditions precedent must be complied with in
order that the extension may be effectuated. And, generally
these conditions must be complied with, and the steps
necessary to effect the extension must be taken,during the
life of the corporation, and before the expiration of the term
of existence as original fixed by its charter or the general
law, since, as a rule, the corporation is ipso facto dissolved as
soon as that time expires. So where the extension is by
amendment of the articles of incorporation, the amendment
must be adopted before that time. And, similarly, the filing
and recording of a certificate of extension after that time
cannot relate back to the date of the passage of a resolution
by the stockholders in favor of the extension so as to save
the life of the corporation. The contrary is true, however, and
the doctrine of relation will apply, where the delay is due to
the neglect of the officer with whom the certificate is
required to be filed, or to a wrongful refusal on his part to
receive it. And statutes in some states specifically provide
that a renewal may be had within a specified time before or
after the time fixed for the termination of the corporate
existence".5
The logic of this position is well expressed in a foursquare
case decided by the Court of Appeals of Kentucky. 6There,
pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any
corporation expires by the terms of its articles of
incorporation, it may be thereafter continued to act for the
purpose of closing up its business, but for no other purpose.
The corporate life of the Home Building Association expired
on May 3, 1905. After that date, by the mandate of the
statute, it could continue to act for the purpose of closing up
its business, but for no other purpose. The proposed
amendment was not made until January 16, 1908, or nearly
three years after the corporation expired by the terms of the
articles of incorporation. When the corporate life of the
corporation was ended, there was nothing to extend. Here it
was proposed nearly three years after the corporate life of
the association had expired to revivify the dead body, and to
make that relate back some two years and eight months. In
other words, the association for two years and eight months
had only existed for the purpose of winding up its business,
and, after this length of time, it was proposed to revivify it
and make it a live corporation for the two years and eight
months daring which it had not been such.
The law gives a certain length of time for the filing of records
in this court, and provides that the time may be extended by
the court, but under this provision it has uniformly been held
that when the time was expired, there is nothing to extend,
and that the appeal must be dismissed... So, when the
articles of a corporation have expired, it is too late to adopt
an amendment extending the life of a corporation; for, the
corporation having expired, this is in effect to create a new
corporation ..."7
True it is, that the Alabama Supreme Court has stated in one
case.8 that a corporation empowered by statute torenew its
corporate existence may do so even after the expiration of its
corporate life, provided renewal is taken advantage of within
the extended statutory period for purposes of liquidation.
That ruling, however, is inherently weak as persuasive
authority for the situation at bar for at least two
reasons: First. That case was a suit for mandamus to compel
a former corporate officer to turn over books and records that
came into his possession and control by virtue of his office. It
was there held that such officer was obliged to surrender his
books and records even if the corporation had already
expired. The holding on the continued existence of the
corporation was a mere dictum. Second. Alabama's law is
different. Corporations in that state were authorized not only
to extend but also to renew their corporate existence.That
very case defined the word "renew" as follows; "To make new
again; to restore to freshness; to make new spiritually; to
regenerate; to begin again; to recommence; to resume; to
restore to existence, to revive; to re-establish; to recreate; to
replace; to grant or obtain an extension of Webster's New
International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins.
Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec". 9
On this point, we again draw from Fletcher: "There is a broad
distinction between the extension of a charter and the grant
of a new one. To renew a charter is to revive a charter which
has expired, or, in other words, "to give a new existence to
one which has been forfeited, or which has lost its vitality by
lapse of time". To "extend" a charter is "to increase the time
for the existence of one which would otherwise reach its limit
at an earlier period".10Nowhere in our statute Section 18,
Corporation Law, as amended by Republic Act 3531 do we
find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself
to extension of corporate existence. And, as so understood,
extension may be made only before the term provided in the
corporate charter expires.
Alhambra draws attention to another case 11 which declares
that until the end of the extended period for liquidation, a
dissolved corporation "does not become an extinguished
entity". But this statement was obviously lifted out of
context. That case dissected the question whether or not
suits can be commenced by or against a corporation within
its liquidation period. Which was answered in the affirmative.
For, the corporation still exists for the settlement of its
affairs.
People, ex rel. vs. Green, 12 also invoked by Alhambra, is as
unavailing. There, although the corporation amended its
articles to extend its existence at a time when it had no legal
authority yet, it adopted the amended articles later on when
it had the power to extend its life and during its original term
when it could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the
contention that its case is arguably within the purview of the
law. It says that before cessation of its corporate life, it could
not have extended the same, for the simple reason that
Republic Act 3531 had not then become law. It must be
remembered that Republic Act 3531 took effect on June 20,
1963, while the original term of Alhambra's existence expired
before that date on January 15, 1962. The mischief that
flows from this theory is at once apparent. It would certainly
open the gates for all defunct corporations whose charters
have expired even long before Republic Act 3531 came into
being to resuscitate their corporate existence.
4. Alhambra brings into argument Republic Act 1932, which
amends Section 196 of the Insurance Act, now reading as
follows: 1wph1.t
SEC. 196. Any provision of law to the contrary
notwithstanding, every domestic life insurance corporation,
formed for a limited period under the provisions of its articles
of incorporation, may extend its corporate existence for a
period not exceeding fifty years in any one instance by
amendment to its articles of incorporation on or before the
expiration of the term so fixed in said articles ...
To be observed is that the foregoing statute unlike
Republic Act 3531 expressly authorizes domestic
insurance corporations to extend their corporate existence
"on or before the expiration of the term" fixed in their articles
of incorporation. Republic Act 1932 was approved on June 22,
1957, long before the passage of Republic Act 3531 in 1963.
Congress, Alhambra points out, must have been aware of
Republic Act 1932 when it passed Republic Act 3531. Since
the phrase "on or before", etc., was omitted in Republic Act
3531, which contains no similar limitation, it follows,
according to Alhambra, that it is not necessary to extend
corporate existence on or before the expiration of its original
term.
That Republic Act 3531 stands mute as to when extention of
corporate existence may be made, assumes no relevance.
We have already said, in the face of a familiar precept, that a
defunct corporation is bereft of any legal faculty not
otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later
Republic Act 3531 now in dispute. Its first paragraph states
that "Republic Act No. 1932 allows the automatic extension
of the corporate existence of domestic life insurance
corporations upon amendment of their articles of
incorporation on or before the expiration of the terms fixed
by said articles". The succeeding lines are decisive: "This is a
good law, a sane and sound one. There appears to be no
valid reason why it should not be made to apply to other
private corporations.13
The situation here presented is not one where the law under
consideration is ambiguous, where courts have to put in
harness extrinsic aids such as a look at another statute to
disentangle doubts. It is an elementary rule in legal
hermeneutics that where the terms of the law are clear, no
statutory construction may be permitted. Upon the basic
conceptual scheme under which corporations operate, and
with Section 77 of the Corporation Law particularly in mind,
we find no vagueness in Section 18, as amended by Republic
Act 3531. As we view it, by directing attention to Republic Act
1932, Alhambra would seek to create obscurity in the law;
and, with that, ask of us a ruling that such obscurity be
explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact,
commands that statutes must be harmonized with each
other.14 So harmonizing, the conclusion is clear that Section
18 of the Corporation Law, as amended by Republic Act 3531
in reference to extensions of corporate existence, is to be
read in the same light as Republic Act 1932. Which means
that domestic corporations in general, as with domestic
insurance companies, can extend corporate existence only
on or before the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one
which brushes technicalities aside. Bases for this posture are
that Republic Act 3531 is a remedial statute, and that
extension of corporate life is beneficial to the economy.
Alhambra's stance does not induce assent. Expansive
construction is possible only when there is something to
expand. At the time of the passage of Republic Act 3531,
Alhambra's corporate life had already expired. It had
overstepped the limits of its limited existence. No life there is
to prolong.
Besides, a new corporation Alhambra Industries, Inc., with
but slight change in stockholdings 15 has already been
established. Its purpose is to carry on, and it actually does
carry on,16 the business of the dissolved entity. The
beneficial-effects argument is off the mark.
The way the whole case shapes up then, the only possible
drawbacks of Alhambra might be that, instead of the new
corporation (Alhambra Industries, Inc.) being written off, the
old one (Alhambra Cigar & Cigarette Manufacturing
Company, Inc.) has to be wound up; and that the old
corporate name cannot be retained fully in its exact
form.17 What is important though is that the
word Alhambra, the name that counts [it has goodwill],
remains.
FOR THE REASONS GIVEN, the ruling of the Securities and
Exchange Commission of November 18, 1963, and its order
of September 8, 1964, both here under review, are hereby
affirmed.
Costs against petitioner Alhambra Cigar & Cigarette
Manufacturing Company, Inc. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar,
Castro, Angeles and Fernando, JJ., concur.
Footnotes
.R. No. 125986 January 28, 1999
LUXURIA HOMES, INC., and/or AIDA M.
POSADAS, petitioners,
vs.
HONORABLE COURT OF APPEALS, JAMES BUILDER
CONSTRUCTION and/or JAIME T. BRAVO,respondents.
MARTINEZ, J.:
This petition for review assails the decision of the respondent
Court of Appeals dated March 15, 1996, 1 which affirmed with
modification the judgment of default rendered by the
Regional Trial Court of Muntinlupa, Branch 276, in Civil Case
No. 92-2592 granting all the reliefs prayed for in the
complaint of private respondents James Builder Construction
and/or Jaime T. Bravo.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children co-
owned a 1.6 hectare property in Sucat, Muntinlupa, which
was occupied by squatters. Petitioner Posadas entered into
negotiations with private respondent Jaime T. Bravo
regarding the development of the said property into a
residential subdivision. On May 3, 1989, she authorized
private respondent to negotiate with the squatters to leave
the said property. With a written authorization, respondent
Bravo buckled down to work and started negotiations with
the squatters.
Meanwhile, some seven (7) months later, on December 11,
1989, petitioner Posadas and her two (2) children, through a
Deed of Assignment, assigned the said property to petitioner
Luxuria Homes, Inc., purportedly for organizational and tax
avoidance purposes. Respondent Bravo signed as one of the
witnesses to the execution of the Deed of Assignment and
the Articles of Incorporation of petitioner Luxuria Homes, Inc.
Then sometime in 1992, the harmonious and congenial
relationship of petitioner Posadas and respondent Bravo
turned sour when the former supposedly could not accept the
management contracts to develop the 1.6 hectare property
into a residential subdivision, the latter was proposing. In
retaliation, respondent Bravo demanded payment for
services rendered in connection with the development of the
land. In his statement of account dated 21 August
1991 2 respondent demanded the payment of P1,708,489.00
for various services rendered, i.e., relocation of squatters,
preparation of the architectural design and site development
plan, survey and fencing.
Petitioner Posadas refused to pay the amount demanded.
Thus, in September 1992, private respondents James Builder
Construction and Jaime T. Bravo instituted a complaint for
specific performance before the trial court against petitioners
Posadas and Luxuria Homes, Inc. Private respondents alleged
therein that petitioner Posadas asked them to clear the
subject parcel of land of squatters for a fee of P1,100,000.00
for which they were partially paid the amount of
P461,511.50, leaving a balance of P638,488.50. They were
also supposedly asked to prepare a site development plan
and an architectural design for a contract price of
P450,000.00 for which they were partially paid the amount of
P25,000.00, leaving a balance of P425,000.00. And in
anticipation of the signing of the land development contract,
they had to construct a bunkhouse and warehouse on the
property which amounted to P300,000.00, and a hollow
blocks factory for P60,000.00. Private respondents also
claimed that petitioner Posadas agreed that private
respondents will develop the land into a first class subdivision
thru a management contract and that petitioner Posadas is
unjustly refusing to comply with her obligation to finalize the
said management contract.
The prayer in the complaint of the private respondents before
the trial court reads as follows:
WHEREFORE, premises considered, it is respectfully prayed of
this Honorable Court that after hearing/trial judgment be
rendered ordering defendant to:
a) Comply with its obligation to deliver/finalize Management
Contract of its land in Sucat, Muntinlupa, Metro Manila and to
pay plaintiff its balance in the amount of P1,708,489.00:
b) Pay plaintiff moral and exemplary damages in the amount
of P500.000.00;
c) Pay plaintiff actual damages in the amount of P500.000.00
(Bunkhouse/warehouse- P300.000.00, Hollow-block factory-
P60.000.00, lumber, cement, etc., P120.000.00, guard-
P20.000.00);
d) Pay plaintiff attorney's fee of P50.000 plus P700 per
appearance in court and 5% of that which may be awarded
by the court to plaintiff re its monetary claims:
e) Pay cost of this suit. 3
On September 27, 1993, the trial court declared petitioner
Posadas in default and allowed the private respondents to
present their evidence ex-parte. On March 8, 1994, it ordered
petitioner Posadas, jointly and in solidum with petitioner
Luxuria Homes, Inc., to pay private respondents as follows:
1. . . . the balance of the payment for the various services
performed by Plaintiff with respect to the land covered by
TCT NO. 167895 previously No. 158290 in the total amount of
P1,708,489.00.
2. . . . actual damages incurred for the construction of the
warehouse/bunks, and for the material used in the total sum
of P1,500.000.00.
3. Moral and exemplary damages of P500.000.00.
4. Attorney's fee of P50,000.00.
5. And cost of this proceedings.
Defendant Aida Posadas as the Representative of the
Corporation Luxuria Homes, Incorporated, is further directed
to execute the management contract she committed to do,
also in consideration of the various undertakings that Plaintiff
rendered for her. 4
Aggrieved by the aforecited decision, petitioners appealed to
respondent Court of Appeals, which, as aforestated, affirmed
with modification the decision of the trial court. The appellate
court deleted the award of moral damages on the ground
that respondent James Builder Construction is a corporation
and hence could not experience physical suffering and
mental anguish. It also reduced the award of exemplary
damages. The dispositive portion of the decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED
with the modification that the award of moral damages is
ordered deleted and the award of exemplary damages to the
plaintiff's-appellee should only be in the amount of FIFTY
THOUSAND (P50,000.00) PESOS. 5
Petitioners' motion for reconsideration was denied, prompting
the filing of this petition for review before this Court.
On January 15, 1997, the Third Division of this Court denied
due course to this petition for failing to show convincingly
any reversible error on the part of the Court of Appeals. This
Court however deleted the grant of exemplary damages and
attorney's fees. The Court also reduced the trial court's
award of actual damages from P1,500,000.00 to P500,000.00
reasoning that the grant should not exceed the amount
prayed for in the complaint. In the prayer in the complaint
respondents asked for actual damages in the amount of
P500,000.00 only.
Still feeling aggrieved with the resolution of this Court,
petitioners filed a motion for reconsideration. On March 17,
1997, this Court found merit in the petitioners' motion for
reconsideration and reinstated this petition for review.
From their petition for review and motion for reconsideration
before this Court, we now synthesize the issues as follows:
1. Were private respondents able to present ex-parte
sufficient evidence to substantiate the allegations in their
complaint and entitle them to their prayers?
2. Can petitioner Luxuria Homes, Inc., be held liable to
private respondents for the transactions supposedly entered
into between petitioner Posadas and private respondents?
3. Can petitioners be compelled to enter into a management
contract with private respondents?
Petitioners who were declared in default assert that the
private respondents who presented their evidence ex-
parte nonetheless utterly failed to substantiate the
allegations in their complaint and as such cannot be entitled
to the reliefs prayed for.
