SECOND DIVISION [G.R. No. 125469. October 27, 1997] PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs.

THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC., respondents. DECISION TORRES, JR., J.: The Securities and Exchange Commission is the government agency, under the direct general supervision of the Office of the President,[1] with the immense task of enforcing the Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its innumerable functions, and one of the most important, is the supervision of all corporations, partnerships or associations, who are grantees or primary franchise and/or a license or permit issued by the
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government to operate in the Philippines.[2] Just how far this regulatory authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar. In this Petition for Review of Certiorari, petitioner assails the resolution of the respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the public offering of PALIs shares. The facts of the case are undisputed, and are hereby restated in sum. The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its shares through the Philippine

Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an application to list its shares, with supporting documents attached. On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALIs application, recommended to the PSEs Board of Governors the approval of PALIs listing application. On February 14, 1996, before it could act upon PALIs application, the Board of Governors of PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate Development Corporation, which is among the stockholders of PALI, likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested PALIs application to be deferred. PALI was requested to comment upon the said letter. PALIs answer stated that the properties forming part of Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its assets. On the contrary, the
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resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and beneficial ownership of other properties titled under the name of PALI. On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good Government (PCGG) requesting for comments on the letter of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a Temporary Restraining Order on the same date, enjoining the Marcoses from, among others, further impeding, obstructing, delaying or interfering in any manner by or any means with the consideration, processing and approval by the PSE of the initial public offering of PALI. The TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject PALIs application, citing the existence of serious claims, issues and circumstances surrounding PALIs ownership over its assets that adversely affect the suitability of listing PALIs shares in the stock exchange. On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SECs attention the action taken by the PSE in the application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSEs action on PALIs listing application and institute such measures as are just and proper and under the circumstances. On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and directing the PSE to file its comments thereto within five days from its receipt and for its authorized representative to appear for an inquiry on the matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
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On April 24, 1996, the SEC rendered its Order, reversing the PSEs decision. The dispositive portion of the said order reads: WHEREFORE, premises considered, and invoking the Commissioners authority and jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the Presidential Decree No. 902-A, the decision of the Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange, without prejudice to its authority to require PALI to disclose such other material information it deems necessary for the protection of the investing public. This Order shall take effect immediately. SO ORDERED. PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the Commission in its May 9, 1996 Order which states: WHEREFORE, premises considered, the Commission finds no compelling reason to consider its order dated April 24, 1996, and in the light of recent developments
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on the adverse claim against the PALI properties, PSE should require PALI to submit full disclosure of material facts and information to protect the investing public. In this regard, PALI is hereby ordered to amend its registration statements filed with the Commission to incorporate the full disclosure of these material facts and information. Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC: I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALIS LISTING APPLICATION; III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION; AND IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE CONSTITUTION. On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to Dismiss. On June 10, 1996, PSE filed its Reply to Comment and Opposition to Motion to Dismiss. On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSEs Petition for Review. Hence, this Petition by the PSE.
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The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the petitioner PSE, pursuant to Section 3[3] of the Revised Securities Act in relation to Section 6(j) and 6(m)[4] of P.D. No. 902-A, and Section 38(b)[5] of the Revised Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner is subject to public respondents jurisdiction, regulation and control. Accepting the argument that the public respondent has the authority merely to supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock exchange whose business is impressed with public interest. Abuse is not remote if the public respondent is left without any system of control. If the securities act vested the public respondent with jurisdiction and control over all corporations; the power to authorize the establishment of stock exchanges; the right to supervise and regulate the same; and the power to alter and supplement rules of the exchange in the listing or delisting of securities, then the law certainly granted to the public respondent the

plenary authority over the petitioner; and the power of review necessarily comes within its authority. All in all, the court held that PALI complied with all the requirements for public listing, affirming the SECs ruling to the effect that: x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application of PALI for listing of its shares in the face of the following considerations: 1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of the Exchange; 2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE has failed to justify why it acted differently on the application of PALI, as compared to the IPOs of other companies similarly that were allowed listing in the Exchange; 3. It appears that the claims and issues on the title to PALIs properties were even less serious than the claims against the assets of the other companies
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in that, the assertions of the Marcoses that they are owners of the disputed properties were not substantiated enough to overcome the strength of a title to properties issued under the Torrens System as evidence of ownership thereof; 4. No action has been filed in any court of competent jurisdiction seeking to nullify PALIs ownership over the disputed properties, neither has the government instituted recovery proceedings against these properties. Yet the import of PSEs decision in denying PALIs application is that it would be PALI, not the Marcoses, that must go to court to prove the legality of its ownership on these properties before its shares can be listed. In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief. The point is, the PALI properties are now titled. A property losses its public character the moment it is covered by a title. As a matter of fact, the titles have long been settled by a final judgment; and the final decree having been registered, they can no longer be reopened considering that the one year period has already passed. Lastly, the
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determination of what standard to apply in allowing PALIs application for listing, whether the discretion method or the system of public disclosure adhered to by the SEC, should be addressed to the Securities Commission, it being the government agency that exercises both supervisory and regulatory authority over all corporations. On August 15, 1996, the PSE, after it was granted an extension, filed an instant Petition for Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the PCGGs Petition for Intervention on October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGGs motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
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On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On may 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE. PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC over stock exchanges are more limited as compared to its authority over ordinary corporations. In connection with this, the powers of the SEC over stock exchanges under the Revised Securities Act are specifically enumerated, and these do not include the power to reverse the decisions of the stock exchange. Authorities are in abundance even in the United States, from which the countrys security policies are patterned, to the effect of giving the Securities Commission less control over stock exchanges, which in turn are given more lee-way in making the decision whether or not to allow corporations to offer their stock to the public through the
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stock exchange. This is in accord with the business judgment rule whereby the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal of the decision of the PSE to deny PALIs listing application, absent a showing a bad faith on the part of the PSE. Under the listing rule of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing. Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuers listing application if the PSE determines that the listing shall not serve the interests of the investing public. Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations whose properties are under sequestration. A reading of Republic of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI, which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC), are under sequestration by the PCGG, and the subject of
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forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law of the case between the Republic and the TDC and MSDC. It categorically declares that the assets of these corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988. It is, likewise, intimidated that the Court of Appeals sanction that PALIs ownership over its properties can no longer be questioned, since certificates of title have been issued to PALI and more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on land titles. That a certificate of title issued under the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is fundamental that forest lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or a government reservation, such title is void. PSE, likewise, assails the SECs and the Court of Appeals reliance on the alleged policy of full disclosure to uphold the listing of the PALIs shares with the PSE, in the absence of a clear mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with the listing rules
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and disclosure requirements. In fact, PALIs documents supporting its application contained misrepresentations and misleading statements, and concealed material information. The matter of sequestration of PALIs properties and the fact that the same form part of military/naval/forest reservations were not reflected in PALIs application. It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the marking of a corporate entity, its functions as the primary channel through which the vessels of capital trade ply. The PSEs relevance to the continued operation and filtration of the securities transactions in the country gives it a distinct color of importance such that government intervention in its affairs becomes justified, if not necessary. Indeed, as the only operational stock exchange in the country today, the PSE enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon the countrys economy. Due to this special nature of stock exchanges, the countrys lawmakers has seen it wise to give special treatment to the administration and regulation of stock exchanges.[6]
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These provisions, read together with the general grant of jurisdiction, and right of supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the investing public may be fully safeguarded. Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SECs challenged control authority over the petitioner PSE even as it provides that the Commission shall have absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines The SECs regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a corporations concerns. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the state. The SECs power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as necessary or incidental to the carrying out of
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the SECs express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange.[7] It is, likewise, observed that the principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development.[8] Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the application for listing in the stock exchange of the private respondent PALI. The SECs action was affirmed by the Court of Appeals. We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SECs mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country.[9] As the appellate court explains:
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Paramount policy also supports the authority of the public respondent to review petitioners denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to the national economy, as the business is affected with public interest. As a matter of fact, it has often been said that the economy moves on the basis of the rise and fall of stocks being traded. By its economic power, the petitioner certainly can dictate which and how many users are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally as it may please. Petitioner can either allow or deny the entry to the market of securities. To repeat, the monopoly, unless accompanied by control, becomes subject to abuse; hence, considering public interest, then it should be subject to government regulation. The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office.[10]
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This is not to say, however, that the PSEs management prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSEs main concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal acts within its allocated express or implied powers. A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such body.[11] As to its corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business
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manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.[12] Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSEs decision in matters of application for listing in the market, the SEC may exercise such power only if the PSEs judgment is attended by bad faith. In board of Liquidators vs. Kalaw,[13] it was held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud. In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which in the general scheme, brings to serious question the qualification of PALI to sell its shares to the public through the stock exchange. During the time for receiving objections to the application, the PSE heard from the representative of the late President Ferdinand E. Marcos and his family who claim the properties of the private respondent to be part of the
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Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of sequestration has been issued covering the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan Court. How the properties were effectively transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer. The petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best interest of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the investing public against fraudulent representations, or false promises, and the imposition of worthless ventures.[14] It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to legitimate business, thus: The Securities Act, often referred to as the truth in securities Act, was designed not only to provide investors with adequate information upon which to base their
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decisions to buy and sell securities, but also to protect legitimate business seeking to obtain capital through honest presentation against competition form crooked promoters and to prevent fraud in the sale of securities. (Tenth Annual Report, U.S. Securities and Exchange Commission, p. 14). As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and fraudulent transactions, merely by requirement of that details be revealed; (2) placing the market during the early stages of the offering of a security a body of information, which operating indirectly through investment services and expert investors, will tend to produce a more accurate appraisal of a security. x x x. Thus, the Commission may refuse to permit a registration statement to become effective if it appears on its face to be incomplete or inaccurate in any material respect, and empower the Commission to issue a stop order suspending the effectiveness of any registration statement which is found to include any untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (Idem).
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Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose to transact through its facilities. It was reasonable for PSE, therefore, to exercise its judgment in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded. In this connection, it is proper to observe that the concept of government absolutism in a thing of the past, and should remain so. The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment. At this juncture, there is the claim that the properties were owned by the TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong to Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and forest reserves, and therefore beyond private dominion. If any of these claims is established to be true, the certificates of title
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over the subject properties now held by PALI may be disregarded, as it is an established rule that a registration of a certificate of title does not confer ownership over the properties described therein to the person named as owner. The inscription in the registry, to be effective, must be made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw. In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the true ownership of the properties of PALI need not be determined as an absolute fact. What is material is that the uncertainty of the properties ownership and alienability exists, and this puts to question the qualification of PALIs public offering. In sum, the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporate entity, whose business judgments are respected in the absence of bad faith. The question as to what policy is, or should be relied upon in approving the registration and sale of
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securities in the SEC is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange Commission. In mandating the SEC to administer the Revised Securities Act, and in performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the said laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless registered in accordance with the rules and regulations that shall be promulgated in the public interest and for the protection of investors by the Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency, has supervision and control over all corporations and over the securities market as a whole, and as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of full material disclosure where all companies, listed or applying for listing, are
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required to divulge truthfully and accurately, all material information about themselves and the securities they sell, for the protection of the investing public, and under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its securities.[15] While the employment of this policy is recognized and sanctioned by laws, nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must satisfy.[16] Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of the registration of a security: - - The Commission may reject a registration statement and refuse to issue a permit to sell the securities included in such registration statement if it finds that (1) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material facts required to be stated therein or necessary to make the statements therein not misleading; or
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(2) The issuer or registrant - (i) is not solvent or not is sound financial condition; (ii) has violated or has not complied with the provisions of this Act, or the rules promulgated pursuant thereto, or any order of the Commission; (iii) has failed to comply with any of the applicable requirements and conditions that the Commission may, in the public interest and for the protection of investors, impose before the security can be registered; (iv) had been engaged or is engaged or is about to engaged in fraudulent transactions; (v) is in any was dishonest of is not of good repute; or (vi) does not conduct its business in accordance with law or is engaged in a business that is illegal or contrary or government rules and regulations. (3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound business principles; (4) An officer, member of the board of directors, or principal stockholder of the issuer is disqualified to such officer, director or principal stockholder; or
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(5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its security would not work to the prejudice to the public interest or as a fraud upon the purchaser or investors. (Emphasis Ours) A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to be determined by the Securities and Exchange Commission. This measure was meant to protect the interest of the investing public against fraudulent and worthless securities, and the SEC is mandated by law to safeguard these interests, following the policies and rules therefore provided. The absolute reliance on the full disclosure method in the registration of securities is, therefore, untenable. At it is, the Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in
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setting the standard for public offerings of corporations wishing to do so. However, the SEC must recognize and implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot be amended or supplanted my mere administrative issuance. In resum, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this case. ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for Review on Certiorari. The decisions of the Court of Appeals and the Securities and Exchage Commission dated July 27, 1996 and April 24, 1996, respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc. SO ORDERED.
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EN BANC [G.R. No. 147402. January 14, 2004] ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region VIII, respondents. DECISION CARPIO, J.: The Case This is a petition for certiorari*1+ to annul the Commission on Audits (COA) Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos
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request for COA to cease all audit services, and to stop charging auditing fees, to Leyte Metropolitan Water District (LMWD). The COA also denied petitioners request for COA to refund all auditing fees previously paid by LMWD. Antecedent Facts A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 (PD 198)*2+, as well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred petitioners reply to the COA Chairman on 18 October 1999. On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to COA.