A perusal of the record shows that petitioner Posadas
contracted respondent Bravo to render various services for
the initial development of the property as shown by vouchers
evidencing payments made by petitioner Posadas to
respondent Bravo for squatter relocation, architectural
design, survey and fencing.
Respondents prepared the architectural design, site
development plan and survey in connection with petitioner
Posadas' application with the Housing and Land Use
Regulatory Board (HLURB) for the issuance of the
Development Permit, Preliminary Approval and Locational
Clearance. 6 Petitioner benefited from said services as the
Development Permit and the Locational Clearance were
eventually issued by the HLURB in her favor. Petitioner
Posadas is therefore liable to pay for these services rendered
by respondents. The contract price for the survey of the land
is P140,000.00. Petitioner made partial payments totaling
P130,000.00 leaving a payable balance of P10,000.00.
In his testimony, 7 he alleged that the agreed price for the
preparation of the site development plan is P500,000.00 and
that the preparation of the architectural designs is for
P450,000, or a total of P950,000.00 for the two contracts. In
his complaint however, respondent Bravo alleged that he was
asked "to prepare the site development plan and the
architectural designs . . . for a contract price of P450,000.00 .
. . " 8 The discrepancy or inconsistency was never reconciled
and clarified.
We reiterate that we cannot award an amount higher than
what was claimed in the complaint. Consequently for the
preparation of both the architectural design and site
development plan, respondent is entitled to the amount of
P450,000.00 less partial payments made in the amount of
P25,000.00. In Policarpio v. RTC of Quezon City, 9 it was held
that a court is bereft of jurisdiction to award, in a judgment
by default, a relief other than that specifically prayed for in
the complaint.
As regards the contracts for the ejectment of squatters and
fencing, we believe however that respondents failed to show
proof that they actually fulfilled their commitments therein.
Aside from the bare testimony of respondent Bravo, no other
evidence was presented to show that all the squatters were
ejected from the property. Respondent Bravo failed to show
how many shanties or structures were actually occupying the
property before he entered the same, to serve as basis for
concluding whether the task was finished or not. His
testimony alone that he successfully negotiated for the
ejectment of all the squatters from the property will not
suffice.
Likewise, in the case of fencing, there is no proof that it was
accomplished as alleged. Respondent Bravo claims that he
finished sixty percent (60%) of the fencing project but he
failed to present evidence showing the area sought to be
fenced and the actual area fenced by him. We therefore have
no basis to determining the veracity respondent's allegations.
We cannot assume that the said services rendered for it will
be unfair to require petitioner to pay the full amount claimed
in case the respondents obligations were not completely
fulfilled.
For respondents' failure to show proof of accomplishment of
the aforesaid services, their claims cannot be granted. In P.T.
Cerna Corp. v. Court of Appeals, 10 we ruled that in civil cases,
the burden of proof rests upon the party who, as determined
by the pleadings or the nature of the case, asserts the
affirmative of an issue. In this case the burden lies on the
complainant, who is duty bound to prove the allegations in
the complaint. As this Court has held, he who alleges a fact
has the burden of proving it and A MERE ALLEGATION IS NOT
EVIDENCE.
And the rules do not change even if the defendant is
declared in default. In the leading case of Lopez v.
Mendezona, 11 this Court ruled that after entry of judgment in
default against a defendant who has neither appeared nor
answered, and before final judgment in favor of the plaintiff,
the latter must establish by competent evidence all the
material allegations of his complaint upon which he bases his
prayer for relief. In De los Santos v. De la Cruz, 12 this Court
declared that a judgement by default against a defendant
does not imply a waiver of rights except that of being heard
and of presenting evidence in his favor. It does not imply
admission by the defendant of the facts and causes of action
of the plaintiff, because the codal section requires the latter
to adduce his evidence in support of his allegations as an
indispensable condition before final judgment could be given
in his favor. Nor could it be interpreted as an admission by
the defendant that the plaintiff's causes of action finds
support in the law or that the latter is entitled to the relief
prayed for.
We explained the rule in judgments by default in Pascua v.
Florendo, 13 where we said that nowhere is it stated that the
complainants are automatically entitled to the relief prayed
for, once the defendants are declared in default. Favorable
relief can be granted only after the court has ascertained
that the evidence offered and the facts proven by the
presenting party warrant the grant of the same. Otherwise it
would be meaningless to require presentation of evidence if
everytime the other party is declared in default, a decision
would automatically be rendered in favor of the non-
defaulting party and exactly according to the tenor of his
prayer. In Lim Tanhu v. Ramolete 14 we elaborated and said
that a defaulted defendant is not actually thrown out of
court. The rules see to it that any judgment against him must
be in accordance with law. The evidence to support the
plaintiff's cause is, of course, presented in his absence, but
the court is not supposed to admit that which is basically
incompetent. Although the defendant would not be in a
position to object, elementary justice requires that only legal
evidence should be considered against him. If the evidence
presented should not be sufficient to justify a judgment for
the plaintiff, the complaint must be dismissed. And if an
unfavorable judgment should be justifiable, it cannot exceed
the amount or be different in kind from what is prayed for in
the complaint.
The prayer for actual damages in the amount of P500,000.00,
supposedly for the bunkhouse/warehouse, hollow-block
factory, lumber, cement, guard, etc., which the trial court
granted and even increased to P1,500,000.00, and which this
Court would have rightly reduced to the amount prayed for in
the complaint, was not established, as shown upon further
review of the record. No receipts or vouchers were presented
by private respondents to show that they actually spent the
amount. In Salas v. Court of Appeals, 15 we said that the
burden of proof of the damages suffered is on the party
claiming the same. It his duty to present evidence to support
his claim for actual damages. If he failed to do so, he has
only himself to blame if no award for actual damages is
handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v.
Court of Appeals, 16 basic is the rule that to recover actual
damages, the amount of loss must not only be capable of
proof but must actually be proven with reasonable degree of
certainty, premised upon competent proof or best evidence
obtainable of the actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc.,
was a party to the transactions entered into by petitioner
Posadas and private respondents and thus could be held
jointly and severally with petitioner Posadas. Private
respondents contend that petitioner Posadas surreptitiously
formed Luxuria Homes, Inc., and transferred the subject
parcel of land to it to evade payment and defraud creditors,
including private respondents. This allegation does not find
support in the evidence on record.
On the contrary we hold that respondent Court of Appeals
committed a reversible error when it upheld the factual
finding of the trial court that petitioners' liability was
aggravated by the fact that Luxuria Homes, Inc., was formed
by petitioner Posadas after demand for payment had been
made, evidently for her to evade payment of her obligation,
thereby showing that the transfer of her property to Luxuria
Homes, Inc., was in fraud of creditors.
We easily glean from the record that private respondents
sent demand letters on 21 August 1991 and 14 September
1991, or more than a year and a half after the execution of
the Deed of Assignment on 11 December 1989, and the
issuance of the Articles of Incorporation of petitioner Luxuria
Homes on 26 January 1990. And, the transfer was made at
the time the relationship between petitioner Posadas and
private respondents was supposedly very pleasant. In fact
the Deed of Assignment dated 11 December 1989 and the
Articles of Incorporation of Luxuria Homes, Inc., issued 26
January 1990 were both signed by respondent Bravo himself
as witness. It cannot be said then that the incorporation of
petitioner Luxuria Homes and the eventual transfer of the
subject property to it were in fraud of private respondents as
such were done with the full knowledge of respondent Bravo
himself.
Besides petitioner Posadas is not the majority stockholder of
petitioner Luxuria Homes, Inc., as erroneously stated by the
lower court. The Articles of Incorporation of petitioner Luxuria
Homes, Inc., clearly show that petitioner Posadas owns
approximately 33% only of the capital stock. Hence petitioner
Posadas cannot be considered as an alter ego of petitioner
Luxuria Homes, Inc.
To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. This is elementary. Thus
in Bayer-Roxas v. Court of Appeals, 17 we said that the
separate personality of the corporation may be disregarded
only when the corporation is used as a cloak or cover for
fraud or illegality, or to work injustice, or where necessary for
the protection of the creditors. Accordingly in Del Roscrrio v.
NLRC, 18 where the Philsa International Placement and
Services Corp. was organized and registered with the POEA in
1981, several years before the complainant was filed a case
in 1985, we held that this cannot imply fraud.
Obviously in the instant case, private respondents failed to
show proof that petitioner Posadas acted in bad faith.
Consequently since private respondents failed to show that
petitioner Luxuria Homes, Inc., was a party to any of the
supposed transactions, not even to the agreement to
negotiate with and relocate the squatters, it cannot be held
liable, nay jointly and in solidum, to pay private respondents.
In this case since it was petitioner Aida M. Posadas who
contracted respondent Bravo to render the subject services,
only she is liable to pay the amounts adjudged herein.
We now resolve the third and final issue. Private respondents
urge the court to compel petitioners to execute a
management contract with them on the basis of the
authorization letter dated May 3, 1989. The full text of Exh.
"D" reads:
I hereby certify that we have duly authorized the bearer,
Engineer Bravo to negotiate, in our behalf, the ejectment of
squatters from our property of 1.6 hectares, more or less, in
Sucat Muntinlupa. This authority is extended to him as the
representative of the Managers; under our agreement for
them to undertake the development of said area and the
construction of housing units intended to convert the land
into a first class subdivision.
The aforecited document is nothing more than a "to-whom-it-
may-concern" authorization letter to negotiate with the
squatters. Although it appears that there was an agreement
for the development of the area, there is no showing that
same was ever perfected and finalized. Private respondents
presented in evidence only drafts of a proposed management
contract with petitioner's handwritten marginal notes but the
management contract was not put in its final form. The
reason why there was no final uncorrected draft was because
the parties could not agree on the stipulations of said
contract, which even private respondents admitted as found
by the trial court. 19 As a consequence the management
drafts submitted by the private respondents should at best
be considered as mere unaccepted offers. We find no cogent
reason, considering that the parties no longer are in a
harmonious relationship, for the execution of a contract to
develop a subdivision.
It is fundamental that there can be no contract in the true
sense in the absence of the element of agreement, or of
mutual assent of the parties. To compel petitioner Posadas,
whether as representative of petitioner Luxuria Homes or in
her personal capacity, to execute a management contract
under the terms and conditions of private respondents would
be to violate the principle of consensuality of contracts.
In Philippine National Bank v. Court of Appeals, 20 we held
that if the assent is wanting on the part of one who contracts,
his act has no more efficacy than if it had been done under
duress or by a person of unsound mind. In ordering petitioner
Posadas to execute a management contract with private
respondents, the trial court in effect is putting her under
duress.
The parties are bound to fulfill the stipulations in a contract
only upon its perfection. At anytime prior to the perfection of
a contract, unaccepted offers and proposals remain as such
and cannot be considered as binding commitments; hence
not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The
assailed decision dated March 15, 1996, of respondent
Honorable Court of Appeals and its Resolution dated August
12, 1996, are MODIFIED ordering PETITIONER AIDA M.
POSADAS to pay PRIVATE RESPONDENTS the amount of
P435,000.00 as balance for the preparation of the
architectural design, site development plan and survey. All
other claims of respondents are hereby DENIED for lack of
merit.1wphi1.nt
SO ORDERED.
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); and Norberto Marabe; Rodolfo Raquel,
Cristobal Riego, Manuel Gillego, Palcronio Giducos,
Pedro Aboigar, Norberto Comendador, Rogelio Salut,
Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo
Albera, Paquito Salut, Domingo Guarino, Romeo Galve,
Dominador Sabina, Felipe Radiana, Gavino Sualibio,
Moreno Escares, Ferdinand Torres, Felipe Basilan, and
Ruben Robalos, respondents.
HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may
be pierced when a corporation is just but the alter ego of a
person or of another corporation. Where badges of fraud
exist; where public convenience is defeated; where a wrong
is sought to be justified thereby, the corporate fiction or the
notion of legal entity should come to naught. The law in
these instances will regard the corporation as a mere
association of persons and, in case of two corporations,
merge them into one.
Thus, where a sister corporation is used as a shield to evade
a corporation's subsidiary liability for damages, the
corporation may not be heard to say that it has a personality
separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of
whether the National Labor Relations Commission committed
grave abuse of discretion when it issued a "break-open
order" to the sheriff to be enforced against personal property
found in the premises of petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro
Manila, is engaged in the construction business. Private
respondents were employed by said company as laborers,
carpenters and riggers.
On November, 1981, private respondents were served
individual written notices of termination of employment by
petitioner, effective on November 30, 1981. It was stated in
the individual notices that their contracts of employment had
expired and the project in which they were hired had been
completed.
Public respondent found it to be, the fact, however, that at
the time of the termination of private respondent's
employment, the project in which they were hired had not
yet been finished and completed. Petitioner had to engage
the services of sub-contractors whose workers performed the
functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal
dismissal, unfair labor practice and non-payment of their
legal holiday pay, overtime pay and thirteenth-month pay
against petitioner.
On December 19, 1984, the Labor Arbiter rendered
judgment 1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one
year or three hundred working days.
On November 27, 1985, the National Labor Relations
Commission (NLRC) dismissed the motion for reconsideration
filed by petitioner on the ground that the said decision had
already become final and executory. 2
On October 16, 1986, the NLRC Research and Information
Department made the finding that private respondents' back
wages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of
execution directing the sheriff to execute the Decision, dated
December 19, 1984. The writ was partially satisfied through
garnishment of sums from petitioner's debtor, the
Metropolitan Waterworks and Sewerage Authority, in the
amount of P81,385.34. Said amount was turned over to the
cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by
the Labor Arbiter directing the sheriff to collect from herein
petitioner the sum of P117,414.76, representing the balance
of the judgment award, and to reinstate private respondents
to their former positions.
On July 13, 1989, the sheriff issued a report stating that he
tried to serve the alias writ of execution on petitioner through
the security guard on duty but the service was refused on the
ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents,
the Labor Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff
because, as stated in his progress report, dated November 2,
1989:
1. All the employees inside petitioner's premises at 355
Maysan Road, Valenzuela, Metro Manila, claimed that they
were employees of Hydro Pipes Philippines, Inc. (HPPI) and
not by respondent;
2. Levy was made upon personal properties he found in the
premises;
3. Security guards with high-powered guns prevented him
from removing the properties he had levied upon. 4
The said special sheriff recommended that a "break-open
order" be issued to enable him to enter petitioner's premises
so that he could proceed with the public auction sale of the
aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a
third-party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were
owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-
President.
On November 23, 1989, private respondents filed a "Motion
for Issuance of a Break-Open Order," alleging that HPPI and
petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner
temporarily suspended its business operations in order to
evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may
suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents
presented duly certified copies of the General Informations
Sheet, dated May 15, 1987, submitted by petitioner to the
Securities Exchange Commission (SEC) and the General
Information Sheet, dated May 25, 1987, submitted by HPPI to Elisa O. Lim Treasurer
the Securities and Exchange Commission.
Virgilio O. Casino Corporate Secretary
The General Information Sheet submitted by the petitioner
revealed the following: 4. Principal Office

1. Breakdown of Subscribed Capital 355 Maysan Road

Name of Stockholder Amount Subscribed Valenzuela, Metro Manila. 5

HPPI P 6,999,500.00 On the other hand, the General Information Sheet of HPPI
revealed the following:
Antonio W. Lim 2,900,000.00
1. Breakdown of Subscribed Capital
Dennis S. Cuyegkeng 300.00
Name of Stockholder Amount Subscribed
Elisa C. Lim 100,000.00
Antonio W. Lim P 400,000.00
Teodulo R. Dino 100.00
Elisa C. Lim 57,700.00
Virgilio O. Casino 100.00
AWL Trading 455,000.00
2. Board of Directors
Dennis S. Cuyegkeng 40,100.00
Antonio W. Lim Chairman
Teodulo R. Dino 100.00
Dennis S. Cuyegkeng Member
Virgilio O. Casino 100.00
Elisa C. Lim Member
2. Board of Directors
Teodulo R. Dino Member
Antonio W. Lim Chairman
Virgilio O. Casino Member
Elisa C. Lim Member
3. Corporate Officers
Dennis S. Cuyegkeng Member
Antonio W. Lim President
Virgilio O. Casino Member
Dennis S. Cuyegkeng Assistant to the President
Teodulo R. Dino Member
3. Corporate Officers veil should not have been applied, in this case, in the
absence of any showing that it created HPPI in order to evade
Antonio W. Lim President its liability to private respondents. It also contends that HPPI
is engaged in the manufacture and sale of steel, concrete
Dennis S. Cuyegkeng Assistant to the President and iron pipes, a business which is distinct and separate from
petitioner's construction business. Hence, it is of no
Elisa C. Lim Treasurer consequence that petitioner and HPPI shared the same
premises, the same President and the same set of officers
Virgilio O. Casino Corporate Secretary and subscribers. 7