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On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001. On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the petition. The Ruling of the Commission on Audit The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City Water District v. Civil Service Commission and Commission on Audit,[3] as follows: The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners contention that they are private corporations. It is clear therefrom that the power to appoint the members who will comprise the members of the Board of Directors belong to the local executives of the local
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subdivision unit where such districts are located. In contrast, the members of the Board of Directors or the trustees of a private corporation are elected from among members or stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily, said members or stockholders should be given a free hand to choose who will compose the governing body of their corporation. But this is not the case here and this clearly indicates that petitioners are not private corporations. The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA to refund all auditing fees already paid. The Issues Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:
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1. Whether a Local Water District (LWD) created under PD 198, as amended, is a government-owned or controlled corporation subject to the audit jurisdiction of COA; 2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water districts; and 3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations auditing fees. The Ruling of the Court The petition lacks merit. The Constitution and existing laws[4] mandate COA to audit all government agencies, including government-owned and controlled corporations (GOCCs) with original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows: SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts
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of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied)

36

The COAs audit jurisdiction extends not only to government agencies or instrumentalities, but also to government-owned and controlled corporations with original charters as well as other government-owned or controlled corporations without original charters. Whether LWDs are Private or Government-Owned and Controlled Corporations with Original Charters Petitioner seeks to revive a well-settled issue. Petitioner asks for a reexamination of a doctrine backed by a long line of cases culminating in Davao City Water District v. Civil Service Commission[5] and just recently reiterated in De Jesus v. Commission on Audit.[6] Petitioner maintains that LWDs are not government-owned and controlled corporations with original charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a new perspective to the issue of the true character of water districts.*7+ Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are
37

created pursuant to and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an original charter that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only provides for their formation on an optional or voluntary basis.[8] Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as specified in PD 198. Petitioners contention deserves scant consideration. We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to governmentowned or controlled corporations created by special charters. Section 16, Article XII of the Constitution provides: Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or
38

controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens.[9] The purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other citizens.[10] In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code,[11] except that the Cooperative Code governs the incorporation of cooperatives.[12] The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have
39

special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that *A+ll corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x x x. LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus: From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations created pursuant to the Corporation Code. Significantly, petitioners are not created under the said code,

40

but on the contrary, they were created pursuant to a special law and are governed primarily by its provision.[13] (Emphasis supplied) LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is constitutionally infirm. Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD 198[14] provide: Section 6.Formation of District. This Act is the source of authorization and power to form and maintain a district. For purposes of this Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As such, a district shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the powers granted in, and subject to such restrictions imposed, under this Act.
41

(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by said system, followed by the words Water District. (b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof. (c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the control of such city, municipality or province to such district upon the filing of resolution forming the district. (d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above. (e) The names of the initial directors of the district with the date of expiration of term of office for each.

42

(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title. (g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title. Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the district beyond that specifically provided for in this Act. If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be adopted in each city, municipality and province. xxx Sec. 25.Authorization. The district may exercise all the powers which are expressly granted by this Title or which are necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is hereby granted the power of eminent domain,

43

the exercise thereof shall, however, be subject to review by the Administration. (Emphasis supplied) Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall exercise the powers, rights and privileges given to private corporations under existing laws. Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled corporations with a special charter. The phrase government-owned and controlled corporations with original charters means GOCCs created under special laws and not under the general incorporation law. There is no difference between the term original charters and special charters. The Court clarified this in National Service Corporation v. NLRC[15] by citing the deliberations in the Constitutional Commission, as follows: THE PRESIDING OFFICER (Mr. Trenas). The session is resumed. Commissioner Romulo is recognized.
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MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows: including government-owned or controlled corporations WITH ORIGINAL CHARTERS. The purpose of this amendment is to indicate that government corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However, corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service. THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say? MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters, what exactly do we mean? MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law. MR. FOZ. And not under the general corporation law. MR. ROMULO. That is correct. Mr. Presiding Officer. MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
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MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out. MR. ROMULO. That is correct. (Emphasis supplied) Again, in Davao City Water District v. Civil Service Commission,[16] the Court reiterated the meaning of the phrase government-owned and controlled corporations with original charters in this wise:/ By government-owned or controlled corporation with original charter, We mean government owned or controlled corporation created by a special law and not under the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We held: The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively from the deliberations of the 1986 Constitutional Commission in respect of the intent and meaning of the new phrase with original charter, in effect held that government-owned and controlled corporations with original charter refer to corporations chartered by special law as distinguished from
46

corporations organized under our general incorporation statute the Corporation Code. In NASECO, the company involved had been organized under the general incorporation statute and was a subsidiary of the National Investment Development Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered by a special statute. Thus, government-owned or controlled corporations like NASECO are effectively, excluded from the scope of the Civil Service. (Emphasis supplied) Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption. The Local Government Code[17] does not vest in the Sangguniang Bayan the power to create corporations.[18] What the Local Government Code empowers the Sangguniang Bayan to do is to provide for the establishment of a waterworks system subject to existing laws. Thus, Section 447(5)(vii) of the Local Government Code provides:

47

SECTION 447.Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the legislative body of the municipality, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the municipality and its inhabitants pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as provided for under Section 22 of this Code, and shall: xxx (vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient waterworks system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and, for this purpose, extend the coverage of appropriate ordinances over all territory within the drainage area of said water supply and within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in connection with the water service; and regulate the consumption, use or wastage of water;
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x x x. (Emphasis supplied) The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan has the power to create corporations, the LWDs would remain government-owned or controlled corporations subject to COAs audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the LWD a government-owned and controlled corporation with an original charter. In any event, the Court has already ruled in Baguio Water District v. Trajano[19] that the Sangguniang Bayan resolution is not the special charter of LWDs, thus: While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of the opinion that said resolution cannot be

49

considered as its charter, the same being intended only to implement the provisions of said decree. Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an original charter. In short, petitioner argues that one special law cannot serve as enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the Constitution mandates that Congress shall not, except by general law,*20+ provide for the creation of private corporations. Thus, the Constitution prohibits one special law to create one private corporation, requiring instead a general law to create private corporations. In contrast, the same Section 16 states that Government-owned or controlled corporations may be created or established by special charters. Thus, the Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress to create several GOCCs of the same class under one special enabling charter.

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The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs. There is no danger of creating special privileges to certain individuals, families or groups if there is one special law creating each GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or one special enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to LWDs. Petitioner also contends that LWDs are private corporations because Section 6 of PD 198*21+ declares that LWDs shall be considered quasi-public in nature. Petitioners rationale is that only private corporations may be deemed quasipublic and not public corporations. Put differently, petitioner rationalizes that a public corporation cannot be deemed quasi-public because such corporation is already public. Petitioner concludes that the term quasi-public can only apply to private corporations. Petitioners argument is inconsequential.

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Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the governments ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is immaterial. The Constitution vests in the COA audit jurisdiction over government-owned and controlled corporations with original charters, as well as government-owned or controlled corporations without original charters. GOCCs with original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs without original charters refer to corporations created under the Corporation Code but are owned or controlled by the government. The nature or purpose of the corporation is not material in determining COAs audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law. The determining factor of COAs audit jurisdiction is government ownership or control of the corporation. In Philippine Veterans Bank Employees Union-NUBE v.