4. Principal Office We find petitioner's contention to be unmeritorious.

355 Maysan Road, Valenzuela, Metro Manila. 6 It is a fundamental principle of corporation law that a
corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be
On February 1, 1990, HPPI filed an Opposition to private
connected. 8 But, this separate and distinct personality of a
respondents' motion for issuance of a break-open order,
corporation is merely a fiction created by law for convenience
contending that HPPI is a corporation which is separate and
and to promote justice. 9 So, when the notion of separate
distinct from petitioner. HPPI also alleged that the two
juridical personality is used to defeat public convenience,
corporations are engaged in two different kinds of
justify wrong, protect fraud or defend crime, or is used as a
businesses, i.e., HPPI is a manufacturing firm while petitioner
device to defeat the labor laws, 10 this separate personality of
was then engaged in construction.
the corporation may be disregarded or the veil of corporate
fiction pierced. 11 This is true likewise when the corporation is
On March 2, 1990, the Labor Arbiter issued an Order which
merely an adjunct, a business conduit or an alter ego of
denied private respondents' motion for break-open order.
another corporation. 12
Private respondents then appealed to the NLRC. On April 23,
The conditions under which the juridical entity may be
1992, the NLRC set aside the order of the Labor Arbiter,
disregarded vary according to the peculiar facts and
issued a break-open order and directed private respondents
circumstances of each case. No hard and fast rule can be
to file a bond. Thereafter, it directed the sheriff to proceed
accurately laid down, but certainly, there are some probative
with the auction sale of the properties already levied upon. It
factors of identity that will justify the application of the
dismissed the third-party claim for lack of merit.
doctrine of piercing the corporate veil, to wit:
Petitioner moved for reconsideration but the motion was
1. Stock ownership by one or common ownership of both
denied by the NLRC in a Resolution, dated December 3, 1992.
corporations.
Hence, the resort to the present petition.
2. Identity of directors and officers.
Petitioner alleges that the NLRC committed grave abuse of
3. The manner of keeping corporate books and records.
discretion when it ordered the execution of its decision
despite a third-party claim on the levied property. Petitioner
4. Methods of conducting the business. 13
further contends, that the doctrine of piercing the corporate
The SEC en banc explained the "instrumentality rule" which
the courts have applied in disregarding the separate juridical
personality of corporations as follows:
Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded.
The control necessary to invoke the rule is not majority or
even complete stock control but such domination of
instances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It
must be kept in mind that the control must be shown to have
been exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately
cause the injury or unjust loss for which the complaint is
made.
The test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing
the corporate veil." In applying the "instrumentality" or "alter
ego" doctrine, the courts are concerned with reality and not
form, with how the corporation operated and the individual
defendant's relationship to that operation. 14
Thus the question of whether a corporation is a mere alter
ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact. 15
In this case, the NLRC noted that, while petitioner claimed
that it ceased its business operations on April 29, 1986, it
filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address
is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on the
same day, a similar information sheet stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O.
Casio as the corporate secretary of both corporations. It
would also not be amiss to note that both corporations had
the same president, thesame board of directors,
the same corporate officers, and substantially
the same subscribers.
From the foregoing, it appears that, among other things, the
respondent (herein petitioner) and the third-party claimant
shared the same address and/or premises. Under this
circumstances, (sic) it cannot be said that the property levied
upon by the sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to
evade the payment to private respondents of back wages
and to bar their reinstatement to their former positions. HPPI
is obviously a business conduit of petitioner corporation and
its emergence was skillfully orchestrated to avoid the
financial liability that already attached to petitioner
corporation.
The facts in this case are analogous to Claparols v. Court of
Industrial Relations, 17 where we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel
and Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the Hence, the NLRC did not commit any grave abuse of
next day, July 1, 1957, up to December 7, 1962, when the discretion when it affirmed the break-open order issued by
latter finally ceased to operate, were not disputed by the Labor Arbiter.
petitioner. It is very clear that the latter corporation was a
continuation and successor of the first entity . . . . Both Finally, we do not find any reason to disturb the rule that
predecessors and successor were owned and controlled by factual findings of quasi-judicial agencies supported by
petitioner Eduardo Claparols and there was no break in the substantial evidence are binding on this Court and are
succession and continuity of the same business. This entitled to great respect, in the absence of showing of grave
"avoiding-the-liability" scheme is very patent, considering abuse of a discretion. 18
that 90% of the subscribed shares of stock of the Claparols
Steel Corporation (the second corporation) was owned by WHEREFORE, the petition is DISMISSED and the assailed
respondent . . . Claparols himself, and all the assets of the resolutions of the NLRC, dated April 23, 1992 and December
dissolved Claparols Steel and Nail plant were turned over to 3, 1992, are AFFIRMED.
the emerging Claparols Steel Corporation.
SO ORDERED.
It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in the Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.
present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial Footnotes
obligation to its employees.
G.R. No. 100812 June 25, 1999
In view of the failure of the sheriff, in the case at bar, to
effect a levy upon the property subject of the execution,
FRANCISCO MOTORS CORPORATION, petitioner,
private respondents had no other recourse but to apply for a
vs.
break-open order after the third-party claim of HPPI was
COURT OF APPEALS and SPOUSES GREGORIO and
dismissed for lack of merit by the NLRC. This is in consonance
LIBRADA MANUEL, respondents.
with Section 3, Rule VII of the NLRC Manual of Execution of
Judgment which provides that:

Should the losing party, his agent or representative, refuse or

prohibit the Sheriff or his representative entry to the place
where the property subject of execution is located or kept,
the judgment creditor may apply to the Commission or Labor
Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin
requirements of due notice and hearing were complied with.
Petitioner and the third-party claimant were given the
opportunity to submit evidence in support of their claim.
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the
Rules of Court, seeks to annul the decision 1 of the Court of
Appeals in C.A. G.R. CV No. 10014 affirming the decision
rendered by Branch 135, Regional Trial Court of Makati, Metro
Manila. The procedural antecedents of this petition are as
follows:
On January 23, 1985, petitioner filed a complaint 2 against
private respondents to recover three thousand four hundred
twelve and six centavos (P3,412.06), representing the
balance of the jeep body purchased by the Manuels from Dissatisfied with the trial court's order, petitioner elevated
petitioner; an additional sum of twenty thousand four the matter to the Court of Appeals, posing the following
hundred fifty-four and eighty centavos (P20,454.80) issues:
representing the unpaid balance on the cost of repair of the
vehicle; and six thousand pesos (P6,000.00) for cost of suit I.
and attorney's fees. 3 To the original balance on the price of
jeep body were added the costs of repair. 4 In their answer, WHETHER OR NOT THE DECISION RENDERED BY THE LOWER
private respondents interposed a counterclaim for unpaid COURT IS NULL AND VOID AS IT NEVER ACQUIRED
legal services by Gregorio Manuel in the amount of fifty JURISDICTION OVER THE PERSON OF THE DEFENDANT.
thousand pesos (P50,000) which was not paid by the
incorporators, directors and officers of the petitioner. The trial II.
court decided the case on June 26, 1985, in favor of
petitioner in regard to the petitioner's claim for money, but WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL
also allowed the counter-claim of private respondents. Both PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD
parties appealed. On April 15, 1991, the Court of Appeals BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.
sustained the trial court's decision. 5 Hence, the present
petition.
III.
For our review in particular is the propriety of the permissive
WHETHER OR NOT THERE IS FAILURE ON THE PART OF
counterclaim which private respondents filed together with
PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED PERMISSIVE
their answer to petitioner's complaint for a sum of money.
COUNTERCLAIM. 8
Private respondent Gregorio Manuel alleged as an affirmative
defense that, while he was petitioner's Assistant Legal
Petitioner contended that the trial court did not acquire
Officer, he represented members of the Francisco family in
jurisdiction over it because no summons was validly served
the intestate estate proceedings of the late Benita Trinidad.
on it together with the copy of the answer containing the
However, even after the termination of the proceedings, his
permissive counterclaim. Further, petitioner questions the
services were not paid. Said family members, he said, were
propriety of its being made party to the case because it was
also incorporators, directors and officers of petitioner. Hence
not the real party in interest but the individual members of
to petitioner's collection suit, he filed a counter permissive
the Francisco family concerned with the intestate case.
counterclaim for the unpaid attorney's fees. 6
In its assailed decision now before us for review, respondent
For failure of petitioner to answer the counterclaim, the trial
Court of Appeals held that a counterclaim must be answered
court declared petitioner in default on this score, and
in ten (10) days, pursuant to Section 4, Rule 11, of the Rules
evidence ex-parte was presented on the counterclaim. The
of Court; and nowhere does it state in the Rules that a party
trial court ruled in favor of private respondents and found
still needed to be summoned anew if a counterclaim was set
that Gregorio Manuel indeed rendered legal services to the
up against him. Failure to serve summons, said respondent
Francisco family in Special Proceedings Number 7803 "In
court, did not effectively negate trial court's jurisdiction over
the Matter of Intestate Estate of Benita Trinidad". Said court
petitioner in the matter of the counterclaim. It likewise
also found that his legal services were not compensated
pointed out that there was no reason for petitioner to be
despite repeated demands, and thus ordered petitioner to
excused from answering the counterclaim. Court records
pay him the amount of fifty thousand (P50,000.00) pesos. 7
showed that its former counsel, Nicanor G. Alvarez, received
the copy of the answer with counterclaim two (2) days prior
to his withdrawal as counsel for petitioner. Moreover when
petitioner's new counsel, Jose N. Aquino, entered his
appearance, three (3) days still remained within the period to
file an answer to the counterclaim. Having failed to answer,
petitioner was correctly considered in default by the trial
court. 9 Even assuming that the trial court acquired no
jurisdiction over petitioner, respondent court also said, but
having filed a motion for reconsideration seeking relief from
the said order of default, petitioner was estopped from
further questioning the trial court's jurisdiction. 10
On the question of its liability for attorney's fees owing to
private respondent Gregorio Manuel, petitioner argued that
being a corporation, it should not be held liable therefor
because these fees were owed by the incorporators, directors
and officers of the corporation in their personal capacity as
heirs of Benita Trinidad. Petitioner stressed that the
personality of the corporation, vis-a-vis the individual persons
who hired the services of private respondent, is separate and
distinct, 11 hence, the liability of said individuals did not
become an obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals
ruled as follows:
However, this distinct and separate personality is merely a
fiction created by law for convenience and to promote
justice. Accordingly, this separate personality of the
corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover
for found (sic) illegality, or to work an injustice, or where
necessary to achieve equity or when necessary for the
protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc.,
72 SCRA 347) Corporations are composed of natural persons
and the legal fiction of a separate corporate personality is not
a shield for the commission of injustice and inequity.
(Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408).
In the instant case, evidence shows that the plaintiff-
appellant Francisco Motors Corporation is composed of the
heirs of the late Benita Trinidad as directors and
incorporators for whom defendant Gregorio Manuel rendered
legal services in the intestate estate case of their deceased
mother. Considering the aforestated principles and
circumstances established in this case, equity and justice
demands plaintiff-appellant's veil of corporate identity should
be pierced and the defendant be compensated for legal
services rendered to the heirs, who are directors of the
plaintiff-appellant corporation. 12
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE
OF PIERCING THE VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE
WAS JURISDICTION OVER PETITIONER WITH RESPECT TO THE
COUNTERCLAIM. 13
Petitioner submits that respondent court should not have
resorted to piercing the veil of corporate fiction because the
transaction concerned only respondent Gregorio Manuel and
the heirs of the late Benita Trinidad. According to petitioner,
there was no cause of action by said respondent against
petitioner; personal concerns of the heirs should be
distinguished from those involving corporate affairs.
Petitioner further contends that the present case does not fall
among the instances wherein the courts may look beyond
the distinct personality of a corporation. According to
petitioner, the services for which respondent Gregorio
Manuel seeks to collect fees from petitioner are personal in
nature. Hence, it avers the heirs should have been sued in
their personal capacity, and not involve the corporation. 14
With regard to the permissive counterclaim, petitioner also
insists that there was no proper service of the answer
containing the permissive counterclaim. It claims that the
counterclaim is a separate case which can only be properly
served upon the opposing party through summons. Further
petitioner states that by nature, a permissive counterclaim is
one which does not arise out of nor is necessarily connected
with the subject of the opposing party's claim. Petitioner
avers that since there was no service of summons upon it
with regard to the counterclaim, then the court did not
acquire jurisdiction over petitioner. Since a counterclaim is
considered an action independent from the answer,
according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party
is at the same time both plaintiff and defendant with respect
to the other, 15requiring in each case separate summonses.
In their Comment, private respondents focus on the two
questions raised by petitioner. They defend the propriety of
piercing the veil of corporate fiction, but deny the necessity
of serving separate summonses on petitioner in regard to
their permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts
found that respondent Gregorio Manuel was employed as
assistant legal officer of petitioner corporation, and that his
services were solicited by the incorporators, directors and
members to handle and represent them in Special
Proceedings No. 7803, concerning the Intestate Estate of the
late Benita Trinidad. They assert that the members of
petitioner corporation took advantage of their positions by
not compensating respondent Gregorio Manuel after the
termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of
the appellate court that support piercing the veil of corporate
identity in this particular case. They assert that the corporate
veil may be disregarded when it is used to defeat public
convenience, justify wrong, protect fraud, and defend crime.
It may also be pierced, according to them, where the
corporate entity is being used as an alter ego, adjunct, or
business conduit for the sole benefit of the stockholders or of
another corporate entity. In these instances, they aver, the
corporation should be treated merely as an association of
individual persons. 16
Private respondents dispute petitioner's claim that its right to
due process was violated when respondents' counterclaim
was granted due course, although no summons was served
upon it. They claim that no provision in the Rules of Court
requires service of summons upon a defendant in a
counterclaim. Private respondents argue that when the
petitioner filed its complaint before the trial court it
voluntarily submitted itself to the jurisdiction of the court. As
a consequence, the issuance of summons on it was no longer
necessary. Private respondents say they served a copy of
their answer with affirmative defenses and counterclaim on
petitioner's former counsel, Nicanor G. Alvarez. While
petitioner would have the Court believe that respondents
served said copy upon Alvarez after he had withdrawn his
appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records
disclose that the answer was received two (2) days before
the former counsel for petitioner withdrew his appearance,
according to private respondents. They maintain that the
present petition is but a form of dilatory appeal, to set off
petitioner's obligations to the respondents by running up
more interest it could recover from them. Private
respondents therefore claim damages against petitioner. 17
To resolve the issues in this case, we must first determine the
propriety of piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation
has a separate personality distinct from its stockholders and
from other corporations to which it may be
18
connected. However, under the doctrine of piercing the veil
of corporate entity, the corporation's separate juridical
personality may be disregarded, for example, when the
corporate identity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Also, where the
corporation is a mere alter ego or business conduit of a
person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation, then its distinct personality may be
ignored. 19 In these circumstances, the courts will treat the
corporation as a mere aggrupation of persons and the
liability will directly attach to them. The legal fiction of a
separate corporate personality in those cited instances, for
reasons of public policy and in the interest of justice, will be
justifiably set aside.
In our view, however, given the facts and circumstances of
this case, the doctrine of piercing the corporate veil has no
relevant application here. Respondent court erred in
permitting the trial court's resort to this doctrine. The
rationale behind piercing a corporation's identity in a given
case is to remove the barrier between the corporation from
the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. However,
in the case at bar, instead of holding certain individuals or
persons responsible for an alleged corporate act, the
situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and
incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its
erroneous invocation. Note that according to private
respondent Gregorio Manuel his services were solicited as
counsel for members of the Francisco family to represent
them in the intestate proceedings over Benita Trinidad's
estate. These estate proceedings did not involve any
business of petitioner.
Note also that he sought to collect legal fees not just from
certain Francisco family members but also from petitioner
corporation on the claims that its management had
requested his services and he acceded thereto as an
employee of petitioner from whom it could be deduced he
was also receiving a salary. His move to recover unpaid legal
fees through a counterclaim against Francisco Motors
Corporation, to offset the unpaid balance of the purchase and
repair of a jeep body could only result from an obvious
misapprehension that petitioner's corporate assets could be
used to answer for the liabilities of its individual directors,
officers, and incorporators. Such result if permitted could
easily prejudice the corporation, its own creditors, and even
other stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services
involved, whatever obligation said incorporators, directors
and officers of the corporation had incurred, it was incurred
in their personal capacity. When directors and officers of a
corporation are unable to compensate a party for a personal
obligation, it is far-fetched to allege that the corporation is
perpetuating fraud or promoting injustice, and be thereby
held liable therefor by piercing its corporate veil. While there
are no hard and fast rules on disregarding separate corporate
identity, we must always be mindful of its function and
purpose. A court should be careful in assessing the milieu
where the doctrine of piercing the corporate veil may be
applied. Otherwise an injustice, although unintended, may
result from its erroneous application.
The personality of the corporation and those of its
incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The claim
for legal fees against the concerned individual incorporators,
officers and directors could not be properly directed against
the corporation without violating basic principles governing
corporations. Moreover, every action including a
counterclaim must be prosecuted or defended in the name
of the real party in interest. 20 It is plainly an error to lay the
claim for legal fees of private respondent Gregorio Manuel at
the door of petitioner (FMC) rather than individual members
of the Francisco family.
However, with regard to the procedural issue raised by
petitioner's allegation, that it needed to be summoned anew
in order for the court to acquire jurisdiction over it, we agree
with respondent court's view to the contrary. Section 4, Rule
11 of the Rules of Court provides that a counterclaim or
cross-claim must be answered within ten (10) days from
service. Nothing in the Rules of Court says that summons
should first be served on the defendant before an answer to
counterclaim must be made. The purpose of a summons is to
enable the court to acquire jurisdiction over the person of the
defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the
counterclaim, being the plaintiff in the original complaint, has
already submitted to the jurisdiction of the court. Following
Rule 9, Section 3 of the 1997 Rules of Civil Procedure, 21 if a
defendant (herein petitioner) fails to answer the
counterclaim, then upon motion of plaintiff, the defendant Republic of the Philippines
may be declared in default. This is what happened to SUPREME COURT
petitioner in this case, and this Court finds no procedural Baguio City
error in the disposition of the appellate court on this
particular issue. Moreover, as noted by the respondent court, THIRD DIVISION
when petitioner filed its motion seeking to set aside the order
of default, in effect it submitted itself to the jurisdiction of the G.R. No. 142936 April 17, 2002
court. As well said by respondent court:
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
Further on the lack of jurisdiction as raised by plaintiff- DEVELOPMENT CORPORATION, petitioners,
appellant[,] [t]he records show that upon its request, plaintiff- vs.
appellant was granted time to file a motion for ANDRADA ELECTRIC & ENGINEERING
reconsideration of the disputed decision. Plaintiff-appellant COMPANY, respondent.
did file its motion for reconsideration to set aside the order of
default and the judgment rendered on the counterclaim. PANGANIBAN, J.:

Thus, even if the court acquired no jurisdiction over plaintiff-
appellant on the counterclaim, as it vigorously insists,
plaintiff-appellant is considered to have submitted to the
court's jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano vs.
Palacio, 12 SCRA 447). A party is estopped from assailing the
jurisdiction of a court after voluntarily submitting himself to
its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100).
Estoppel is a bar against any claims of lack of jurisdiction.
(Balais vs. Balais, 159 SCRA 37). 22
WHEREFORE, the petition is hereby GRANTED and the
assailed decision is hereby REVERSED insofar only as it held
Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this
decision is without prejudice to his filing the proper suit
against the concerned members of the Francisco family in
their personal capacity. No pronouncement as to
costs.1wphi1.nt
SO ORDERED.
Bellosillo, Puno, Mendoza and Buena, JJ., concur.
Basic is the rule that a corporation has a legal personality
distinct and separate from the persons and entities owning it.
The corporate veil may be lifted only if it has been used to
shield fraud, defend crime, justify a wrong, defeat public
convenience, insulate bad faith or perpetuate injustice. Thus,
the mere fact that the Philippine National Bank (PNB)
acquired ownership or management of some assets of the
Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by
the Development Bank of the Philippines (DBP), will not make
PNB liable for the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000
Decision1 of the Court of Appeals (CA) in CA-GR CV No.
57610. The decretal portion of the challenged Decision reads
as follows:
"WHEREFORE, the judgment appealed from is hereby
AFFIRMED."2
The Facts
The factual antecedents of the case are summarized by the
Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged
that it is a partnership duly organized, existing, and
operating under the laws of the Philippines, with office and
principal place of business at Nos. 794-812 Del Monte
[A]venue, Quezon City, while the defendant [herein
petitioner] Philippine National Bank (herein referred to as
PNB), is a semi-government corporation duly organized,
existing and operating under the laws of the Philippines, with
office and principal place of business at Escolta Street, Sta.
Cruz, Manila; whereas, the other defendant, the National
Sugar Development Corporation (NASUDECO in brief), is also
a semi-government corporation and the sugar arm of the
PNB, with office and principal place of business at the 2nd
Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a
corporation organized, existing and operating under the 1975
laws of the Philippines, and had its business office before
1975 at Del Carmen, Floridablanca, Pampanga; that the
plaintiff is engaged in the business of general construction
for the repairs and/or construction of different kinds of
machineries and buildings; that on August 26, 1975, the
defendant PNB acquired the assets of the defendant PASUMIL
that were earlier foreclosed by the Development Bank of the
Philippines (DBP) under LOI No. 311; that the defendant PNB
organized the defendant NASUDECO in September, 1975, to
take ownership and possession of the assets and ultimately
to nationalize and consolidate its interest in other PNB
controlled sugar mills; that prior to October 29, 1971, the
defendant PASUMIL engaged the services of plaintiff for
electrical rewinding and repair, most of which were partially
paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff; that finally, on October 29, 1971,
the plaintiff and the defendant PASUMIL entered into a
contract for the plaintiff to perform the following, to wit
(a) Construction of one (1) power house building;
(b) Construction of three (3) reinforced concrete foundation
for three (3) units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation
for the 5,000 KW and 1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning tests sum for
three (3) 350 KW diesel engine generating set[s];
(e) Installation of turbine and diesel generating sets
including transformer, switchboard, electrical wirings and
pipe provided those stated units are completely supplied with
their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all
existing concrete foundation and drainage canals,
excavation, and earth fillings all for the total amount of
P543,500.00 as evidenced by a contract, [a] xerox copy of
which is hereto attached as Annex A and made an integral
part of this complaint;
that aside from the work contract mentioned-above, the
defendant PASUMIL required the plaintiff to perform extra
work, and provide electrical equipment and spare parts, such
as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) Supply of diesel engine parts and other related works
including fabrication of parts.
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the PNB,
a machine copy of which is appended as Annex C of the
complaint; that out of said unpaid balance of P527,263.80,
the defendant PASUMIL made a partial payment to the
plaintiff of P14,000.00, in broken amounts, covering the
period from January 5, 1974 up to May 23, 1974, leaving an
unpaid balance of P513,263.80; that the defendant PASUMIL
and the defendant PNB, and now the defendant NASUDECO,
failed and refused to pay the plaintiff their just, valid and
demandable obligation; that the President of the NASUDECO
is also the Vice-President of the PNB, and this official holds
office at the 10th Floor of the PNB, Escolta, Manila, and
plaintiff besought this official to pay the outstanding
obligation of the defendant PASUMIL, inasmuch as the
defendant PNB and NASUDECO now owned and possessed
the assets of the defendant PASUMIL, and these defendants
all benefited from the works, and the electrical, as well as the
engineering and repairs, performed by the plaintiff; that
because of the failure and refusal of the defendants to pay
their just, valid, and demandable obligations, plaintiff
suffered actual damages in the total amount of P513,263.80;
and that in order to recover these sums, the plaintiff was
compelled to engage the professional services of counsel, to
whom the plaintiff agreed to pay a sum equivalent to 25% of
the amount of the obligation due by way of attorneys fees.
Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL,
jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum
of P513,263.80, with annual interest of 14% from the time
the obligation falls due and demandable;
(2) Condemning the defendants to pay attorneys fees
amounting to 25% of the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
"The defendants PNB and NASUDECO filed a joint motion to
dismiss the complaint chiefly on the ground that the
complaint failed to state sufficient allegations to establish a
cause of action against both defendants, inasmuch as there
is lack or want of privity of contract between the plaintiff and
the two defendants, the PNB and NASUDECO, said
defendants citing Article 1311 of the New Civil Code, and the
case law ruling in Salonga v. Warner Barnes & Co., 88 Phil.
125; and Manila Port Service, et al. v. Court of Appeals, et al.,
20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its
Order of November 27, 1980; in the same order, that court
directed the defendants to file their answer to the complaint
within 15 days.
"In their answer, the defendant NASUDECO reiterated the
grounds of its motion to dismiss, to wit:
That the complaint does not state a sufficient cause of
action against the defendant NASUDECO because: (a)
NASUDECO is not x x x privy to the various electrical
construction jobs being sued upon by the plaintiff under the
present complaint; (b) the taking over by NASUDECO of the
assets of defendant PASUMIL was solely for the purpose of
reconditioning the sugar central of defendant PASUMIL
pursuant to martial law powers of the President under the
Constitution; (c) nothing in the LOI No. 189-A (as well as in
LOI No. 311) authorized or commanded the PNB or its
subsidiary corporation, the NASUDECO, to assume the
corporate obligations of PASUMIL as that being involved in
the present case; and, (d) all that was mentioned by the said
letter of instruction insofar as the PASUMIL liabilities [were]
concerned [was] for the PNB, or its subsidiary corporation the
NASUDECO, to make a study of, and submit [a]
recommendation on the problems concerning the same.
"By way of counterclaim, the NASUDECO averred that by
reason of the filing by the plaintiff of the present suit, which it
[labeled] as unfounded or baseless, the defendant
NASUDECO was constrained to litigate and incur litigation
expenses in the amount of P50,000.00, which plaintiff should
be sentenced to pay. Accordingly, NASUDECO prayed that the
complaint be dismissed and on its counterclaim, that the
plaintiff be condemned to pay P50,000.00 in concept of
attorneys fees as well as exemplary damages.
"In its answer, the defendant PNB likewise reiterated the
grounds of its motion to dismiss, namely: (1) the complaint
states no cause of action against the defendant PNB; (2) that
PNB is not a party to the contract alleged in par. 6 of the
complaint and that the alleged services rendered by the
plaintiff to the defendant PASUMIL upon which plaintiffs suit
is erected, was rendered long before PNB took possession of
the assets of the defendant PASUMIL under LOI No. 189-A; (3)
that the PNB take-over of the assets of the defendant
PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume
its operations in time for the 1974-75 milling season, and
that nothing in the said LOI No. 189-A, as well as in LOI No.
311, authorized or directed PNB to assume the corporate
obligation/s of PASUMIL, let alone that for which the present
action is brought; (4) that PNBs management and operation
under LOI No. 311 did not refer to any asset of PASUMIL
which the PNB had to acquire and thereafter [manage], but
only to those which were foreclosed by the DBP and were in
turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and
the Development Bank of the Philippines (DBP) entered into a
Redemption Agreement whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its
(DBP) rights and interest in and over the foreclosed real
and/or personal properties of PASUMIL, as shown in Annex C
which is made an integral part of the answer; (6) that again,
conformably with LOI No. 311, PNB pursuant to a Deed of
Assignment dated October 21, 1975, conveyed, transferred,
and assigned for valuable consideration, in favor of
NASUDECO, a distinct and independent corporation, all its
(PNB) rights and interest in and under the above Redemption
Agreement. This is shown in Annex D which is also made an
integral part of the answer; [7] that as a consequence of the
said Deed of Assignment, PNB on October 21, 1975 ceased to
managed and operate the above-mentioned assets of
PASUMIL, which function was now actually transferred to
NASUDECO. In other words, so asserted PNB, the complaint
as to PNB, had become moot and academic because of the
execution of the said Deed of Assignment; [8] that moreover,
LOI No. 311 did not authorize or direct PNB to assume the
corporate obligations of PASUMIL, including the alleged
obligation upon which this present suit was brought; and [9]
that, at most, what was granted to PNB in this respect was
the authority to make a study of and submit
recommendation on the problems concerning the claims of
PASUMIL creditors, under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was
unnecessarily constrained to litigate and to incur expenses in
this case, hence it is entitled to claim attorneys fees in the
amount of at least P50,000.00. Accordingly, PNB prayed that
the complaint be dismissed; and that on its counterclaim,
that the plaintiff be sentenced to pay defendant PNB the sum
of P50,000.00 as attorneys fees, aside from exemplary
damages in such amount that the court may seem just and
equitable in the premises.
"Summons by publication was made via the Philippines Daily
Express, a newspaper with editorial office at 371 Bonifacio
Drive, Port Area, Manila, against the defendant PASUMIL,
which was thereafter declared in default as shown in the
August 7, 1981 Order issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment,
the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against the defendant Corporation, Philippine
National Bank (PNB) NATIONAL SUGAR DEVELOPMENT
CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS
(PASUMIL), ordering the latter to pay jointly and severally the
former the following:
1. The sum of P513,623.80 plus interest thereon at the rate
of 14% per annum as claimed from September 25, 1980 until
fully paid;
2. The sum of P102,724.76 as attorneys fees; and,
3. Costs.
The Court of Appeals gravely erred in law in holding the
herein petitioners liable for the unpaid corporate debts of
PASUMIL, a corporation whose corporate existence has not
been legally extinguished or terminated, simply because of
petitioners[] take-over of the management and operation of
PASUMIL pursuant to the mandates of LOI No. 189-A, as
amended by LOI No. 311.

SO ORDERED. "II

Manila, Philippines, September 4, 1986. The Court of Appeals gravely erred in law in not applying [to]
the case at bench the ruling enunciated in Edward J. Nell Co.
v. Pacific Farms, 15 SCRA 415."6

'(SGD) ERNESTO S. TENGCO Succinctly put, the aforesaid errors boil down to the principal
Judge"3 issue of whether PNB is liable for the unpaid debts of
PASUMIL to respondent.