52

Philippine Veterans Bank,[22] the Court even ruled that the criterion of ownership and control is more important than the issue of original charter, thus: This point is important because the Constitution provides in its Article IX-B, Section 2(1) that the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters. As the Bank is not owned or controlled by the Government although it does have an original charter in the form of R.A. No. 3518,[23] it clearly does not fall under the Civil Service and should be regarded as an ordinary commercial corporation. Section 28 of the said law so provides. The consequence is that the relations of the Bank with its employees should be governed by the labor laws, under which in fact they have already been paid some of their claims. (Emphasis supplied) Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or local government owns and controls all their assets. The
53

government controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD for a fixed term of six years.[24] The board directors of LWDs are not co-owners of the LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are government employees subject to civil service laws[25] and anti-graft laws.[26] While Section 8 of PD 198 states that *N+o public official shall serve as director of an LWD, it only means that the appointees to the board of directors of LWDs shall come from the private sector. Once such private sector representatives assume office as directors, they become public officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service includes government-owned or controlled corporations with original charters. If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under the term agencies or instrumentalities of the government and thus still subject to COAs audit jurisdiction. However, the
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stark and undeniable fact is that the government owns LWDs. Section 45[27] of PD 198 recognizes government ownership of LWDs when Section 45 states that the board of directors may dissolve an LWD only on the condition that another public entity has acquired the assets of the district and has assumed all obligations and liabilities attached thereto. The implication is clear that an LWD is a public and not a private entity. Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner advances the theory that the Water Districts owner is the District itself.*28+ Assuming for the sake of argument that an LWD is self-owned,*29+ as petitioner describes an LWD, the government in any event controls all LWDs. First, government officials appoint all LWD directors to a fixed term of office. Second, any per diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration, and directors can receive no other compensation for their services to the LWD.[30] Third, the Local Water Utilities Administration can require LWDs to merge or consolidate their

55

facilities or operations.[31] This element of government control subjects LWDs to COAs audit jurisdiction. Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of ownership of water facilities from local government units to their respective water districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves the transfer of government assets to a private entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD 198 is no other than the LWD itself.[32] The transfer of assets mandated by PD 198 is a transfer of the water systems facilities managed, operated by or under the control of such city, municipality or province to such (water) district.*33+ In short, the transfer is from one government entity to another government entity. PD 198 is bereft of any indication that the transfer is to privatize the operation and control of water systems. Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. [34] Section 20 of PD 198 provides:
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Sec. 20.System of Business Administration. The Board shall, as soon as practicable, prescribe and define by resolution a system of business administration and accounting for the district, which shall be patterned upon and conform to the standards established by the Administration. Auditing shall be performed by a certified public accountant not in the government service. The Administration may, however, conduct annual audits of the fiscal operations of the district to be performed by an auditor retained by the Administration. Expenses incurred in connection therewith shall be borne equally by the water district concerned and the Administration.[35] (Emphasis supplied) Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198 when it states that *A+uditing shall be performed by a certified public accountant not in the government service.*36+ PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of
57

the Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus: Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the Commission on Audit. (Emphasis supplied) The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange in the deliberations of the Constitutional Commission elucidates this intent of the framers: MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
58

May I explain my reasons on record. We know that a number of entities of the government took advantage of the absence of a legislature in the past to obtain presidential decrees exempting themselves from the jurisdiction of the Commission on Audit, one notable example of which is the Philippine National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly on its own account. Its funds were not very impressive in quantity but underneath that shell there were billions of pesos in a multiplicity of companies. The PNOC the empty shell under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of pesos invested in different corporations underneath it were exempted from the coverage of the Commission on Audit. Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the United Coconut
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Planters Bank. The charter of the UCPB, through a presidential decree, exempted it from the jurisdiction of the Commission on Audit, it being a private organization. So these are the fetuses of future abuse that we are slaying right here with this additional section. May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT. THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople? MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the amendment. MR. OPLE: Gladly, Madam President. Thank you. MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
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THE PRESIDENT: Commissioner de Castro is recognized. MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople. Is that not included in Section 2 (1) where it states: (c) government-owned or controlled corporations and their subsidiaries? So that if these governmentowned and controlled corporations and their subsidiaries are subjected to the audit of the COA, any law exempting certain government corporations or subsidiaries will be already unconstitutional. So I believe, Madam President, that the proposed amendment is unnecessary. MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by Commissioner de Castro. THE PRESIDENT: Commissioner Monsod will please proceed. MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same provision was in the 1973 Constitution and yet somehow a law or a decree was passed where certain institutions were

61

exempted from audit. We are just reaffirming, emphasizing, the role of the Commission on Audit so that this problem will never arise in the future.[37] There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the Constitution. On the Legality of COAs Practice of Charging Auditing Fees Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section 18 of RA 6758,[38] which states: Sec. 18.Additional Compensation of Commission on Audit Personnel and of other Agencies. In order to preserve the independence and integrity of the Commission on Audit (COA), its officials and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government unit, government-owned or controlled
62

corporations, and government financial institutions, except those compensation paid directly by COA out of its appropriations and contributions. Government entities, including government-owned or controlled corporations including financial institutions and local government units are hereby prohibited from assessing or billing other government entities, including government-owned or controlled corporations including financial institutions or local government units for services rendered by its officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and employees. (Emphasis supplied) Claiming that Section 18 is absolute and leaves no doubt,*39+ petitioner asks COA to discontinue its practice of charging auditing fees to LWDs since such practice allegedly violates the law. Petitioners claim has no basis. Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government entity except compensation paid directly by
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COA out of its appropriations and contributions. Thus, RA 6758 itself recognizes an exception to the statutory ban on COA personnel receiving compensation from GOCCs. In Tejada v. Domingo,[40] the Court declared: There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to preserve the independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government unit, GOCCs and government financial institutions, except such compensation paid directly by the COA out of its appropriations and contributions, and (2) government entities, including GOCCs, government financial institutions and local government units from assessing or billing other government entities, GOCCs, government financial institutions or local government units for services rendered by the latters officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and employees. xxx
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The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the GOCCs and government financial institutions. Under the first, COA personnel assigned to auditing units of GOCCs or government financial institutions can receive only such salaries, allowances or fringe benefits paid directly by the COA out of its appropriations and contributions. The contributions referred to are the cost of audit services earlier mentioned which cannot include the extra emoluments or benefits now claimed by petitioners. The COA is further barred from assessing or billing GOCCs and government financial institutions for services rendered by its personnel as part of their regular audit functions for purposes of paying additional compensation to such personnel. x x x. (Emphasis supplied) In Tejada, the Court explained the meaning of the word contributions in Section 18 of RA 6758, which allows COA to charge GOCCs the cost of its audit services: x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of the audit function in the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit
65

cost shall include personnel services, maintenance and other operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the formers auditing units, the same shall be directly defrayed by COA from its own appropriations x x x. [41] COA may charge GOCCs actual audit cost but GOCCs must pay the same directly to COA and not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs actual audit cost. Neither has petitioner alleged that the auditing fees are paid by LWDs directly to individual COA auditors. Thus, petitioners contention must fail. WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30 January 2001 denying petitioners Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs. SO ORDERED.
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SECOND DIVISION G.R. No. 145842 June 27, 2008

EDSA SHANGRI-LA HOTEL AND RESORT, INC., RUFO B. COLAYCO, RUFINO L. SAMANIEGO, KUOK KHOON CHEN, and KUOK KHOON TSEN, petitioners, vs. BF CORPORATION, respondent. G.R. No. 145873 June 27, 2008 CYNTHIA ROXAS-DEL CASTILLO, petitioner, 67

vs. BF CORPORATION, respondent. DECISION VELASCO, JR., J.: Before us are these two (2) consolidated petitions for review under Rule 45 to nullify certain issuances of the Court of Appeals (CA). In the first petition, docketed as G.R. No. 145842, petitioners Edsa Shangri-la Hotel and Resort, Inc. (ESHRI), Rufo B. Colayco, Rufino L. Samaniego, Kuok Khoon Chen, and Kuok Khoon Tsen assail the Decision1 dated November 12, 1999 of the CA in CA-G.R. CV No. 57399, affirming the Decision2 dated September 23, 1996 of the Regional Trial Court (RTC), Branch 162 in Pasig City in Civil Case No. 63435 that ordered them to pay jointly and severally respondent BF Corporation (BF) a sum of money with interests and damages. They also assail the CA Resolution dated October 25, 2000 which, apart from setting aside an earlier Resolution3 of August 13, 1999 granting ESHRI's application for restitution and damages against bond, affirmed the aforesaid September 23, 1996 RTC Decision. In the second petition, docketed as G.R. No. 145873, petitioner Cynthia Roxas-del Castillo also assails the aforementioned CA Decision of November 12, 1999 insofar at it adjudged her jointly and severally liable with ESHRI, et al. to pay the monetary award decreed in the RTC Decision. Both petitions stemmed from a construction contract denominated as Agreement for the Execution of Builder's Work for the EDSA Shangri-la Hotel Project4 that ESHRI and BF executed for the construction of the EDSA Shangri-la Hotel starting May 1, 1991. Among other things, the contract stipulated for the 68

payment of the contract price on the basis of the work accomplished as described in the monthly progress billings. Under this arrangement, BF shall submit a monthly progress billing to ESHRI which would then re-measure the work accomplished and prepare a Progress Payment Certificate for that month's progress billing.5 In a memorandum-letter dated August 16, 1991 to BF, ESHRI laid out the collection procedure BF was to follow, to wit: (1) submission of the progress billing to ESHRI's Engineering Department; (2) following-up of the preparation of the Progress Payment Certificate with the Head of the Quantity Surveying Department; and (3) following-up of the release of the payment with one Evelyn San Pascual. BF adhered to the procedures agreed upon in all its billings for the period from May 1, 1991 to June 30, 1992, submitting for the purpose the required Builders Work Summary, the monthly progress billings, including an evaluation of the work in accordance with the Project Manager's Instructions (PMIs) and the detailed valuations contained in the Work Variation Orders (WVOs) for final re-measurement under the PMIs. BF said that the values of the WVOs were contained in the progress billings under the section "Change Orders."6 From May 1, 1991 to June 30, 1992, BF submitted a total of 19 progress billings following the procedure agreed upon. Based on Progress Billing Nos. 1 to 13, ESHRI paid BF PhP 86,501,834.05.7 According to BF, however, ESHRI, for Progress Billing Nos. 14 to 19, did not re-measure the work done, did not prepare the Progress Payment Certificates, let alone remit payment for the inclusive periods covered. In this regard, BF claimed having been misled into working continuously on the project by ESHRI which gave the assurance about the Progress Payment Certificates already being processed.