Ruling of the Court of Appeals This Courts Ruling

Affirming the trial court, the CA held that it was offensive to The Petition is meritorious.
the basic tenets of justice and equity for a corporation to take
over and operate the business of another corporation, while Main Issue:
disavowing or repudiating any responsibility, obligation or
liability arising therefrom.4 Liability for Corporate Debts

Hence, this Petition.5 As a general rule, questions of fact may not be raised in a
petition for review under Rule 45 of the Rules of Court. 7To this
Issues rule, however, there are some exceptions enumerated
in Fuentes v. Court of Appeals.8 After a careful scrutiny of the
In their Memorandum, petitioners raise the following errors records and the pleadings submitted by the parties, we find
for the Courts consideration: that the lower courts misappreciated the evidence
presented.9 Overlooked by the CA were certain relevant facts
"I that would justify a conclusion different from that reached in
the assailed Decision.10

Petitioners posit that they should not be held liable for the
corporate debts of PASUMIL, because their takeover of the
latters foreclosed assets did not make them assignees. On
the other hand, respondent asserts that petitioners and
PASUMIL should be treated as one entity and, as such, jointly
and severally held liable for PASUMILs unpaid
obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another
will not be liable for the debts of the selling corporation,
provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the
following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where
the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely
a continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape
liability for those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of
law. It possesses the right of succession and such powers,
attributes, and properties expressly authorized by law or
incident to its existence.12 It has a personality separate and
distinct from the persons composing it, as well as from any
other legal entity to which it may be related. 13 This is basic.
Equally well-settled is the principle that the corporate mask
may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another
corporation.14 For reasons of public policy and in the interest
of justice, the corporate veil will justifiably be impaled 15 only
when it becomes a shield for fraud, illegality or inequity
committed against third persons.16
Hence, any application of the doctrine of piercing the
corporate veil should be done with caution. 17 A court should
be mindful of the milieu where it is to be applied. 18 It must be
certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against
another, in disregard of its rights. 19 The wrongdoing must be
clearly and convincingly established; it cannot be
presumed.20 Otherwise, an injustice that was never
unintended may result from an erroneous application. 21
This Court has pierced the corporate veil to ward off a
judgment credit,22 to avoid inclusion of corporate assets as
part of the estate of the decedent,23 to escape liability arising
from a debt,24 or to perpetuate fraud and/or confuse
legitimate issues25 either to promote or to shield unfair
objectives26 or to cover up an otherwise blatant violation of
the prohibition against forum-shopping.27 Only in these and
similar instances may the veil be pierced and disregarded. 28
The question of whether a corporation is a mere alter ego is
one of fact.29 Piercing the veil of corporate fiction may be
allowed only if the following elements concur: (1) control --
not mere stock control, but complete domination -- not only
of finances, but of policy and business practice in respect to
the transaction attacked, must have been such that the
corporate entity as to this transaction had at the time no
separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or
a wrong to perpetuate the violation of a statutory or other
positive legal duty, or a dishonest and an unjust act in
contravention of plaintiffs legal right; and (3) the said control
and breach of duty must have proximately caused the injury
or unjust loss complained of.30
We believe that the absence of the foregoing elements in the
present case precludes the piercing of the corporate
veil. First, other than the fact that petitioners acquired the
assets of PASUMIL, there is no showing that their control over
it warrants the disregard of corporate personalities. 31 Second,
there is no evidence that their juridical personality was used
to commit a fraud or to do a wrong; or that the separate
corporate entity was farcically used as a mere alter ego,
business conduit or instrumentality of another entity or
person.32 Third, respondent was not defrauded or injured
when petitioners acquired the assets of PASUMIL. 33
Being the party that asked for the piercing of the corporate
veil, respondent had the burden of presenting clear and
convincing evidence to justify the setting aside of the
separate corporate personality rule.34 However, it utterly
failed to discharge this burden; 35 it failed to establish by
competent evidence that petitioners separate corporate veil
had been used to conceal fraud, illegality or inequity. 36
While we agree with respondents claim that the assets of the
National Sugar Development Corporation (NASUDECO) can
be easily traced to PASUMIL,37 we are not convinced that the
transfer of the latters assets to petitioners was fraudulently
entered into in order to escape liability for its debt to
respondent.38
A careful review of the records reveals that DBP foreclosed
the mortgage executed by PASUMIL and acquired the assets
as the highest bidder at the public auction conducted. 39 The
bank was justified in foreclosing the mortgage, because the
PASUMIL account had incurred arrearages of more than 20
percent of the total outstanding obligation. 40 Thus, DBP had
not only a right, but also a duty under the law to foreclose
the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No.
311,43 PNB acquired PASUMILs assets that DBP had
foreclosed and purchased in the normal course. Petitioner
bank was likewise tasked to manage temporarily the
operation of such assets either by itself or through a
subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the
foreclosed PASUMIL assets pursuant to Section 6 of Act No.
3135.45 These assets were later conveyed to PNB for a
consideration, the terms of which were embodied in the
Redemption Agreement.46 PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMILs creditor. 47 By
way of a Deed of Assignment, 48 PNB then transferred to
NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of
Appeals,49 we had the occasion to resolve a similar issue. We
ruled that PNB, DBP and their transferees were not liable for
Marinduque Minings unpaid obligations to Remington
Industrial Sales Corporation (Remington) after the two banks
had foreclosed the assets of Marinduque Mining. We likewise
held that Remington failed to discharge its burden of proving
bad faith on the part of Marinduque Mining to justify the
piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts
lifting of the corporate mask.50 The CA did not point to any
fact evidencing bad faith on the part of PNB and its
transferee.51 The corporate fiction was not used to defeat
public convenience, justify a wrong, protect fraud or defend
crime.52 None of the foregoing exceptions was shown to exist
in the present case.53 On the contrary, the lifting of the
corporate veil would result in manifest injustice. This we
cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held
liable for the unpaid obligations of PASUMIL by virtue of LOI
Nos. 189-A and 311, which expressly authorized PASUMIL and
PNB to merge or consolidate. On the other hand, petitioners
contend that their takeover of the operations of PASUMIL did
not involve any corporate merger or consolidation, because
the latter had never lost its separate identity as a
corporation.
A consolidation is the union of two or more existing entities
to form a new entity called the consolidated corporation. A
merger, on the other hand, is a union whereby one or more
existing corporations are absorbed by another corporation
that survives and continues the combined business. 54
The merger, however, does not become effective upon the
mere agreement of the constituent corporations. 55Since a
merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law
authorizing them.56 For a valid merger or consolidation, the
approval by the Securities and Exchange Commission (SEC)
of the articles of merger or consolidation is required. 57 These PACIFIC BANKING CORPORATION, REGISTER OF DEEDS,
articles must likewise be duly approved by a majority of the RTC EX-OFFICIO SHERIFF OF QUEZON CITY and the
respective stockholders of the constituent corporations. 58 Heirs of EUGENIO D. TRINIDAD, respondents.

In the case at bar, we hold that there is no merger or QUISUMBING, J.:

consolidation with respect to PASUMIL and PNB. The
procedure prescribed under Title IX of the Corporation
Code59 was not followed.
In fact, PASUMILs corporate existence, as correctly found by
the CA, had not been legally extinguished
terminated.60 Further, prior to PNBs acquisition of the
foreclosed assets, PASUMIL had previously made partial
payments to respondent for the formers obligation in the
amount of P777,263.80. As of June 27, 1973, PASUMIL had
paid P250,000 to respondent and, from January 5, 1974 to
May 23, 1974, another P14,000.
This petition for review on certiorari seeks the reversal of the
Decision1 dated October 21, 1999 of the Court of Appeals in
CA-G.R. CV No. 41536 which dismissed herein petitioners'
appeal from the Decision2 dated February 10, 1993 of the
or Regional Trial Court (RTC) of Quezon City, Branch 84, in Civil
Case No. Q-89-4152. The trial court had dismissed
petitioners' complaint for annulment of real estate mortgage
and the extra-judicial foreclosure thereof. Likewise brought
for our review is the Resolution3 dated February 23, 2000 of
the Court of Appeals which denied petitioners' motion for
reconsideration.

Neither did petitioner expressly or impliedly agree to assume The facts, as culled from records, are as follows:
the debt of PASUMIL to respondent.61 LOI No. 11 explicitly
provides that PNB shall study and submit recommendations Petitioners, the spouses Alfredo Lipat and Estelita Burgos
on the claims of PASUMILs creditors. 62Clearly, the corporate Lipat, owned "Bela's Export Trading" (BET), a single
separateness between PASUMIL and PNB remains, despite proprietorship with principal office at No. 814 Aurora
respondents insistence to the contrary.63 Boulevard, Cubao, Quezon City. BET was engaged in the
manufacture of garments for domestic and foreign
WHEREFORE, the Petition is hereby GRANTED and the consumption. The Lipats also owned the "Mystical Fashions"
assailed Decision SET ASIDE. No pronouncement as to costs. in the United States, which sells goods imported from the
Philippines through BET. Mrs. Lipat designated her daughter,
SO ORDERED. Teresita B. Lipat, to manage BET in the Philippines while she
was managing "Mystical Fashions" in the United States.
epublic of the Philippines
SUPREME COURT In order to facilitate the convenient operation of BET, Estelita
Manila Lipat executed on December 14, 1978, a special power of
attorney appointing Teresita Lipat as her attorney-in-fact to
SECOND DIVISION obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She
G.R. No. 142435 April 30, 2003 likewise authorized Teresita to execute mortgage contracts
on properties owned or co-owned by her as security for the
ESTELITA BURGOS LIPAT and ALFREDO obligations to be extended by Pacific Bank including any
LIPAT, petitioners, extension or renewal thereof.
vs.
Sometime in April 1979, Teresita, by virtue of the special
power of attorney, was able to secure for and in behalf of her
mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured
by BET and exported to "Mystical Fashions" in the United
States. As security therefor, the Lipat spouses, as
represented by Teresita, executed a Real Estate Mortgage
over their property located at No. 814 Aurora Blvd., Cubao,
Quezon City. Said property was likewise made to secure
"other additional or new loans, discounting lines, overdrafts
and credit accommodations, of whatever amount, which the
Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the
Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and
other credit accommodations, including interest and
expenses or other obligations of the Mortgagor and/or Debtor
owing to the Mortgagee, whether directly, or indirectly,
principal or secondary, as appears in the accounts, books
and records of the Mortgagee."4
On September 5, 1979, BET was incorporated into a family
corporation named Bela's Export Corporation (BEC) in order
to facilitate the management of the business. BEC was
engaged in the business of manufacturing and exportation of
all kinds of garments of whatever kind and description 5 and
utilized the same machineries and equipment previously
used by BET. Its incorporators and directors included the
Lipat spouses who owned a combined 300 shares out of the
420 shares subscribed, Teresita Lipat who owned 20 shares,
and other close relatives and friends of the Lipats. 6 Estelita
Lipat was named president of BEC, while Teresita became the
vice-president and general manager.
Eventually, the loan was later restructured in the name of
BEC and subsequent loans were obtained by BEC with the
corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened
by Pacific Bank in favor of A. O. Knitting Manufacturing Co.,
Inc., upon the request of BEC after BEC executed the
corresponding trust receipt therefor. Export bills were also
executed in favor of Pacific Bank for additional finances.
These transactions were all secured by the real estate
mortgage over the Lipats' property.
The promissory notes, export bills, and trust receipt
eventually became due and demandable. Unfortunately, BEC
defaulted in its payments. After receipt of Pacific Bank's
demand letters, Estelita Lipat went to the office of the bank's
liquidator and asked for additional time to enable her to
personally settle BEC's obligations. The bank acceded to her
request but Estelita failed to fulfill her promise.
Consequently, the real estate mortgage was foreclosed and
after compliance with the requirements of the law the
mortgaged property was sold at public auction. On January
31, 1989, a certificate of sale was issued to respondent
Eugenio D. Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the
Quezon City RTC a complaint for annulment of the real estate
mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D.
Trinidad. The complaint, which was docketed as Civil Case
No. Q-89-4152, alleged, among others, that the promissory
notes, trust receipt, and export bills were all ultra vires acts
of Teresita as they were executed without the requisite board
resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on
BEC, the same were the corporation's sole obligation, it
having a personality distinct and separate from spouses
Lipat. It was likewise pointed out that Teresita's authority to
secure a loan from Pacific Bank was specifically limited to
Mrs. Lipat's sole use and benefit and that the real estate
mortgage was executed to secure the Lipats' and BET's
P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged
in common that petitioners Lipat cannot evade payments of
the value of the promissory notes, trust receipt, and export
bills with their property because they and the BEC are one
and the same, the latter being a family corporation.
Respondent Trinidad further claimed that he was a buyer in
good faith and for value and that petitioners are estopped
from denying BEC's existence after holding themselves out
as a corporation.
After trial on the merits, the RTC dismissed the complaint,
thus:
WHEREFORE, this Court holds that in view of the facts
contained in the record, the complaint filed in this case must
be, as is hereby, dismissed. Plaintiffs however has five (5)
months and seventeen (17) days reckoned from the finality
of this decision within which to exercise their right of
redemption. The writ of injunction issued is automatically
dissolved if no redemption is effected within that period.
The counterclaims and cross-claim are likewise dismissed for
lack of legal and factual basis.
No costs.
IT IS SO ORDERED. 7 denied by the appellate court in its Resolution of February 23,
The trial court ruled that there was convincing and conclusive
evidence proving that BEC was a family corporation of the
Lipats. As such, it was a mere extension of petitioners'
personality and business and a mere alter ego or business
conduit of the Lipats established for their own benefit. Hence,
to allow petitioners to invoke the theory of separate
corporate personality would sanction its use as a shield to
further an end subversive of justice. 8 Thus, the trial court
pierced the veil of corporate fiction and held that Bela's
Export Corporation and petitioners (Lipats) are one and the
same. Pacific Bank had transacted business with both BET
and BEC on the supposition that both are one and the same.
Hence, the Lipats were estopped from disclaiming any
obligations on the theory of separate personality of
corporations, which is contrary to principles of reason and
good faith.
The Lipats timely appealed the RTC decision to the Court of
Appeals in CA-G.R. CV No. 41536. Said appeal, however, was
dismissed by the appellate court for lack of merit. The Court
of Appeals found that there was ample evidence on record to
support the application of the doctrine of piercing the veil of
corporate fiction. In affirming the findings of the RTC, the
appellate court noted that Mrs. Lipat had full control over the
activities of the corporation and used the same to further her
business interests.9 In fact, she had benefited from the loans
obtained by the corporation to finance her business. It also
found unnecessary a board resolution authorizing Teresita
Lipat to secure loans from Pacific Bank on behalf of BEC
because the corporation's by-laws allowed such conduct even
without a board resolution. Finally, the Court of Appeals ruled
that the mortgage property was not only liable for the
original loan of P583,854.00 but likewise for the value of the
promissory notes, trust receipt, and export bills as the
mortgage contract equally applies to additional or new loans,
discounting lines, overdrafts, and credit accommodations
which petitioners subsequently obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was
2000.10
Hence, this petition, with petitioners submitting that the
court a quo erred
1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE
VEIL OF CORPORATE FICTION APPLIES IN THIS CASE.
2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE
HELD LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY
FOR THE AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL
VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND
EXPORT BILLS OF BELA'S EXPORT CORPORATION.
3) . . . IN HOLDING THAT "THE IMPOSITION OF 15%
ATTORNEY'S FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS
BEYOND THIS COURT'S JURISDICTION FOR IT IS BEING RAISED
FOR THE FIRST TIME IN THIS APPEAL."
4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY
THE DISPUTED PROMISSORY NOTES, THE DOLLAR
ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE
EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.
5) . . . IN DENYING PETITIONERS' MOTION FOR
RECONSIDERATION AND IN HOLDING THAT SAID MOTION FOR
RECONSIDERATION IS "AN UNAUTHORIZED MOTION, A MERE
SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY
CONSEQUENCE TO APPELLANTS."11
In sum, the following are the relevant issues for our
resolution:
1. Whether or not the doctrine of piercing the veil of
corporate fiction is applicable in this case;
2. Whether or not petitioners' property under the real estate
mortgage is liable not only for the amount of P583,854.00
but also for the value of the promissory notes, trust receipt,
and export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15%
attorney's fees stipulated in the deed of real estate
mortgage.
On the first issue, petitioners contend that both the appellate
and trial courts erred in holding them liable for the
obligations incurred by BEC through the application of the
doctrine of piercing the veil of corporate fiction absent any
clear showing of fraud on their part.
Respondents counter that there is clear and convincing
evidence to show fraud on part of petitioners given the
findings of the trial court, as affirmed by the Court of
Appeals, that BEC was organized as a business conduit for
the benefit of petitioners.
Petitioners' contentions fail to persuade this Court. A careful
reading of the judgment of the RTC and the resolution of the
appellate court show that in finding petitioners' mortgaged
property liable for the obligations of BEC, both courts below
relied upon the alter ego doctrine or instrumentality rule,
rather than fraud in piercing the veil of corporate fiction.
When the corporation is the mere alter ego or business
conduit of a person, the separate personality of the
corporation may be disregarded.12 This is commonly referred
to as the "instrumentality rule" or the alter ego doctrine,
which the courts have applied in disregarding the separate
juridical personality of corporations. As held in one case,
Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the 'instrumentality' may be disregarded.
The control necessary to invoke the rule is not majority or
even complete stock control but such domination of finances,
policies and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own, and
is but a conduit for its principal. x x x . 13
We find that the evidence on record demolishes, rather than
buttresses, petitioners' contention that BET and BEC are
separate business entities. Note that Estelita Lipat admitted
that she and her husband, Alfredo, were the owners of
BET14 and were two of the incorporators and majority
stockholders of BEC.15 It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her
daughter, Teresita, to obtain loans and credit lines from
Pacific Bank on her behalf.16 Incidentally, Teresita was
designated as executive-vice president and general manager
of both BET and BEC, respectively. 17 We note further that: (1)
Estelita and Alfredo Lipat are the owners and majority
shareholders of BET and BEC, respectively; 18 (2) both firms
were managed by their daughter, Teresita; 19 (3) both firms
were engaged in the garment business, supplying products to
"Mystical Fashion," a U.S. firm established by Estelita Lipat;
(4) both firms held office in the same building owned by the
Lipats;20 (5) BEC is a family corporation with the Lipats as its
majority stockholders; (6) the business operations of the BEC
were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were
held by Estelita Lipat and the corporation itself had no visible
assets; (8) the board of directors of BEC was composed of the
Burgos and Lipat family members; 21 (9) Estelita had full
control over the activities of and decided business matters of
the corporation;22 and that (10) Estelita Lipat had benefited
from the loans secured from Pacific Bank to finance her
business abroad23 and from the export bills secured by BEC
for the account of "Mystical Fashion."24 It could not have been
coincidental that BET and BEC are so intertwined with each
other in terms of ownership, business purpose, and
management. Apparently, BET and BEC are one and the
same and the latter is a conduit of and merely succeeded the
former. Petitioners' attempt to isolate themselves from and
hide behind the corporate personality of BEC so as to evade
their liabilities to Pacific Bank is precisely what the classical
doctrine of piercing the veil of corporate entity seeks to
prevent and remedy. In our view, BEC is a mere continuation
and successor of BET, and petitioners cannot evade their
obligations in the mortgage contract secured under the name
of BEC on the pretext that it was signed for the benefit and
under the name of BET. We are thus constrained to rule that
the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their
mortgaged property should not be made liable for the
subsequent credit lines and loans incurred by BEC because,
first, it was not covered by the mortgage contract of BET
which only covered the loan of P583,854.00 and which
allegedly had already been paid; and, second, it was secured
by Teresita Lipat without any authorization or board
resolution of BEC.
We find petitioners' contention untenable. As found by the
Court of Appeals, the mortgaged property is not limited to
answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats' property can be held
liable under the real estate mortgage is not limited to
P583,854.00. It can be held liable for the value of the
promissory notes, trust receipt and export bills as well. For
the mortgage was executed not only for the purpose of
securing the Bela's Export Trading's original loan of
P583,854.00, but also for "other additional or new loans,
discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may
subsequently obtain from the mortgagee as well as any
renewal or extension by the Mortgagor and/or Debtor of the
whole or part of said original, additional or new loans,
discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other
obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly principal or
secondary, as appears in the accounts, books and records of
the mortgagee.25
As a general rule, findings of fact of the Court of Appeals are
final and conclusive, and cannot be reviewed on appeal by
the Supreme Court, provided they are borne out by the
record or based on substantial evidence. 26 As noted earlier,
BEC merely succeeded BET as petitioners' alter ego; hence,
petitioners' mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.
Further, petitioners' contention that the original loan had
already been paid, hence, the mortgaged property should not
be made liable to the loans of BEC, is unsupported by any
substantial evidence other than Estelita Lipat's self-serving
testimony. Two disputable presumptions under the rules on
evidence weigh against petitioners, namely: (a) that a person
takes ordinary care of his concerns; 27 and (b) that things have
happened according to the ordinary course of nature and the
ordinary habits of life.28 Here, if the original loan had indeed
been paid, then logically, petitioners would have asked from
Pacific Bank for the required documents evidencing receipt
and payment of the loans and, as owners of the mortgaged
property, would have immediately asked for the cancellation
of the mortgage in the ordinary course of things. However,
the records are bereft of any evidence contradicting or
overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property
should not bind the loans and credit lines obtained by BEC as
they were secured without any proper authorization or board
resolution. They also blame the bank for its laxity and
complacency in not requiring a board resolution as a
requisite for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a
board resolution since per admissions by both petitioner
Estelita Lipat and Alice Burgos, petitioners' rebuttal witness,
no business or stockholder's meetings were conducted nor
were there election of officers held since its incorporation. In
fact, not a single board resolution was passed by the
corporate board29 and it was Estelita Lipat and/or Teresita
Lipat who decided business matters.30
Secondly, the principle of estoppel precludes petitioners from
denying the validity of the transactions entered into by
Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of
petitioner Estelita Lipat and both BET and BEC. While the
power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is
lodged in its board of directors, subject to the articles of
incorporation, by-laws, or relevant provisions of law, yet, just
as a natural person may authorize another to do certain acts
for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers,
committees, or agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate
by-laws, or authorization from the board, either expressly or
impliedly by habit, custom, or acquiescence in the general
course of business.31 Apparent authority, is derived not
merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in
other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his ordinary
powers.32
In this case, Teresita Lipat had dealt with Pacific Bank on the
mortgage contract by virtue of a special power of attorney
executed by Estelita Lipat. Recall that Teresita Lipat acted as
the manager of both BEC and BET and had been deciding
business matters in the absence of Estelita Lipat. Further, the
export bills secured by BEC were for the benefit of "Mystical
Fashion" owned by Estelita Lipat. 33 Hence, Pacific Bank
cannot be faulted for relying on the same authority granted
to Teresita Lipat by Estelita Lipat by virtue of a special power
of attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; thus,
the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying
the agent's authority.34
We find no necessity to extensively deal with the liability of
Alfredo Lipat for the subsequent credit lines of BEC. Suffice it
to state that Alfredo Lipat never disputed the validity of the G.R. No. L-30822 July 31, 1975
real estate mortgage of the original loan; hence, he cannot
now dispute the subsequent loans obtained using the same EDUARDO CLAPAROLS, ROMULO AGSAM and/or
mortgage contract since it is, by its very terms, a continuing CLAPAROLS STEEL AND NAIL PLANT, petitioners,
mortgage contract. vs.
COURT OF INDUSTRIAL RELATIONS, ALLIED WORKERS'
On the third and final issue, petitioners assail the decision of ASSOCIATION and/or DEMETRIO GARLITOS, ALFREDO
the Court of Appeals for not taking cognizance of the issue on ONGSUCO, JORGE SEMILLANO, SALVADOR DOROTEO,
attorney's fees on the ground that it was raised for the first ROSENDO ESPINOSA, LUDOVICO BALOPENOS, ASER
time on appeal. We find the conclusion of the Court of AMANCIO, MAXIMO QUIOYO, GAUDENCIO QUIOYO, and
Appeals to be in accord with settled jurisprudence. Basic is IGNACIO QUIOYO,respondents.
the rule that matters not raised in the complaint cannot be
raised for the first time on appeal. 35 A close perusal of the Ruben G. Bala for petitioners.
complaint yields no allegations disputing the attorney's fees
imposed under the real estate mortgage and petitioners Rolando N. Medalla for private respondents.
cannot now allege that they have impliedly disputed the
same when they sought the annulment of the contract.

In sum, we find no reversible error of law committed by the MAKASIAR, J.:

Court of Appeals in rendering the decision and resolution
herein assailed by petitioners.
A petition for certiorari to set aside the order of respondent
Court of Industrial Relations dated May 30, 1969 directing
WHEREFORE, the petition is DENIED. The Decision dated petitioners to pay back wages and bonuses to private
October 21, 1999 and the Resolution dated February 23, respondents as well as its resolution of July 5, 1969 denying
2000 of the Court of Appeals in CA-G.R. CV No. 41536 are the motion for reconsideration of said order in Case No. 32-
AFFIRMED. Costs against petitioners. ULP-Iloilo entitled "Allied Workers' Association, et. al., versus
Eduardo Claparols, et. al.."
SO ORDERED.
It appears that on August 6, 1957, a complaint for unfair
Bellosillo, Austria-Martinez and Callejo, Sr., JJ ., concur. labor practice was filed by herein private respondent Allied
Workers' Association, respondent Demetrio Garlitos and ten
(10) respondent workers against herein petitioners on
account of the dismissal of respondent workers from
epublic of the Philippines petitioner Claparols Steel and Nail Plant.
SUPREME COURT
Manila On September 16, 1963, respondent Court rendered its
decision finding "Mr. Claparols guilty of union busting and" of
FIRST DIVISION having "dismissed said complainants because of their union
activities," and ordering respondents "(1) To cease and desist
from committing unfair labor practices against their
employees and laborers; (2) To reinstate said complainants to
their former or equivalent jobs, as soon as possible, with
back wages from the date of their dismissal up to their actual
reinstatement" (p. 12, Decision; p. 27, rec.).
A motion to reconsider the above decision was filed by herein
petitioners, which respondent Court, sitting en banc, denied
in a resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers
(complainants in the ULP case) filed a motion for execution of
respondent Court's September 16, 1963 decision.
On May 14, 1964, respondent Court, in its order of
September 16, 1963, granted execution and directed herein
petitioners
to reinstate the above complainants to their former or
equivalent jobs within five (5) days after receipt of a copy of
this order. In order to implement the award of back wages,
the Chief of the Examining Division or any of his assistants is
hereby directed to proceed to the office of the respondents at
Matab-ang, Talisay, Negros Occidental, and examine its
payrolls and other pertinent records and compute the back
wages of the complainants in accordance with the decision
dated September 16, 1963, and, upon termination, to submit
his report as soon as possible for further disposition (p. 7,
Brief for Respondents, p. 113, rec.).
which was reiterated by respondent Court in a subsequent
order dated November 10, 1964 (pp. 7-8, Brief for
Respondents, p. 113, rec.).
On December 14, 1964, respondent workers were
accompanied by the Chief of Police of Talisay, Negros
Occidental to the compound of herein petitioner company to
report for reinstatement per order of the court. Respondent
workers were, however, refused reinstatement by company
accountant Francisco Cusi for he had no order from plant
owner Eduardo Claparols nor from his lawyer Atty. Plaridel
Katalbas, to reinstate respondent workers.
Again, on December 15, 1964, respondent workers were
accompanied by a police officer to the company compound,
but then, they were again refused reinstatement by Cusi on
the same ground.
On January 15, 1965, the CIR Chief Examiner Submitted his
report containing three computations, to wit:
The first computation covers the period February 1, 1957 to
October 31, 1964. The second is up to and including
December 7, 1962, when the corporation stopped operations,
while the third is only up to June 30, 1957 when the Claparols
Steel and Nail Plant ceased to operate (Annex B, Petition for
Review on Certiorari, p. 14, Brief for appellees, p. 113, rec.).
with the explanation that:
6. Since the records of the Claparols Steel Corporation show
that it was established on July 1, 1957 succeeding the
Claparols Steel and Nail Plant which ceased operations on
June 30, 1957, and that the Claparols Steel Corporation
stopped operations on December 7, 1962, three (3)
computations are presented herein for the consideration of
this Honorable Court (p. 2, Report of Examiner, p. 29, rec.).
On January 23, 1965, petitioners filed an opposition alleging
that under the circumstances presently engulfing the
company, petitioner Claparols could not personally reinstate
respondent workers; that assuming the workers are entitled
to back wages, the same should only be limited to three
months pursuant to the court ruling in the case of Sta. Cecilia
Sawmills vs. CIR (L-19273-74, February 20, 1964); and that
since Claparols Steel Corporation ceased to operate on
December 7, 1962, re-employment of respondent workers
cannot go beyond December 7, 1962.
A reply to petitioner's opposition was filed by respondent
workers, alleging among others, that Claparols Steel and Nail
Plant and Claparols Steel and Nail Corporation are one and
the same corporation controlled by petitioner Claparols, with
the latter corporation succeeding the former.
On November 28, 1966, after conducting a series of hearings
on the report of the examiner, respondent Court issued an
order, the dispositive portion of which reads:
WHEREFORE, the Report of the. Examiner filed on January 15,
1965, is hereby approved subject to the foregoing findings
and dispositions. Consequently, the Corporation Auditing
Examiner is directed to recompute the back wages of
complainants Demetrio Garlitos and Alfredo Ongsuco on the
basis of P200.00 and P270.00 a month, respectively; to
compute those of complainant Ignacio Quioyo as aforesaid;
to compute the deductible earnings of complainants
Ongsuco, Jorge Semillano and Garlitos, as found in the body
of this order; and to compute the bonuses of each and every
complainant, except Honorato Quioyo. Thereafter, as soon as
possible, the Examiner should submit a report in compliance
herewith of the Court's further disposition (p. 24, Brief for
Respondents, p. 113, rec.).
On December 7, 1966, a motion for reconsideration was filed
by petitioner, assailing respondent Court's ruling that (1) the
ruling in the case of Sta. Cecilia Sawmills Inc. CIR, et. al, does
not apply in the case at bar; and (2) that bonus should be
included in the recoverable wages.
On December 14, 1966, a counter-opposition was filed by
private respondents alleging that petitioners' motion for
reconsideration was pro forma, it not making express
reference to the testimony or documentary evidence or to
the provision of law alleged to be contrary to such findings or
conclusions of respondent Court.
On February 8, 1967, respondent Court of Industrial Relations
dismissed petitioners' motion for reconsideration for
being pro forma.
Whereupon, petitioners filed a petition for certiorari with this
COURT in G.R. No. L-27272 to set aside the November 28,
1966 order of respondent Court, as well as its February 8,
1967 resolution. Petitioners assigned therein as errors of law
the very same assignment of errors it raises in the present
case, to wit:
I
THE RESPONDENT COURT ERRED AND/OR ACTED WITH
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, IN HOLDING IN THE ORDER UNDER REVIEW
THAT BONUSES SHOULD BE PAID TO THE RESPONDENT
WORKERS DESPITE THE FACT THAT THE SAME WAS NOT
ADJUDICATED IN ITS ORIGINAL DECISION.
II
THE RESPONDENT COURT ERRED AND/OR ACTED WITH
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, IN NOT APPLYING THE DOCTRINE LAID DOWN
BY THIS HONORABLE TRIBUNAL IN THE CASE OF "STA.
CECILIA SAWMILLS, INC. VS. C.I.R., ET. AL.," G.R. No.
L-19273-74, PROMULGATED ON FEBRUARY 29, 1964 (pp. 10-
11, rec.).
On April 27, 1967, the Supreme Court denied petitioners'
petition for certiorari (p. 77, rec. of L-27272), which was
reiterated on May 19, 1967 (p. 27, Respondent's Brief, p.
113, rec.; p. 81, rec. of L-27272).
On May 3, 1967, private respondents moved to have the
workers' back wages properly recomputed. A motion to the
same end was reiterated by private respondents on June 14,
1967.
On July 13, 1967, respondent Court directed a recomputation
of the back wages of respondent workers in accordance with
its order dated November 28, 1966. The said order in part
reads:
WHEREFORE, the Chief Auditing Examiner of the Court or any 7. Rosendo Espinosa 1,075.40
of his assistants, is hereby directed to recompute the back 8. Gaudencio Quioyo 1,167.92
wages of the workers involved in this case in accordance with 9. Jorge Semillano 1,212.08
the Order of November 28, 1966 within 20 days from receipt 10. Maximo Quioyo 449.41
of a copy of this Order (p. 28, Brief for Respondents, p. 113, Total P9,107.79
rec.).
(Pp. 30-31, Respondent's Brief, p. 113, rec.)
Then on March 21, 1968, the Chief Examiner came out with
his report, the disputed portion of which (regarding bonuses) On April 16, 1968, petitioners filed their opposition to the
reads: report of the Examiner dated March 21, 1968 on grounds
already rejected by respondent Court in its order dated
xxx xxx xxx November 28, 1966, and by the Supreme Court also in its
ruling in G.R. No. L-27272.
4. The yearly bonuses of the employees and laborers of
respondent corporation are given on the following basis: On May 4, 1968, a rejoinder to petitioners' opposition was
filed by private respondents, alleging among others "that the
Basic Additional: grounds of petitioners' opposition were the same grounds
raised by them before and passed upon by respondent Court
a. For every dependent 1% of monthly salary and this Honorable Tribunal; that this order of November 28,
1966 which passed upon these issues became final and
b. For every dependent in elementary grade 2% of monthly executory on June 3, 1967 from the Honorable Supreme
salary Court. (Order of respondent Court dated July 13, 1967). [p.
32, Brief for Respondents, p. 113, rec.].
c. For every dependent in high school 3% of monthly salary
On July 26, 1968, private respondents filed their motion for
d. For every dependent in college 5% of monthly salary approval of the Report of the Examiner submitted on March
21, 1968, alleging, among others, that petitioners, in their
opposition, did not actually dispute the data elicited by the
xxx xxx xxx
Chief Examiner but rather harped on grounds which, as
already stated, had already been turned down by the
7. The computed ... bonuses after deducting the earnings
Supreme Court.
elsewhere of Messrs. Ongsuco, Garlitos and Semillano are as
follows:
On October 19, 1968, herein private respondents filed their
"Constancia", submitting the case for resolution of
Name x x x Bonuses x x x
respondent Court of Industrial Relations.
1. Alfredo Ongsuco P1,620.00
On May 30, 1969, respondent Court issued an order, subject
2. Demetrio Garlitos 1,200.00
of the present appeal, the dispositive portion of which reads:
3. Ignacio Quioyo 455.23
4. Aser Abancio 461.00
WHEREFORE, there being no proof offered to substantiate
5. Ludovico Belopeos 752.05
respondent Eduardo Claparols' opposition, the Examiner's
6. Salvador Doroteo 714.70
Report should be, and it is hereby, APPROVED. Consequently,
pursuant to the decision dated September 16, 1963,
respondent ... (petitioners herein) are hereby directed to pay
the respective back wages and bonuses of the
complainants (respondents herein) ... (p. 35, Brief for
Respondents; p. 113, rec.; emphasis supplied).1wph1.t
On June 7, 1969, petitioners filed a motion for
reconsideration on practically the same grounds previously
raised by them.
On June 30, 1969, respondents filed an opposition to
petitioners' motion for reconsideration, with the following
allegations:
1. The issues raised, namely, whether bonuses should be
included in the award for back wages had already been
resolved by respondent court in its orders dated November
28, 1966, and December 7, 1966, and in the Resolution of
the Honorable Supreme Court in G.R. No. L-27272 dated April
26, 1967 and May 19, 1967, and the same is already a
settled and final issue.
2. Petitioners' motion for reconsideration is merely a rehash
of previous arguments, effete and unrejuvenated, pro forma,
and intended merely to delay the proceedings.
As correctly contended by private respondents, the present
petition is barred by Our resolutions of April 26, 1967 and
May 19, 1967 in G.R. No. L-27272 (Eduardo Claparols, et. al.
vs. CIR, et. al.) [pp. 77-83, rec. of L- 27272], dismissing said
case, wherein said petitioners invoked the applicability of the
doctrine in Sta. Cecilia Sawmills, Inc. vs. CIR, et. al. (L-19273-
74, Feb. 29, 1964, 10 SCRA 433) and impugned the illegality
of the order of respondent Court dated November 28, 1966
directing the computation and payment of the bonuses, aside
from back wages on the ground that these bonuses were not
included in the decision of September 16, 1963, which had
long become final.
The aforesaid resolutions in G.R. No. L-27272 constitute the
law of the instant case, wherein herein petitioners raised
again practically the same issues invoked in the
abovementioned case. The denial of the petition in G.R. No.
L-27272 suffices to warrant the denial of the present petition;
and We need not go any further.
However, without lending a sympathetic ear to the obvious
desire of herein petitioners of this Court to re-examine
which would be an exercise in futility the final ruling in
G.R. No. L-27272, which as above-stated is the law of the
instant case, but solely to remind herein petitioners, We
reiterate the governing principles.
WE uniformly held that "a bonus is not a demandable and
enforceable obligation, except when it is a part of the wage
or salary compensation" (Philippine Education Co. vs. CIR and
the Union of Philippine Co. Employees [NLU], 92 Phil. 381;
Ansay, et. al. vs. National Development Co., et. al., 107 Phil.
998, 999; Emphasis supplied).
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual
Benefit Association (92 Phil. 754), this Court, thru Justice
Labrador, held:
Whether or not bonus forms part of wages depends upon the
condition or circumstance for its payment. If it is an
additional compensation WHICH THE EMPLOYER PROMISED
AND AGREED to give without any condition imposed for its
payment ... then it is part of the wage. (Emphasis
supplied).1wph1.t
In Altomonte vs. Philippine American Drug Co. (106 Phil.
137), the Supreme Court held that an employee is not
entitled to bonus where there is no showing that it had been
granted by the employer to its employees periodically or
regularly as to become part of their wages or salaries. The
clear implication is that bonus is recoverable as part of the
wage or salary where the employer regularly or periodically
gives it to employees.
American jurisprudence equally regards bonuses as part of
compensation or recoverable wages.
Thus, it was held that "... it follows that in determining the
regular rate of pay, a bonus which in fact constitutes PART
OF AN EMPLOYEE'S compensation, rather than a true gift or
gratuity, has to be taken into consideration." (48 Am. Jur. 2d,
Labor and Labor Relations, No. 1555, citing the cases of Triple
"AAA" Co. vs. Wirtz and Haber vs. Americana Corporation;
Emphasis supplied). It was further held that "... the regular
rate includes incentive bonuses paid to the employees in
addition to the guaranteed base rates regardless of any
contract provision to the contrary and even though such
bonuses could not be determined or paid until such time
after the pay day" (48 Am. Jur. 2d, Labor and Labor Relations,
No. 1555, citing the case of Walling vs. Harnischfeger Corp.,
325 US 427, 89 L Ed 1711, 65 S Ct. 1246; Emphasis
supplied).1wph1.t latter finally ceased to operate, were not disputed by
Petitioners in the present case do not dispute that as a
matter of tradition, the company has been doling out
bonuses to employees. In fact, the company balance sheets
for the years 1956 to 1962 contained bonus and pension
computations which were never repudiated or questioned by
petitioners. As such, bonus for a given year earmarked as a
matter of tradition for distribution to employees has formed
part of their recoverable wages from the company. Moreover,
with greater reason, should recovery of bonuses as part of
back wages be observed in the present case since the
company, in the light of the very admission of company
accountant Francisco Cusi, distributes bonuses to its
employees even if the company has suffered losses.
Specifically, petitioner company has done this in 1962 (t.s.n.,
p. 149, Sept. 20, 1965).
Since bonuses are part of back wages of private respondents,
the order of May 30, 1969, directing the payment of their
bonuses, did not amend the decision of September 16, 1963
of respondent Court directing payment of their wages, which
has long become final and executory, in the same way that
the previous order of May 14, 1964 granting execution of said
decision of September 16, 1963 also directed the
computation of the wages to be paid to private respondents
as decreed by the decision of September 16, 1963. All the
orders of May 30, 1969, November 28, 1966 and May 14,
1964 merely implement the already final and executory
decision of September 16, 1963.
Petitioners insist that We adopt the ruling in the Sta. Cecilia
Sawmills case wherein the recoverable back wages were
limited to only three (3) months; because as in the Sta.
Cecilia Sawmills case, the Claparols Steel and Nail Plant
ceased operations due to enormous business reverses.
Respondent Court's findings that indeed the Claparols Steel
and Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957 up to December 7, 1962, when the
petitioners. It is very clear that the latter corporation was a
continuation and successor of the first entity, and its
emergence was skillfully timed to avoid the financial liability
that already attached to its predecessor, the Claparols Steel
and Nail Plant. Both predecessors and successor were owned
and controlled by the petitioner Eduardo Claparols and there
was no break in the succession and continuity of the same
business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stocks of
the Claparols Steel Corporation (the second corporation) was
owned by respondent (herein petitioner) Claparols himself,
and all the assets of the dissolved Claparols Steel and Nail
Plant were turned over to the emerging Claparols Steel
Corporation.
It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in the
present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial
obligation to its employees.
It is well remembering that in Yutivo & Sons Hardware
Company vs. Court of Tax Appeals (L-13203, Jan. 28, 1961, 1
SCRA 160), We held that when the notion of legal entity is
used to defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as
an association or persons, or, in the case of two corporations,
will merge them into one.
In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-
9687, June 30, 1961, 2 SCRA 632), this Court likewise held
that where a corporation is a dummy and serves no business
purpose and is intended only as a blind, the corporate fiction
may be ignored.
In Commissioner of Internal Revenue vs. Norton and Harrison
Company (L-17618, Aug. 31, 1964, 11 SCRA 714), We ruled
that where a corporation is merely an adjunct, business
conduit or alter ego of another corporation, the fiction of
separate and distinct corporate entities should be
disregarded.
To the same uniform effect are the decisions in the cases
of Republic vs. Razon (L-17462, May 29, 1967, 20 SCRA 234)
and A.D. Santos, Inc. vs. Vasquez (L-23586, March 20, 1968,
22 SCRA 1156).
WE agree with respondent Court of Industrial Relations,
therefore, that the amount of back wages recoverable by
respondent workers from petitioners should be the amount
accruing up to December 7, 1962 when the Claparols Steel
Corporation ceased operations.
WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE
COSTS AGAINST PETITIONERS TO BE PAID BY THEIR
COUNSEL.
Castro (Chairman), Esguerra, Muoz Palma and Martin, JJ.,
concur.
Teehankee, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68661 July 22, 1986
NATIONAL FEDERATION OF LABOR UNION (NAFLU) AND
TERESITA LORENZO, ET AL., petitioners,
vs.
HON. MINISTER BLAS OPLE, as Minister of Labor and
Employment; LAWMAN INDUSTRIAL/LIBRA
GARMENTS/DOLPHIN ENTERPRISES, respondents.
Olalia, Dimapilis, Olalia & Associates for petitioners.
GUTIERREZ, JR., J.:
The only issue raised in this petition is whether or not, on the
basis of the findings of the public respondent that the
respondent company was guilty of unfair labor practice, the
petitioners should be reinstated to their former positions
without loss of seniority rights and with full backwages.
The background facts which led to the filing of the instant
petition are summarized in the assailed decision as follows:
On September 8, 1982, the National Federation of Labor
Union (NAFLU) filed a request for conciliation before the
Bureau of Labor Relations requesting for the intervention in
its dispute with management involving certain money claims,
refusal to conclude a collective agreement after such has
been negotiated and run-away shop undertaken by
management in order to bust the union.
Several conferences were conducted by the Bureau to settle
the dispute amicably. In the course of the proceedings,
however, management unilaterally declared a temporary
shutdown on September 15, 1982. "On September 23, 1982,
the management of Lawman Industrial promised the union
'that it will start the normalization of operations at Lawman
effective January, 1983.
On October 11, 1982, after all efforts to mediate the charges
of unfair labor practice and non-payment of certain money
claims have failed, the union filed its notice of strike.
On November 9, 1982, the firm offered payment of P200,000.
as complete settlement of all claims inclusive of the
separation pay from the company. The union rejected the
offer which it felt was tantamount to a proposal to eliminate
the union and final separation of its members from the
company.
Efforts of conciliation proved futile. Until the last conference
on January 6, 1983, the company had failed to resume
operations alleging poor business conditions.
Meanwhile, the union filed a complaint for unfair labor
practice against the management of Lawman sometime
December 1982 docketed as Case No. 11-695-82 (NAFLU v.
Lawman) pending before the Metro Manila Branch of the
NLRC.
Notwithstanding the commitment of management to resume
operations in January, 1983 and even with the expiration on
March 15, 1983 of the provisional shutdown, the period of
shutdown was extended without notifying this Office of such
extension. On March 17, 1983, this Office issued the Order
now in question.
On May 20, 1983, respondent filed a motion for
reconsideration alleging that it had suffered losses as shown
by its financial statements. In view thereof, it informed this
Ministry of its decision to effect a shutdown on September 8,
1982 and to circularize a memorandum on November 2, 1982