69

After several futile attempts to collect the unpaid billings, BF filed, on July 26, 1993, before the RTC a suit for a sum of money and damages. In its defense, ESHRI claimed having overpaid BF for Progress Billing Nos. 1 to 13 and, by way of counterclaim with damages, asked that BF be ordered to refund the excess payments. ESHRI also charged BF with incurring delay and turning up with inferior work accomplishment. The RTC found for BF On September 23, 1996, the RTC, on the main finding that BF, as plaintiff a quo, is entitled to the payment of its claim covered by Progress Billing Nos. 14 to 19 and to the retention money corresponding to Progress Billing Nos. 1 to 11, with interest in both instances, rendered judgment for BF. The fallo of the RTC Decision reads: WHEREFORE, defendants [EHSRI], Ru[f]o B. Colayco, Rufino L. Samaniego, Cynthia del Castillo, Kuok Khoon Chen, and Kuok Khoon Tsen, are jointly and severally hereby ordered to: 1. Pay plaintiff the sum of P24,780,490.00 representing unpaid construction work accomplishments under plaintiff's Progress Billings Nos. 14-19; 2. Return to plaintiff the retention sum of P5,810,000.00; 3. Pay legal interest on the amount of P24,780,490.80 representing the construction work accomplishments under Progress Billings Nos. 14-19 and on the amount of P5,810,000.00 representing the retention sum from date of demand until their full Payment; 4. Pay plaintiff P1,000,000.00 as moral damages, P1,000,000.00 as exemplary damages, P1,000,000.00 as attorney's fees, and cost of the suit.8 70

According to the RTC, ESHRI's refusal to pay BF's valid claims constituted evident bad faith entitling BF to moral damages and attorney's fees. ESHRI subsequently moved for reconsideration, but the motion was denied by the RTC, prompting ESHRI to appeal to the CA in CA-G.R. CV No. 57399. Pending the resolution of CA-G.R. CV No. 57399, the following events and/or incidents transpired: (1) The trial court, by Order dated January 21, 1997, granted BF's motion for execution pending appeal. ESHRI assailed this order before the CA via a petition for certiorari, docketed as CA-G.R. SP No. 43187.9 Meanwhile, the branch sheriff garnished from ESHRI's bank account in the Philippine National Bank (PNB) the amount of PhP 35 million. (2) On March 7, 1997, the CA issued in CA-G.R. SP No. 43187 a writ of preliminary injunction enjoining the trial court from carrying out its January 21, 1997 Order upon ESHRI's posting of a PhP 1 million bond. In a supplemental resolution issued on the same day, the CA issued a writ of preliminary mandatory injunction directing the trial court judge and/or his branch sheriff acting under him (a) to lift all the garnishments and levy made under the enjoined order of execution pending appeal; (b) to immediately return the garnished deposits to PNB instead of delivering the same to ESHRI; and (c) if the garnished deposits have been delivered to BF, the latter shall return the same to ESHRI's deposit account. (3) By a Decision dated June 30, 1997 in CA-G.R. SP No. 43187, the CA set aside the trial court's January 21, 1997 Order. The CA would later deny BF's motion for reconsideration.

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(4) Aggrieved, BF filed before this Court a petition for review of the CA Decision, docketed as G.R. No. 132655.10 On August 11, 1998, the Court affirmed the assailed decision of the CA with the modification that the recovery of ESHRI's garnished deposits shall be against BF's bond.11 We denied the motions for reconsideration of ESHRI and BF. (5) Forthwith, ESHRI filed, and the CA by Resolution of August 13, 1999 granted, an application for restitution or damages against BF's bond. Consequently, BF and Stronghold Insurance Co., Inc., the bonding company, filed separate motions for reconsideration. On November 12, 1999, in CA-G.R. CV No. 57399, the CA rendered a Decision resolving (1) the aforesaid motions of BF and its surety and (2) herein petitioners' appeal from the trial court's Decision dated September 23, 1996. This November 12, 1999 Decision, finding for BF and now assailed in these separate recourses, dispositively reads: WHEREFORE, premises considered, the decision appealed from is AFFIRMED in toto. This Court's Resolution dated 13 August 1999 is reconsidered and set aside, and defendants-appellants' application for restitution is denied for lack of merit. SO ORDERED.12 The CA predicated its ruling on the interplay of two main reasons. First, the issues the parties raised in their respective briefs were, for the most part, factual and evidentiary. Thus, there is no reason to disturb the case disposition of the RTC, inclusive of its award of damages and attorney's fees and the reasons underpinning the award. Second, BF had sufficiently established its case by preponderance of evidence. Part of what it had sufficiently proven relates to ESHRI being remiss in its obligation to remeasure BF's later work accomplishments and pay the same. On the other hand, ESHRI had failed to 72

prove the basis of its disclaimer from liability, such as its allegation on the defective work accomplished by BF. Apropos ESHRI's entitlement to the remedy of restitution or reparation arising from the execution of the RTC Decision pending appeal, the CA held that such remedy may peremptorily be allowed only if the executed judgment is reversed, a situation not obtaining in this case. Following the denial by the CA, per its Resolution13 dated October 25, 2000, of their motion for reconsideration, petitioners are now before the Court, petitioner del Castillo opting, however, to file a separate recourse. G.R. No. 145842 In G.R. No. 145842, petitioners ESHRI, et al. raise the following issues for our consideration: I. Whether or not the [CA] committed grave abuse of discretion in disregarding issues of law raised by petitioners in their appeal [particularly in admitting in evidence photocopies of Progress Billing Nos. 14 to 19, PMIs and WVOs]. II. Whether or not the [CA] committed grave abuse of discretion in not holding respondent guilty of delay in the performance of its obligations and, hence, liable for liquidated damages [in view that respondent is guilty of delay and that its works were defective]. III. Whether or not the [CA] committed grave abuse of discretion in finding petitioners guilty of malice and evidence bad faith, and in awarding moral and exemplary damages and attorney's fees to respondent. IV. Whether or not the [CA] erred in setting aside its Resolution dated August 13, 2000.14 73

The petition has no merit. Prefatorily, it should be stressed that the second and third issues tendered relate to the correctness of the CA's factual determinations, specifically on whether or not BF was in delay and had come up with defective works, and whether or not petitioners were guilty of malice and bad faith. It is basic that in an appeal by certiorari under Rule 45, only questions of law may be presented by the parties and reviewed by the Court.15 Just as basic is the rule that factual findings of the CA, affirmatory of that of the trial court, are final and conclusive on the Court and may not be reviewed on appeal, except for the most compelling of reasons, such as when: (1) the conclusion is grounded on speculations, surmises, or conjectures; (2) the inference is manifestly mistaken, absurd, or impossible; (3) there is grave abuse of discretion; (4) the judgment is based on a misapprehension of facts; (5) the findings of fact are conflicting; (6) such findings are contrary to the admissions of both parties; and (7) the CA manifestly overlooked certain relevant evidence and undisputed facts, that, if properly considered, would justify a different conclusion.16 In our review of this case, we find that none of the above exceptions obtains. Accordingly, the factual findings of the trial court, as affirmed by the CA, that there was delay on the part of ESHRI, that there was no proof that BF's work was defective, and that petitioners were guilty of malice and bad faith, ought to be affirmed. Admissibility of Photocopies of Progress Billing Nos. 14 to 19, PMIs and WVOs

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Petitioners fault the CA, and necessarily the trial court, on the matter of the admission in evidence of the photocopies of Progress Billing Nos. 14 to 19 and the complementing PMIs and the WVOs. According to petitioners, BF, before being allowed to adduce in evidence the photocopies adverted to, ought to have laid the basis for the presentation of the photocopies as secondary evidence, conformably to the best evidence rule. Respondent BF, on the other hand, avers having complied with the laying-the-basis requirement. Defending the action of the courts below in admitting into evidence the photocopies of the documents aforementioned, BF explained that it could not present the original of the documents since they were in the possession of ESHRI which refused to hand them over to BF despite requests. We agree with BF. The only actual rule that the term "best evidence" denotes is the rule requiring that the original of a writing must, as a general proposition, be produced17 and secondary evidence of its contents is not admissible except where the original cannot be had. Rule 130, Section 3 of the Rules of Court enunciates the best evidence rule: SEC. 3. Original document must be produced; exceptions. - When the subject of inquiry is the contents of a document, no evidence shall be admissible other than the original document itself, except in the following cases: (a) When the original has been lost or destroyed, or cannot be produced in court, without bad faith on the part of the offeror; (b) When the original is in the custody or under the control of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice; (Emphasis added.) Complementing the above provision is Sec. 6 of Rule 130, which reads: 75