announcing the cessation of operations.
The company alleged further that it had no more plant and
building because they were allegedly repossessed by the
Pioneer Texturizing Corporation for the failure of respondent
to pay rentals as evidenced by the letter of Mr. Eugenio Tan
dated August 10, 1982 stating that respondent is given
fifteen (15) days to settle its accounts, otherwise an action
for repossession and ejectment would be instituted against it.
Nonetheless, the company offered to pay every employee
affected by the shutdown a separation pay of P328.95 each.
On June 6, 1983, the National Federation of Labor Unions
(NAFLU) submitted a position paper alleging that it was
certified by the Bureau of Labor Relations as the sole and
exclusive bargaining agent of all the rank and file employees
of the said factory. Negotiations followed in October 1981
until January 1982. The management refused to grant
substantial economic demands to the workers, hence, the
union declared a strike in July 1982. Thru the efforts of the
Bureau of Labor Relations, the strike was settled in July 1982.
The management agreed as follows: Wage increase, Pl.00 for
the first year; Pl.00 for the second year and P1.00 for the
third year of the contract. Vacation and sick leaves were also
granted and other fringe benefits. The collective bargaining
agreement was suppose to be effective September 1982.
But the actual partial shutdown began in August 1982. It
appears moreover that at night, machines were dismantled,
hauled out and then installed at No. 43 Engineering Road,
Araneta University compound, Malabon, Metro Manila and the
name of Lawman was changed to LIBRA GARMENTS. Under
that name, new applicants for employment were called even
as the company continued to manufacture the same products
but under the name of LIBRA GARMENTS. When this was
discovered by the workers, LIBRA GARMENTS was changed to
DOLPHIN GARMENTS.
On March 17,1983, the Minister of Labor and Employment
issued an order, stating:
In view of the foregoing, this office hereby assumes
jurisdiction over the dispute at Lawman Industrial
Corporation pursuant to Art. 264 (g) of the Labor Code. All
employees affected by the extended shutdown which is
highly irregular, are ordered to return to work and
management is directed to accept all returning workers
under the same terms and conditions prevailing previous to
the illegal shutdown. Management is further directed to pay
severance compensation including all unpaid wages previous
to the shutdown and after March 15, 1983 in the event that
the company cannot resume operations, All pending cases
including Case No. 11-695-82 (NAFLU v. Lawman) are hereby
ordered consolidated to this Office for resolution. Pending the
determination of the charges on illegal lockout run-away-
shop and the pending money claims against the company,
Lawman Industrial is hereby enjoined from transferring
ownership or otherwise effecting any encumbrance or any of
its existing assets in favor of any third party without a prior
clearance from this Office and timely notice to the union. The
company is likewise prohibited from terminating the
employment of any of its employees pending the outcome of
this dispute.
This order automatically enjoins a strike or lockout.
On July 31, 1984, the public respondent modified its earlier
order and directed the private respondent to pay all accrued
wages and benefits including a one month's pay for its failure
to comply with the requirement of notice under Batas
Pambansa Blg. 130, as amended and separation pay for all
dismissed employees equivalent to one month's pay or one-
half month's pay for every year of service whichever is higher
computed up to January, 1983 when the company had
declared its intention to actually close its operations.
However, despite a finding that the private respondent
company was guilty of unfair labor practice, the public
respondent did not order the reinstatement of the employees
concerned "because the company has declared that it had
already ceased its operations completely." It is this order for
non-reinstatement which is now before us.
The petition is impressed with merit.
We see no reason to disturb the findings of fact of the public
respondent, supported as they are by substantial evidence in
the light of the well established principle that findings of
administrative agencies which have acquired expertise
because their jurisdiction is confined to specific matters are
geiterary accorded not only respect but at times even
finality, and that judicial review by this Court on labor cases
does not go so far as to evaluate the sufficiency of the
evidence upon which the Deputy Minister and the Regional
Director based their determinations but are limited to issues
of jurisdiction or grave abuse of discretion (Special Events
and Central Shipping Office Workers Union v. San Miguel
Corporation, 122 SCRA 557).
The findings of the Minister of Labor and Employment
embodied in its July 31, 1984 decision are categorical:
It is clear from the records of this case that the company
bargained in bad faith with the union when pending the
negotiation of their collective agreement, the company
declared a temporary cessation of its operations which in
reality was an illegal lockout. Evidently, the company also
maintained run-away shop when it started transferring its
machine first to Libra and then to Dolphin Garments. Failure
on the part of the company to comply with the requirements
of notice and due process to the employees and the Labor
Ministry one month before the intended 'closure' of the firm
is clearly against the law.
There is also evidence on the record that even after the
alleged 'shutdown' the company was still operating in the
name of Lawman Industrial although production was being
carried out by another firm called Libra Garments (later
Dolphin Garments). When the company declared in its
position paper dated May 20, 1983 that all the machines of
Lawman had been repossessed by the owner, Pioneer
Texturizing Corporation, it admitted the fact that it has
violated the 17 March Order of this Office enjoining any
encumbrance or transfer of the properties of Lawman without
prior clearance from this Office. The evident bad faith, fraud
and deceit committed by the company to the prejudice of
both the union and the employees who have existing wage
claims, some of which are due for execution, leads us to
affirm the union's position that the veil of corporate fiction
should be pierced in order to safeguard the right to self-
organization and certain vested rights which had accrued in
favor of the union.
It is very obvious from the above findings that the second
corporation seeks the protective shield of a corporate fiction
to achieve an illegal purpose. As enunciated in the case
of Claparols v. Court of Industrial Relations (65 SCRA 613) its
veil in the present case should, therefore, be pierced as it
was deliberately and maliciously designed to evade its
financial obligations to its employees. It is an established
principle that when the veil of corporate fiction is made as a
shield to perpetrate a fraud or to confuse legitimate issues
(here, the relation of employer-employee), the same should
be pierced (A.D. Santos, Inc. v. Vasquez, 22 SCRA 1156).
Thus, as Lawman Industrial Corporation was guilty of unfair
labor practice, the public respondent's order for
reinstatement should follow as a matter of right. In National
Mines and Allied Workers Union v. National Labor Relations
Commission (118 SCRA 637), this Court held that it is an
established rule that an employer who commits an unfair
labor practice may be required to reinstate with fun
backwages the workers affected by such act (See also
Compana Maritima v. United Seamen's Union, 104 Phil. 7;
Talisay Silay Mining Co. v. Court of Industrial Relations, 106
Phil. 1081; Velez v. PAV Watchmen's Union, 107 Phil. 689;
Phil. Sugar Institute v. Court of Industrial Relations, et al., 109
Phil. 452; Big Five Products Workers Union v. Court of
Industrial Relations, 8 SCRA 559; and MD Transit and Taxi Co.
v. De Guzman, 7 SCRA 726).
After finding that Lawman Industrial Corporation had
transferred its business operations to Libra Garments
Enterprises, which later changed its name to Dolphin
Garments Enterprises, the public respondent cannot deny
reinstatement to the petitioners simply because Lawman
Industrial Corporation has ceased its operations.
As Libra/Dolphin Garments is but an alter-ego of the old
employer, Lawman Industrial, the former must bear the
consequences of the latter's unfair acts by reinstating the
petitioners to their former positions without loss of seniority
rights (See Phil. Land-Air-Sea Labor Union (PLASLU) v. Sy
Indong Co. Rice and Corn Mill, 11 SCRA 277).
To justify its closure, the respondent company argues that it
can no longer continue its operations due to serious losses,
and in support thereof, presented its financial statements for
1980-1981 and from January to June, 1986.
The alleged losses of the respondent company are more
apparent than real. The argument of the private respondent
are refuted by the petitioners:
As of December 1981, LAWMAN's Cost of Goods
Manufactured and Sold was P2,065,822.26 while on June 30,
1982, it was P 3,768,609.22. The alleged reason was the
entry of Direct Labor under the 'Statement of Cost of Goods
Manufactured and Sold' amounting to P 1,703,768.27 for
1982. This could only mean that there was a sudden increase
in production of LAWMAN necessitating an additional and
huge labor cost, Comparing this with the past year (1981),
the entry for Direct Labor was only P 398,863.40. This
tremendous increase in Direct Labor for the six months
ending June 1982 was not sufficiently explained by LAWMAN
in the proceedings below.
Even on the entry Administrative Salaries has been increased
to justify losses. For June 30, 1982, LAWMAN spent a sizable
P213,752.85 whereas for December 30, 1981, it only spent
P47,889.20 without any justifiable reason at all.
In addition, the Solicitor General submits the following
observations:
xxx xxx xxx
... [T]he net sales of LAWMAN for the year 1981 was,
P2,117,203.95 whereas for the shorter period of January to
June 1982, its next sales was already P2,359,479.25,
surpassing its entire 1981 sales. This clearly shows that the
firm was experiencing a sales upswing at the time of its
shutdown,
Following the precedent set in Lepanto Consolidated Mining
Co. v. Encarnacion et al (136 SCRA 256) and cases cited
therein, the petitioner-workers should be reinstated but with
backwages not exceeding three years.
WHEREFORE, the petition for review is GRANTED. The
appealed decision dated July 31, 1984 is hereby SET ASIDE.
The private respondent is ordered to reinstate the petitioners
to positions in LIBRA/DOLPHIN GARMENTS with backwages of
not more than three (3) years each and without loss of
seniority rights and benefits being enjoyed by them prior to
the alleged closure of Lawman's Industrial Corporation.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-67626 April 18, 1989
JOSE REMO, JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B.
MARCHA TRANSPORT COMPANY, INC., represented by
APIFANIO B. MARCHA, respondents.
Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.
GANCAYCO, J.:
A corporation is an entity separate and distinct from its
stockholders. While not in fact and in reality a person, the
law treats a corporation as though it were a person by
process of fiction or by regarding it as an artificial person
distinct and separate from its individual stockholders. 1
However, the corporate fiction or the notion of legal entity
may be disregarded when it "is used to defeat public
convenience, justify wrong, protect fraud, or defend crime" in
which instances "the law will regard the corporation as an
association of persons, or in case of two corporations, will
merge them into one." The corporate fiction may also be
disregarded when it is the "mere alter ego or business
conduit of a person." 2 There are many occasions when this
Court pierced the corporate veil because of its use to protect
fraud and to justify wrong. 3 The herein petition for review of
a. resolution of the Intermediate Appellate Court dated
February 8, 1984 seeking the reversal thereof and the
reinstatement of its earlier decision dated June 30, 1983 in
AC-G.R. No. 68496-R 4 calls for the application of the
foregoing principles.
In the latter part of December, 1977 the board of directors of
Akron Customs Brokerage Corporation (hereinafter referred
to as Akron), composed of petitioner Jose Remo, Jr., Ernesto
Baares, Feliciano Coprada, Jemina Coprada, and Dario
Punzalan with Lucia Lacaste as Secretary, adopted a
resolution authorizing the purchase of thirteen (13) trucks for
use in its business to be paid out of a loan the corporation
may secure from any lending institution. 5
Feliciano Coprada, as President and Chairman of Akron,
purchased thirteen trucks from private respondent on
January 25, 1978 for and in consideration of P525,000.00 as
evidenced by a deed of absolute sale. 6 In a side agreement
of the same date, the parties agreed on a downpayment in
the amount of P50,000.00 and that the balance of
P475,000.00 shall be paid within sixty (60) days from the
date of the execution of the agreement. The parties also
agreed that until said balance is fully paid, the down
payment of P50,000.00 shall accrue as rentals of the 13
trucks; and that if Akron fails to pay the balance within the
period of 60 days, then the balance shall constitute as a
chattel mortgage lien covering said cargo trucks and the
parties may allow an extension of 30 days and thereafter
private respondent may ask for a revocation of the contract
and the reconveyance of all said trucks. 7
The obligation is further secured by a promissory note
executed by Coprada in favor of Akron. It is stated in the
promissory note that the balance shall be paid from the
proceeds of a loan obtained from the Development Bank of
the Philippines (DBP) within sixty (60) days. 8 After the lapse
of 90 days, private respondent tried to collect from Coprada
but the latter promised to pay only upon the release of the
DBP loan. Private respondent sent Coprada a letter of
demand dated May 10, 1978. 9 In his reply to the said letter,
Coprada reiterated that he was applying for a loan from the
DBP from the proceeds of which payment of the obligation
shall be made. 10
Meanwhile, two of the trucks were sold under a pacto de
retro sale to a certain Mr. Bais of the Perpetual Loans and
Savings Bank at Baclaran. The sale was authorized by a
board resolution made in a meeting held on March 15,
1978. 11
Upon inquiry, private respondent found that no loan
application was ever filed by Akron with DBP. 12
In the meantime, Akron paid rentals of P500.00 a day
pursuant to a subsequent agreement, from April 27, 1978
(the end of the 90-day period to pay the balance) to May 31,
1978. Thereafter, no more rental payments were made.
On June 17, 1978, Coprada wrote private respondent begging
for a grace period of until the end of the month to pay the
balance of the purchase price; that he will update the rentals
within the week; and in case he fails, then he will return the
13 units should private respondent elect to get back the
same. 13 Private respondent, through counsel, wrote Akron
on August 1, 1978 demanding the return of the 13 trucks and
the payment of P25,000.00 back rentals covering the period
from June 1 to August 1, 1978. 14
Again, Coprada wrote private respondent on August 8, 1978
asking for another grace period of up to August 31, 1978 to
pay the balance, stating as well that he is expecting the
approval of his loan application from a certain financing
company, and that ten (10) trucks have been returned to
Bagbag, Novaliches. 15 On December 9, 1978, Coprada
informed private respondent anew that he had returned ten
(10) trucks to Bagbag and that a resolution was passed by
the board of directors confirming the deed of assignment to
private respondent of P475,000 from the proceeds of a loan
obtained by Akron from the State Investment House, Inc. 16
In due time, private respondent filed a compliant for the
recovery of P525,000.00 or the return of the 13 trucks with
damages against Akron and its officers and directors,
Feliciano Coprada, Dario D. Punzalan, Jemina Coprada, Lucia
Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave,
Vicente Martinez, Pacifico Dollario and petitioner with the
then Court of First Instance of Rizal. Only petitioner answered
the complaint denying any participation in the transaction
and alleging that Akron has a distinct corporate personality.
He was, however, declared in default for his failure to attend
the pre-trial.
In the meanwhile, petitioner sold all his shares in Akron to
Coprada. It also appears that Akron amended its articles of
incorporation thereby changing its name to Akron Transport
International, Inc. which assumed the liability of Akron to
private respondent.
After an ex parte reception of the evidence of the private
respondent, a decision was rendered on October 28, 1980,
the dispositive part of which reads as follows:
Finding the evidence sufficient to prove the case of the
plaintiff, judgment is hereby rendered in favor of the plaintiff
and against the defendants, ordering them jointly and
severally to pay;
a the purchase price of the trucks in the amount of
P525,000.00 with ... legal rate (of interest) from the filing of
the complaint until the full amount is paid;
b rentals of Bagbag property at P1,000.00 a month from
August 1978 until the premises is cleared of the said trucks;
c attorneys fees of P10,000.00, and
d costs of suit.
The P50,000.00 given as down payment shall pertain as
rentals of the trucks from June 1 to August 1, 1978 which is
P25,000.00 (see demand letter of Atty. Aniano Exhibit "T")
and the remaining P25,000.00 shall be from August 1, 1978
until the trucks are removed totally from the place." 17
A motion for new trial filed by petitioner was denied so he
appealed to the then Intermediate Appellate Court (IAC)
wherein in due course a decision was rendered on June 30, 1
983 setting aside the said decision as far as petitioner is
concemed. However, upon a motion for reconsideration filed
by private respondent dent, the IAC, in a resolution dated
February 8,1984, set aside the decision dated June 30, 1983.
The appellate court entered another decision affirming the
appealed decision of the trial court, with costs against
petitioner.
Hence, this petition for review wherein petitioner raises the
following issues:
I. The Intermediate Appellate Court (IAC) erred in
disregarding the corporate fiction and in holding the
petitioner personally liable for the obligation of the
Corporation which decision is patently contrary to law and
the applicable decision thereon.
II. The Intermediate Appellate Court (IAC) committed grave
error of law in its decision by sanctioning the merger of the
personality of the corporation with that of the petitioner
when the latter was held liable for the corporate debts. 18
We reverse.
The environmental facts of this case show that there is no
cogent basis to pierce the corporate veil of Akron and hold
petitioner personally liable for its obligation to private
respondent. While it is true that in December, 1977 petitioner
was still a member of the board of directors of Akron and that
he participated in the adoption of a resolution authorizing the
purchase of 13 trucks for the use in the brokerage business
of Akron to be paid out of a loan to be secured from a lending
institution, it does not appear that said resolution was
intended to defraud anyone and more particularly private
respondent. It was Coprada, President and Chairman of
Akron, who negotiated with said respondent for the purchase
of 13 cargo trucks on January 25, 1978. It was Coprada who
signed a promissory note to guarantee the payment of the
unpaid balance of the purchase price out of the proceeds of a
loan he supposedly sought from the DBP. The word "WE' in
the said promissory note must refer to the corporation which
Coprada represented in the execution of the note and not its
stockholders or directors. Petitioner did not sign the said
promissory note so he cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was
foisted on private respondent in that there was a forthcoming
loan from the DBP when it fact there was none, it is Coprada
who should account for the same and not petitioner.
As to the sale through pacto de retro of the two units to a
third person by the corporation by virtue of a board
resolution, petitioner asserts that he never signed said
resolution. Be that as it may, the sale is not inherently
fraudulent as the 13 units were sold through a deed of
absolute sale to Akron so that the corporation is free to
dispose of the same. Of course, it was stipulated that in case
of default in payment to private respondent of the balance of
the consideration, a chattel mortgage lien shag be
constituted on the 13 units. Nevertheless, said mortgage is a
prior lien as against the pacto de retro sale of the 2 units.
As to the amendment of the articles of incorporation of Akron
thereby changing its name to Akron Transport International,
Inc., petitioner alleges that the change of corporate name
was in order to include trucking and container yard
operations in its customs brokerage of which private
respondent was duly informed in a letter. 19Indeed, the new
corporation confirmed and assumed the obligation of the old
corporation. There is no indication of an attempt on the part
of Akron to evade payment of its obligation to private
respondent.
There is the fact that petitioner sold his shares in Akron to
Coprada during the pendency of the case. Since petitioner
has no personal obligation to private respondent, it is his
inherent right as a stockholder to dispose of his shares of
stock anytime he so desires.
Mention is also made of the alleged "dumping" of 10 units in
the premises of private respondent at Bagbag, Novaliches
which to the mind of the Court does not prove fraud and
instead appears to be an attempt on the part of Akron to
attend to its obligations as regards the said trucks. Again
petitioner has no part in this.
If the private respondent is the victim of fraud in this
transaction, it has not been clearly shown that petitioner had
any part or participation in the perpetration of the same.
Fraud must be established by clear and convincing evidence.
If at all, the principal character on whom fault should be
attributed is Feliciano Coprada, the President of Akron, whom
private respondent dealt with personally all through out.
Fortunately, private respondent obtained a judgment against
him from the trial court and the said judgment has long been
final and executory.
WHEREFORE, the petition is GRANTED. The questioned
resolution of the Intermediate Appellate Court dated February
8,1984 is hereby set aside and its decision dated June
30,1983 setting aside the decision of the trial court dated
October 28, 1980 insofar as petitioner is concemed is hereby
reinstated and affirmed, without costs.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.