SEC. 6.When original document is in adverse party's custody or control. - If the document is in the custody or under control of the adverse party, he must have reasonable notice to produce it. If after such notice and after satisfactory proof of its existence, he fails to produce the document, secondary evidence may be presented as in the case of loss. Secondary evidence of the contents of a written instrument or document refers to evidence other than the original instrument or document itself.18 A party may present secondary evidence of the contents of a writing not only when the original is lost or destroyed, but also when it is in the custody or under the control of the adverse party. In either instance, however, certain explanations must be given before a party can resort to secondary evidence. In our view, the trial court correctly allowed the presentation of the photocopied documents in question as secondary evidence. Any suggestion that BF failed to lay the required basis for presenting the photocopies of Progress Billing Nos. 14 to 19 instead of their originals has to be dismissed. The stenographic notes of the following exchanges between Atty. Andres and Atty. Autea, counsel for BF and ESHRI, respectively, reveal that BF had complied with the requirements: ATTY. ANDRES: During the previous hearing of this case, your Honor, likewise, the witness testified that certain exhibits namely, the Progress Payment Certificates and the Progress Billings the originals of these documents were transmitted to ESHRI, all the originals are in the possession of ESHRI since these are internal documents and I am referring specifically to the Progress Payment Certificates. We requested your Honor, that in order that plaintiff [BF] be allowed to present secondary original, that opposing counsel first be given opportunity to present the originals which are in their possession. May we know if they 76

have brought the originals and whether they will present the originals in court, Your Honor. (Emphasis added.) ATTY. AUTEA: We have already informed our client about the situation, your Honor, that it has been claimed by plaintiff that some of the originals are in their possession and our client assured that, they will try to check. Unfortunately, we have not heard from our client, Your Honor. Four factual premises are readily deducible from the above exchanges, to wit: (1) the existence of the original documents which ESHRI had possession of; (2) a request was made on ESHRI to produce the documents; (3) ESHRI was afforded sufficient time to produce them; and (4) ESHRI was not inclined to produce them. Clearly, the circumstances obtaining in this case fall under the exception under Sec. 3(b) of Rule 130. In other words, the conditions sine qua non for the presentation and reception of the photocopies of the original document as secondary evidence have been met. These are: (1) there is proof of the original document's execution or existence; (2) there is proof of the cause of the original document's unavailability; and (3) the offeror is in good faith.19 While perhaps not on all fours because it involved a check, what the Court said in Magdayao v. People, is very much apt, thus: x x x To warrant the admissibility of secondary evidence when the original of a writing is in the custody or control of the adverse party, Section 6 of Rule 130 provides that the adverse party must be given reasonable notice, that he fails or refuses to produce the same in court and that the offeror offers satisfactory proof of its existence. xxxx 77

The mere fact that the original of the writing is in the custody or control of the party against whom it is offered does not warrant the admission of secondary evidence. The offeror must prove that he has done all in his power to secure the best evidence by giving notice to the said party to produce the document. The notice may be in the form of a motion for the production of the original or made in open court in the presence of the adverse party or via a subpoena duces tecum, provided that the party in custody of the original has sufficient time to produce the same. When such party has the original of the writing and does not voluntarily offer to produce it or refuses to produce it, secondary evidence may be admitted.20 (Emphasis supplied.) On the Restitution of the Garnished Funds We now come to the propriety of the restitution of the garnished funds. As petitioners maintain, the CA effectively, but erroneously, prevented restitution of ESHRI's improperly garnished funds when it nullified its own August 13, 1999 Resolution in CA-G.R. SP No. 43187. In this regard, petitioners invite attention to the fact that the restitution of the funds was in accordance with this Court's final and already executory decision in G.R. No. 132655, implying that ESHRI should be restored to its own funds without awaiting the final outcome of the main case. For ease of reference, we reproduce what the appellate court pertinently wrote in its Resolution of August 13, 1999: BASED ON THE FOREGOING, the Application (for Restitution/Damages against Bond for Execution Pending Appeal) dated May 12, 1999 filed by [ESHRI] is GRANTED. Accordingly, the surety of [BF], STRONGHOLD Insurance Co., Inc., is ORDERED to PAY the sum of [PhP 35 million] to [ESHRI] under its SICI Bond. x x x In the event that the bond shall turn out to be insufficient or the surety (STRONGHOLD) cannot be made liable under its bond, [BF], being jointly and severally liable under the bond is ORDERED 78

to RETURN the amount of [PhP 35 million] representing the garnished deposits of the bank account maintained by [ESHRI] with the [PNB] Shangri-la Plaza Branch, Mandaluyong City. Otherwise, this Court shall cause the implementation of the Writ of Execution dated April 24, 1998 issued in Civil Case No. 63435 against both [BF], and/or its surety, STRONGHOLD, in case they should fail to comply with these directives. SO ORDERED.21 Petitioners' contention on the restitution angle has no merit, for, as may be recalled, the CA, simultaneously with the nullification and setting aside of its August 13, 1999 Resolution, affirmed, via its assailed November 12, 1999 Decision, the RTC Decision of September 23, 1996, the execution pending appeal of which spawned another dispute between the parties. And as may be recalled further, the appellate court nullified its August 13, 1999 Resolution on the basis of Sec. 5, Rule 39, which provides: Sec. 5. Effect of reversal of executed judgment. - Where the executed judgment is reversed totally or partially, or annulled, on appeal or otherwise, the trial court may, on motion, issue such orders of restitution or reparation of damages as equity and justice may warrant under the circumstances. On the strength of the aforequoted provision, the appellate court correctly dismissed ESHRI's claim for restitution of its garnished deposits, the executed appealed RTC Decision in Civil Case No. 63435 having in fact been upheld in toto. It is true that the Court's Decision of August 11, 1998 in G.R. No. 132655 recognized the validity of the issuance of the desired restitution order. It bears to emphasize, however, that the CA had since then decided CA-G.R. CV No. 57399, the main case, on the merits when it affirmed the underlying RTC 79

Decision in Civil Case No. 63435. This CA Decision on the original and main case effectively rendered our decision on the incidental procedural matter on restitution moot and academic. Allowing restitution at this point would not serve any purpose, but only prolong an already protracted litigation. G.R. No. 145873 Petitioner Roxas-del Castillo, in her separate petition, excepts from the CA Decision affirming, in its entirety, the RTC Decision holding her, with the other individual petitioners in G.R. No. 145842, who were members of the Board of Directors of ESHRI, jointly and severally liable with ESHRI for the judgment award. She presently contends: I. The [CA] erred in not declaring that the decision of the trial court adjudging petitioner personally liable to respondent void for not stating the factual and legal basis for such award. II. The [CA] erred in not ruling that as former Director, Petitioner cannot be held personally liable for any alleged breach of a contract entered into by the corporation. III. The [cA] erred in not ruling that respondent is not entitled to an award of moral damages. IV. The [CA] erred in holding petitioner personally liable to respondent for exemplary damages. V. The [CA] erred in not ruling that respondent is not entitled to any award of attorney's fees.22 First off, Roxas-del Castillo submits that the RTC decision in question violated the requirements of due process and of Sec. 14, Article VII of the Constitution that states, "No decision shall be rendered by any court without expressing therein clearly and distinctly the facts and the law on which it is based." Roxas-del Castillo's threshold posture is correct. Indeed, the RTC decision in question, as couched, does not provide the factual or legal basis for holding her personally liable under the premises. In fact, only in 80

the dispositive portion of the decision did her solidary liability crop up. And save for her inclusion as party defendant in the underlying complaint, no reference is made in other pleadings thus filed as to her liability. The Court notes that the appellate court, by its affirmatory ruling, effectively recognized the applicability of the doctrine on piercing the veil of the separate corporate identity. Under the circumstances of this case, we cannot allow such application. A corporation, upon coming to existence, is invested by law with a personality separate and distinct from those of the persons composing it. Ownership by a single or a small group of stockholders of nearly all of the capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate corporate personality.23 Thus, obligations incurred by corporate officers, acting as corporate agents, are not theirs but direct accountabilities of the corporation they represent. Solidary liability on the part of corporate officers may at times attach, but only under exceptional circumstances, such as when they act with malice or in bad faith.24 Also, in appropriate cases, the veil of corporate fiction shall be disregarded when the separate juridical personality of a corporation is abused or used to commit fraud and perpetrate a social injustice, or used as a vehicle to evade obligations.25 In this case, no act of malice or like dishonest purpose is ascribed on petitioner Roxas-del Castillo as to warrant the lifting of the corporate veil. The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time ESHRI defaulted in paying BF's monthly progress bill, was still a director, for, before she could be held personally liable as corporate director, it must be shown that she acted in a manner and under the circumstances contemplated in Sec. 31 of the Corporation Code, which reads:

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Section 31. Directors or trustees who willfully or knowingly vote for or assent to patently unlawful acts of the corporation or acquire any pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Emphasis ours.) We do not find anything in the testimony of one Crispin Balingit to indicate that Roxas-del Castillo made any misrepresentation respecting the payment of the bills in question. Balingit, in fact, testified that the submitted but unpaid billings were still being evaluated. Further, in the said testimony, in no instance was bad faith imputed on Roxas-del Castillo. Not lost on the Court are some material dates. As it were, the controversy between the principal parties started in July 1992 when Roxas-del Castillo no longer sat in the ESHRI Board, a reality BF does not appear to dispute. In fine, she no longer had any participation in ESHRI's corporate affairs when what basically is the ESHRI-BF dispute erupted. Familiar and fundamental is the rule that contracts are binding only among parties to an agreement. Art. 1311 of the Civil Code is clear on this point: Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations are not transmissible by their nature, or by stipulation or by provision of law. In the instant case, Roxas-del Castillo could not plausibly be held liable for breaches of contract committed by ESHRI nor for the alleged wrongdoings of its governing board or corporate officers occurring after she severed official ties with the hotel management. Given the foregoing perspective, the other issues raised by Roxas-del Castillo as to her liability for moral and exemplary damages and attorney's fees are now moot and academic. 82

And her other arguments insofar they indirectly impact on the liability of ESHRI need not detain us any longer for we have sufficiently passed upon those concerns in our review of G.R. No. 145842. WHEREFORE, the petition in G.R. No. 145842 is DISMISSED, while the petition in G.R. No. 145873 is GRANTED. Accordingly, the appealed Decision dated November 12, 1999 of the CA in CA-G.R. CV No. 57399 is AFFIRMED with MODIFICATION that the petitioner in G.R. No. 145873, Cynthia Roxas-del Castillo, is absolved from any liability decreed in the RTC Decision dated September 23, 1996 in Civil Case No. 63435, as affirmed by the CA. SO ORDERED.

FIRST DIVISION [G.R. No. 119002. October 19, 2000]

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INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents. DECISION KAPUNAN, J.: On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter.[1] The offer was accepted. Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in September of 1989, in the total amount of P176,467.50.[2] On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.[4] On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the Federation.[5] Thereafter, no further payments were made despite repeated demands. This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as 84

an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.[6] Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of action against him either in his personal capacity or in his official capacity as president of the Federation. He maintained that he did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical personality.[7] On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court.[8] In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized: Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate existence is within the personal knowledge of

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defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not. xxx A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves personally liable. x x x[9] The dispositive portion of the trial court's decision reads: WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees. The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the defendant Henri Kahn are hereby dismissed. With the costs against defendant Henri Kahn.[10] Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads: WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn.[11] 86

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable for the same as said entity has a separate and distinct personality from its officers. Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that: As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating the due process clause, let alone the fact that the judgment dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.[12] Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned errors:[13] A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY. 87

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION. C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION. The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which said Federation derives its existence. As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14 of R.A. 3135 provides: SEC. 14.Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and duties: 1. To adopt a constitution and by-laws for their internal organization and government; 2. To raise funds by donations, benefits, and other means for their purposes.

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3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose; 4. To affiliate with international or regional sports' Associations after due consultation with the executive committee; xxx 13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not inconsistent with this Act. Section 8 of P.D. 604, grants similar functions to these sports associations: SEC. 8.Functions, Powers, and Duties of National Sports Association. - The National sports associations shall have the following functions, powers, and duties: 1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to the Department and any amendment thereto shall take effect upon approval by the Department: Provided, however, That no team, school, club, organization, or entity shall be admitted as a voting member of an association unless 60 per cent of the athletes composing said team, school, club, organization, or entity are Filipino citizens; 2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the Department; 3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their purpose;

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4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the promotion of their sport; 5. Affiliate with international or regional sports associations after due consultation with the Department; xxx 13. Perform such other functions as may be provided by law. The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with juridical capacity. However, while we agree with the appellate court that national sports associations may be accorded corporate status, such does not automatically take place by the mere passage of these laws. It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135 provides: SEC. 11.National Sports' Association; organization and recognition. - A National Association shall be organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall be filed with the executive committee together with, among others, a copy of the 90

constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten pesos. The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the purposes of this Act and particularly section three thereof. No application shall be held pending for more than three months after the filing thereof without any action having been taken thereon by the executive committee. Should the application be rejected, the reasons for such rejection shall be clearly stated in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application which shall be considered as unacted upon: Provided, however, That until the executive committee herein provided shall have been formed, applications for recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon the organization of the executive committee herein provided: Provided, further, That the functioning executive committee is charged with the responsibility of seeing to it that the National Sports' Associations are formed and organized within six months from and after the passage of this Act. Section 7 of P.D. 604, similarly provides: SEC. 7.National Sports Associations. - Application for accreditation or recognition as a national sports association for each individual sport in the Philippines shall be filed with the Department together with, among others, a copy of the Constitution and By-Laws and a list of the members of the proposed association. The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized will promote the objectives of this Decree and has substantially complied with the rules 91

and regulations of the Department: Provided, That the Department may withdraw accreditation or recognition for violation of this Decree and such rules and regulations formulated by it. The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical control over the development and promotion of the particular sport for which they are organized. Clearly the above cited provisions require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.[14] As president of the Federation, Henri Kahn is presumed to have known 92

about the corporate existence or non-existence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence.[15] The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation.[16] In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract. WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED. SO ORDERED.

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WENSHA SPA CENTER, INC. and/or XU ZHI JIE, Petitioners, - versus LORETA T. YUNG, Respondent. G.R. No. 185122 Present: CARPIO, J., Chairperson, NACHURA,PERALTA, ABAD, andMENDOZA, JJ. Promulgated: August 16, 2010 X -------------------------------------------------------------------------------------- X DECISION MENDOZA, J.:

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This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by an employer who was charged before the National Labor Relations Commission (NLRC) for dismissing an employee upon the advice of a Feng Shui master. In this action, the petitioners assail the May 28, 2008 Decision[1] and October 23, 2008 Resolution[2] of the Court of Appeals (CA) in CA-G.R. SP No. 98855 entitled Loreta T. Yung v. National Labor Relations Commission, Wensha Spa Center, Inc. and/or Xu Zhi Jie. THE FACTS: Wensha Spa Center, Inc. (Wensha) in Quezon City is in the business of sauna bath and massage services. Xu Zhi Jie a.k.a. Pobby Co (Xu) is its president,[3] respondent Loreta T. Yung (Loreta) was its administrative manager at the time of her termination from employment. In her position paper,[4] Loreta stated that she used to be employed by Manmen Services Co., Ltd. (Manmen) where Xu was a client. Xu was apparently impressed by Loretas performance. After he established Wensha, he convinced Loreta to transfer and work at Wensha. Loreta was initially reluctant to accept Xus offer because her job at Manmen was stable and she had been with Manmen for seven years. But Xu was persistent and offered her a higher pay. Enticed, Loreta resigned from Manmen and transferred to Wensha. She started working on April 21, 2004 as Xus personal assistant and interpreter at a monthly salary of P12,000.00. Loreta introduced positive changes to Wensha which resulted in increased business. This pleased Xu so that on May 18, 2004, she was promoted to the position of Administrative Manager.[5] Loreta recounted that on August 10, 2004, she was asked to leave her office because Xu and a Feng Shui master were exploring the premises. Later that day, Xu asked Loreta to go on leave with pay for one 95

month. She did so and returned on September 10, 2004. Upon her return, Xu and his wife asked her to resign from Wensha because, according to the Feng Shui master, her aura did not match that of Xu. Loreta refused but was informed that she could no longer continue working at Wensha. That same afternoon, Loreta went to the NLRC and filed a case for illegal dismissal against Xu and Wensha. Wensha and Xu denied illegally terminating Loretas employment. They claimed that two months after Loreta was hired, they received various complaints against her from the employees so that on August 10, 2004, they advised her to take a leave of absence for one month while they conducted an investigation on the matter. Based on the results of the investigation, they terminated Loretas employment on August 31, 2004 for loss of trust and confidence.[6] The Labor Arbiter (LA) Francisco Robles dismissed Loretas complaint for lack of merit. He found it more probable that Loreta was dismissed from her employment due to Wenshas loss of trust and confidence in her. The LAs decision[7] partly reads: However, this office has found it dubious and hard to believe the contentions made by the complainant that she was dismissed by the respondents on the sole ground that she is a mismatch in respondents' business as advised by an alleged Feng Shui Master. The complainant herself alleged in her position paper that she has done several improvements in respondents business such as uplifting the morale and efficiency of its employees and increasing respondents clientele, and that respondent Co was very much pleased with the improvements made by the complainant that she was offered twice a promotion but she nevertheless declined. It would be against human experience and contrary to business acumen to let go of someone, who was an asset and has done so much for the company merely on the ground

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that she is a mismatch to the business. Absent any proof submitted by the complainant, this office finds it more probable that the complainant was dismissed due to loss of trust and confidence.[8] This ruling was affirmed by the NLRC in its December 29, 2006 Resolution,[9] citing its observation that Wensha was still considering the proper action to take on the day Loreta left Wensha and filed her complaint. The NLRC added that this finding was bolstered by Wenshas September 10, 2004 letter to Loreta asking her to come back to personally clarify some matters, but she declined because she had already filed a case. Loreta moved for a reconsideration of the NLRCs ruling but her motion was denied. Loreta then went to the CA on a petition for certiorari. The CA reversed the ruling of the NLRC on the ground that it gravely abused its discretion in appreciating the factual bases that led to Loretas dismissal. The CA noted that there were irregularities and inconsistencies in Wenshas position. The CA stated the following: We, thus, peruse the affidavits and documentary evidence of the Private Respondents and find the following: First, on the affidavits of their witnesses, it must be noted that the same were mere photocopies. It was held that [T]he purpose of the rule in requiring the production of the best evidence is the prevention of fraud, because if a party is in possession of such evidence and withholds it, and seeks to substitute inferior evidence in its place, the presumption naturally arise[s] that the better evidence is withheld for fraudulent purposes which its production would expose and defeat. Moreover, the affidavits were not executed under oath. The rule is that an affiant must sign the document in the presence of and take his oath before a notary public as evidence that the affidavit was properly made. Guided by these principles, the affidavits cannot be assigned any weighty probative value and are mere 97

scraps of paper the contents of which are hearsay. Second, on the sales report and order slips, which allegedly prove that Yung had been charging her food and drinks to Wensha, the said pieces of evidence do not, however, bear Yungs name thereon or even her signature. In fact, it does not state anyones name, except that of Wensha. Hence, it would simply be capricious to pinpoint, or impute, on Yung as the author in charging such expenses to Wensha on the basis of hearsay evidence. Third, while the affidavit of Wenshas Operations Manager, Princess delos Reyes (delos Reyes), may have been duly executed under oath, she did not, however, specify the alleged infractions that Yung committed. If at all, delos Reyes only made general statements on the alleged complaints against Yung that were not even substantiated by any other piece of evidence. Finally, the daily time records (DTRs) of Yung, which supposedly prove her habitual tardiness, were mere photocopies that are not even signed by Wenshas authorized representative, thus suspect, if not violative of the best evidence rule and, therefore, incompetent evidence. x x x [Emphases appear in the original] x x x x. Finally, after the Private Respondents filed their position paper, they alleged mistake on the part of their former counsel in stating that Yung was dismissed on August 31, 2004. Thus, they subsequently moved for the admission of their rejoinder. Notably, however, the said rejoinder was dated October 4, 2004, earlier than the date when their position paper was filed, which was on November 3, 2004. It is also puzzling that their position paper was dated November 25, 2004, much later than its date of filing. The irregularities are simply too glaring to be ignored. Nevertheless, the Private Respondents admission of Yungs termination on August 31, 2004 cannot be retracted. They cannot use the mistake of their 98

counsel as an excuse considering that the position paper was verified by their Operations Manager, delos Reyes, who attested to the truth of the contents therein.[10] [Emphasis supplied] Hence, the fallo of the CA decision reads: WHEREFORE, the instant petition is GRANTED. Wensha Spa Center, Inc. and Xu Zhi Jie are ORDERED to, jointly and severally, pay Loreta T. Yung her full backwages, other privileges, and benefits, or their monetary equivalent, corresponding to the period of her dismissal from September 1, 2004 up to the finality of this decision, and damages in the amounts of fifty thousand pesos (Php50,000.00) as moral damages, twenty five thousand pesos (Php25,000.00) as exemplary damages, and twenty thousand pesos (Php20,000.00) as attorneys fees. No costs. SO ORDERED.[11] Wensha and Xu now assail this ruling of the CA in this petition presenting the following: V. GROUNDS FOR THE ALLOWANCE OF THE PETITION 5.1 The following are the reasons and arguments, which are purely questions of law and some questions of facts, which justify the appeal by certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure, as amended, to this Honorable SUPREME COURT of the assailed Decision and Resolution, to wit: 5.1.1 The Honorable COURT OF APPEALS gravely erred in reversing that factual findings of the Honorable Labor Arbiter and the Honorable NLRC (Third Division) notwithstanding recognized and established rule in our jurisdiction that findings of facts of quasi-judicial agencies who have gained expertise on their respective subject matters are given respect and finality;

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5.1.2 The Honorable COURT OF APPEALS committed grave abuse of discretion and serious errors when it ruled that findings of facts of the Honorable Labor Arbiter and the Honorable NLRC are not supported by substantial evidence despite the fact that the records clearly show that petitioner therein was not dismissed but is under investigation, and that she is guilty of serious infractions that warranted her termination; 5.1.3 The Honorable COURT OF APPEALS grave[ly] erred when it ordered herein petitioner to pay herein respondent her separation pay, in lieu of reinstatement, and full backwages, as well as damages and attorneys fees; 5.1.4 The Honorable COURT OF APPEALS committed grave abuse of discretion and serious errors when it held that petitioner XU ZHI JIE to be solidarily liable with WENSHA, assuming that respondent was illegally dismissed; 5.2 The same need to be corrected as they would work injustice to the herein petitioner, grave and irreparable damage will be done to him, and would pose dangerous precedent.[12] THE COURTS RULING: Loretas security of tenure is guaranteed by the Constitution and the Labor Code. The 1987 Philippine Constitution provides in Section 18, Article II that the State shall protect the rights of workers and promote their welfare. Section 3, Article XIII also provides that all workers shall be entitled to security of tenure. Along that line, Article 3 of the Labor Code mandates that the State shall assure the rights of workers to security of tenure. Under the security of tenure guarantee, a worker can only be terminated from his employment for cause and after due process. For a valid termination by the employer: (1) the dismissal must be for a 100

valid cause as provided in Article 282, or for any of the authorized causes under Articles 283 and 284 of the Labor Code; and (2) the employee must be afforded an opportunity to be heard and to defend himself. A just and valid cause for an employees dismissal must be supported by substantial evidence, and before the employee can be dismissed, he must be given notice and an adequate opportunity to be heard.[13] In the process, the employer bears the burden of proving that the dismissal of an employee was for a valid cause. Its failure to discharge this burden renders the dismissal unjustified and, therefore, illegal.[14]

As a rule, the factual findings of the court below are conclusive on Us in a petition for review on certiorari where We review only errors of law. This case, however, is an exception because the CAs factual findings are not congruent with those of the NLRC and the LA.

According to Wensha in its position paper,[15] it dismissed Loreta on August 31, 2004 after investigating the complaints against her. Wensha asserted that her dismissal was a valid exercise of an employers right to terminate a managerial employee for loss of trust and confidence. It claimed that she caused the resignation of an employee because of gossips initiated by her. It was the reason she was asked to take a leave of absence with pay for one month starting August 10, 2004.[16]

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Wensha also alleged that Loreta was sowing intrigues in the company which was inimical to Wensha. She was also accused of dishonesty, serious breach of trust reposed in her, tardiness, and abuse of authority.[17] In its Rejoinder, Wensha changed its position claiming that it did not terminate Loretas employment on August 31, 2004. It even sent her a notice requesting her to report back to work. She, however, declined because she had already filed her complaint.[18] As correctly found by the CA, the cause of Loretas dismissal is questionable. Loss of trust and confidence to be a valid ground for dismissal must have basis and must be founded on clearly established facts.[19] The Court finds the LA ruling that states, *a+bsent any proof submitted by the complainant, this office finds it more probable that the complainant was dismissed due to loss of trust and confidence,*20+ to be utterly erroneous as it is contrary to the applicable rules and pertinent jurisprudence. The onus of proving a valid dismissal rests on the employer, not on the employee.[21] It is the employer who bears the burden of proving that its dismissal of the employee is for a valid or authorized cause supported by substantial evidence. [22] According to the NLRC, *p+erusal of the entire records show that complainant left the respondents premises when she was confronted with the infractions imputed against her.*23+ This information was taken from the affidavit[24] of Princess Delos Reyes (Delos Reyes) which was dated March 21, 2005, not in Wenshas earlier position paper or pleadings submitted to the LA. The affidavits*25+ of employees

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attached to Delos Reyes affidavit were all dated November 19, 2004 indicating that they were not yet executed when the complaints against Loreta were supposedly being investigated in August 2004. It is also noteworthy that Wenshas position paper related that because of the gossips perpetrated by Loreta, a certain Oliva Gonzalo (Gonzalo) resigned from Wensha. Because of the incident, Gonzalo, whose father was a policeman, reportedly got angry with complainant and of the management telling her friends at respondent company that she would retaliate thus creating fear among those concerned.*26+ As a result, Loreta was advised to take a paid leave of absence for one month while Wensha conducted an investigation. According to Loreta, however, the reason for her termination was her aura did not match that of Xu and the work environment at Wensha. Loreta narrated: On August 10, 2004 however, complainant was called by respondent Xu and told her to wait at the lounge area while the latter and a Feng Shui Master were doing some analysis of the office. After several hours of waiting, respondent Xu then told complainant that according to the Feng Shui master her Chinese Zodiac sign is a mismatch with that of the respondents; that complainant should not enter the administrative office for a month while an altar was to be placed on the left side where complainant has her table to allegedly correct the mismatch and that it is necessary that offerings and prayers have to be made and said for about a month to correct the alleged jinx. Respondent Xu instructed complainant not to report to the office for a month with assurance of continued and regular salary. She was ordered not to seek employment elsewhere and was told to come back on the 10th of September 2004.[27]

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Although she was a little confused, Loreta did as she was instructed and did not report for work for a month. She returned to work on September 10, 2004. This is how Loreta recounted the events of that day: On September 10, 2004, in the morning, complainant reported to the office of respondents. As usual, she punched-in her time card and signed in the logbook of the security guard. When she entered the administrative office, some of its employees immediately contacted respondent Xu. Respondent Xu then contacted complainant thru her mobile phone and told her to leave the administrative office immediately and instead to wait for him in the dining area. xxx Complainant waited for respondent Xu in the dining area. After waiting for about two (2) hours, respondent Xu was nowhere. Instead, it was Jiang Xue Qin a.k.a Annie Co, the Chinese wife of respondent Xu, who arrived and after a short conversation between them, the former frankly told complainant that she has to resign allegedly she is a mismatch to respondent Xu according to the Feng Shui master and therefore she does not fit to work (sic) with the respondents. Surprised and shocked, complainant demanded of Jiang Xue Qin to issue a letter of termination if it were the reason therefor. Instead of a termination letter issued, Jiang Xue Qin insisted for the complainant's resignation. But when complainant stood her ground, Jian Xue Qin shouted invectives at her and told to leave the office immediately. Respondent Xu did not show up but talked to the complainant over the mobile phone and convinced her likewise to resign from the company since there is no way to retain her because her aura unbalanced 104

the area of employment according to the Feng Shui, the Chinese spiritual art of placement. Hearing this from no lees than respondent Xu, complainant left the office and went straight to this Office and filed the present case on September 10, 2004. xxx[28] Loreta also alleged that in the afternoon of that day, September 10, 2004, a notice was posted on the Wensha bulletin board that reads: TO ALL EMPLOYEES OF WENSHA SPA CENTER WE WOULD LIKE TO INFORM YOU THAT MS. LORIE TSE YUNG, FORMER ADMINISTRATIVE OFFICER OF WENSHA SPA CENTER IS NO LONGER CONNECTED TO THIS COMPANY STARTING TODAY SEPTEMBER 10, 2004. ANY TRANSACTION MADE BY HER IS NO LONGER A LIABILITY OF THE COMPANY. (SGD.) THE MANAGEMENT [Italics were in red letters.][29] The Court finds Loretas complaint credible. There is consistency in her pleadings and evidence. In contrast, Wenshas pleadings and evidence, taken as a whole, suffer from inconsistency. Moreover, the affidavits of the employees only pertain to petty matters that, to the Courts mind, are not sufficient to support Wenshas alleged loss of trust and confidence. To be a valid cause for termination of employment, the act or acts constituting breach of trust must have been done intentionally, knowingly, and purposely; and they must be founded on clearly established facts. The CA decision is supported by evidence and logically flows from a review of the records. Loretas narration of the events surrounding her termination from employment was simple and straightforward. Her claims are more credible than the affidavits which were clearly prepared as an afterthought.

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More importantly, the records are bereft of evidence that Loreta was duly informed of the charges against her and that she was given the opportunity to respond to those charges prior to her dismissal. If there were indeed charges against Loreta that Wensha had to investigate, then it should have informed her of those charges and required her to explain her side. Wensha should also have kept records of the investigation conducted while Loreta was on leave. The law requires that two notices be given to an employee prior to a valid termination: the first notice is to inform the employee of the charges against her with a warning that she may be terminated from her employment and giving her reasonable opportunity within which to explain her side, and the second notice is the notice to the employee that upon due consideration of all the circumstances, she is being terminated from her employment.[30] This is a requirement of due process and clearly, Loreta did not receive any of those required notices. We are in accord with the pronouncement of the CA that the reinstatement of Loreta to her former position is no longer feasible in the light of the strained relations between the parties. Reinstatement, under the circumstances, would no longer be practical as it would not be in the interest of both parties. Under the law and jurisprudence, an illegally dismissed employee is entitled to two reliefs - backwages and reinstatement, which are separate and distinct. If reinstatement would only exacerbate the tension and further ruin the relations of the employer and the employee, or if their relationship has been unduly strained due to irreconcilable differences, particularly where the illegally dismissed employee held a managerial or key position in the company, it would be prudent to order payment of separation pay instead of reinstatement.[31] In the case of Golden Ace Builders v. Talde,[32] We wrote: Under the doctrine of strained relations, the payment of separation pay has been considered an acceptable alternative to reinstatement when the latter option is no longer desirable or viable. On the 106

one hand, such payment liberates the employee from what could be a highly oppressive work environment. On the other, the payment releases the employer from the grossly unpalatable obligation of maintaining in its employ a worker it could no longer trust. In the case at bench, the CA, upon its own assessment, pronounced that the relations between petitioners and the respondent have become strained because of her dismissal anchored on dubious charges. The respondent has not contested the finding. As she is not insisting on being reinstated, she should be paid separation pay equivalent to one (1) month salary for every year of service.[33] The CA, however, failed to decree such award in the dispositive portion. This should be rectified. Nevertheless, the Court finds merit in the argument of petitioner Xu that the CA erred in ruling that he is solidarily liable with Wensha. Elementary is the rule that a corporation is invested by law with a personality separate and distinct from those of the persons composing it and from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.*34+ In labor cases, corporate directors and officers may be held solidarily liable with the corporation for the termination of employment only if done with malice or in bad faith.[35] Bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.[36]

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In the subject decision, the CA concluded that petitioner Xu and Wensha are jointly and severally liable to Loreta.[37] We have read the decision in its entirety but simply failed to come across any finding of bad faith or malice on the part of Xu. There is, therefore, no justification for such a ruling. To sustain such a finding, there should be an evidence on record that an officer or director acted maliciously or in bad faith in terminating the services of an employee.[38] Moreover, the finding or indication that the dismissal was effected with malice or bad faith should be stated in the decision itself.[39] WHEREFORE, the petition is PARTIALLY GRANTED. The decretal portion of the May 28, 2008 Decision of the Court of Appeals, in CA-G.R. SP No. 98855, is hereby MODIFIED to read as follows: WHEREFORE, the petition is GRANTED. Wensha Spa Center, Inc. is hereby ordered to pay Loreta T. Yung her full backwages, other privileges, and benefits, or their monetary equivalent, and separation pay reckoned from the date of her dismissal, September 1, 2004, up to the finality of this decision, plus damages in the amounts of Fifty Thousand (P50,000.00) Pesos, as moral damages; Twenty Five Thousand (P25,000.00) Pesos as exemplary damages; and Twenty Thousand (P20,000.00) Pesos, as attorneys fees. No costs. SO ORDERED.

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FIRST DIVISION [G.R. No. 152542. July 8, 2004] MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA, petitioner, vs. ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF APPEALS, respondents. [G.R. No. 155472. July 8, 2004] ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ, petitioners, vs. HON. COURT OF APPEALS, MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA, and RAMON H. MONFORT, respondents. DECISION 109

YNARES-SANTIAGO, J.: Before the Court are consolidated petitions for review of the decisions of the Court of Appeals in the complaints for forcible entry and replevin filed by Monfort Hermanos Agricultural Development Corporation (Corporation) and Ramon H. Monfort against the children, nephews, and nieces of its original incorporators (collectively known as the group of Antonio Monfort III). The petition in G.R. No. 152542, assails the October 5, 2001 Decision[1] of the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which ruled that Ma. Antonia M. Salvatierra has no legal capacity to represent the Corporation in the forcible entry case docketed as Civil Case No. 534-C, before the Municipal Trial Court of Cadiz City. On the other hand, the petition in G.R. No. 155472, seeks to set aside the June 7, 2002 Decision[2] rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251, where it refused to address, on jurisdictional considerations, the issue of Ma. Antonia M. Salvatierras capacity to file a complaint for replevin on behalf of the Corporation in Civil Case No. 506-C before the Regional Trial Court of Cadiz City, Branch 60. Monfort Hermanos Agricultural Development Corporation, a domestic private corporation, is the registered owner of a farm, fishpond and sugar cane plantation known as Haciendas San Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in Cadiz City.[3] It also owns one unit of motor vehicle and two units of tractors.[4] The same allowed Ramon H. Monfort, its Executive Vice President, to breed and maintain fighting cocks in his personal capacity at Hacienda San Antonio.[5] In 1997, the group of Antonio Monfort III, through force and intimidation, allegedly took possession of the 4 Haciendas, the produce thereon and the motor vehicle and tractors, as well as the fighting cocks of Ramon H. Monfort. 110

In G.R. No. 155472: On April 10, 1997, the Corporation, represented by its President, Ma. Antonia M. Salvatierra, and Ramon H. Monfort, in his personal capacity, filed against the group of Antonio Monfort III, a complaint[6] for delivery of motor vehicle, tractors and 378 fighting cocks, with prayer for injunction and damages, docketed as Civil Case No. 506-C, before the Regional Trial Court of Negros Occidental, Branch 60. The group of Antonio Monfort III filed a motion to dismiss contending, inter alia, that Ma. Antonia M. Salvatierra has no capacity to sue on behalf of the Corporation because the March 31, 1997 Board Resolution[7] authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void as the purported Members of the Board who passed the same were not validly elected officers of the Corporation. On May 4, 1998, the trial court denied the motion to dismiss.[8] The group of Antonio Monfort III filed a petition for certiorari with the Court of Appeals but the same was dismissed on June 7, 2002.[9] The Special Former Thirteenth Division of the appellate court did not resolve the validity of the March 31, 1997 Board Resolution and the election of the officers who signed it, ratiocinating that the determination of said question is within the competence of the trial court. The motion for reconsideration filed by the group of Antonio Monfort III was denied.[10] Hence, they instituted a petition for review with this Court, docketed as G.R. No. 155472. In G.R. No. 152542: On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a complaint for forcible entry, preliminary mandatory injunction with temporary restraining order and damages against the group of Antonio Monfort III, before the Municipal Trial Court (MTC) of Cadiz City.[11] It contended that 111

the latter through force and intimidation, unlawfully took possession of the 4 Haciendas and deprived the Corporation of the produce thereon. In their answer,[12] the group of Antonio Monfort III alleged that they are possessing and controlling the Haciendas and harvesting the produce therein on behalf of the corporation and not for themselves. They likewise raised the affirmative defense of lack of legal capacity of Ma. Antonia M. Salvatierra to sue on behalf of the Corporation. On February 18, 1998, the MTC of Cadiz City rendered a decision dismissing the complaint.[13] On appeal, the Regional Trial Court of Negros Occidental, Branch 60, reversed the Decision of the MTCC and remanded the case for further proceedings.[14] Aggrieved, the group of Antonio Monfort III filed a petition for review with the Court of Appeals. On October 5, 2001, the Special Tenth Division set aside the judgment of the RTC and dismissed the complaint for forcible entry for lack of capacity of Ma. Antonia M. Salvatierra to represent the Corporation.[15] The motion for reconsideration filed by the latter was denied by the appellate court.[16] Unfazed, the Corporation filed a petition for review with this Court, docketed as G.R. No. 152542 which was consolidated with G.R. No. 155472 per Resolution dated January 21, 2004.[17]

112

The focal issue in these consolidated petitions is whether or not Ma. Antonia M. Salvatierra has the legal capacity to sue on behalf of the Corporation. The group of Antonio Monfort III claims that the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void because the purported Members of the Board who passed the same were not validly elected officers of the Corporation. A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors.[18] Corollary thereto, corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after the election the names, nationalities and residences of the elected directors, trustees and officers of the Corporation. In order to keep stockholders and the public transacting business with domestic corporations properly informed of their organizational operational status, the SEC issued the following rules: 113

xxx xxx xxx 2. A General Information Sheet shall be filed with this Commission within thirty (30) days following the date of the annual stockholders meeting. No extension of said period shall be allowed, except for very justifiable reasons stated in writing by the President, Secretary, Treasurer or other officers, upon which the Commission may grant an extension for not more than ten (10) days. 2.A. Should a director, trustee or officer die, resign or in any manner, cease to hold office, the corporation shall report such fact to the Commission with fifteen (15) days after such death, resignation or cessation of office. 3. If for any justifiable reason, the annual meeting has to be postponed, the company should notify the Commission in writing of such postponement. The General Information Sheet shall state, among others, the names of the elected directors and officers, together with their corresponding position title (Emphasis supplied) In the instant case, the six signatories to the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation, were: Ma. Antonia M. Salvatierra, President; Ramon H. Monfort, Executive Vice President; Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M. Yusay; and Ester S. Monfort, Secretary.[19] However, the names of the last four (4) signatories to the said Board Resolution do not appear in the 1996 General Information Sheet submitted by the Corporation with the SEC. Under said General Information Sheet the composition of the Board is as follows: 1. Ma. Antonia M. Salvatierra (Chairman); 2. Ramon H. Monfort (Member); 114

3. 4. 5.

Antonio H. Monfort, Jr., (Member); Joaquin H. Monfort (Member); Francisco H. Monfort (Member) and

6. Jesus Antonio H. Monfort (Member).[20] There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly elected Members of the Board legally constituted to bring suit in behalf of the Corporation.[21] In Premium Marble Resources, Inc. v. Court of Appeals,[22] the Court was confronted with the similar issue of capacity to sue of the officers of the corporation who filed a complaint for damages. In the said case, we sustained the dismissal of the complaint because it was not established that the Members of the Board who authorized the filing of the complaint were the lawfully elected officers of the corporation. Thus The only issue in this case is whether or not the filing of the case for damages against private respondent was authorized by a duly constituted Board of Directors of the petitioner corporation. Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of the case against private respondent was authorized by the Board. On the other hand, the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did not authorize the filing in its behalf of any suit against the private respondent International Corporate Bank. 115

Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979 with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma. Silva. However, it appears from the general information sheet and the Certification issued by the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of the board of directors of the Premium Marble Resources, Inc. were: Alberto C. Nograles President/Director Fernando D. Hilario Vice President/Director Augusto I. Galace Treasurer Jose L.R. Reyes Secretary/Director Pido E. Aguilar Director Saturnino G. Belen, Jr. Chairman of the Board. While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981. We agree with the finding of public respondent Court of Appeals, that in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellants subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities & Exchange Commission. 116

By the express mandate of the Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities and residences of the directors, trustees and officers elected. Sec. 26 of the Corporation Code provides, thus: Sec. 26.Report of election of directors, trustees and officers. Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. xxx Evidently, the objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers, of the nature of business, financial condition and operational status of the company together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporations financial resources and business responsibility. The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been fully substantiated. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. In the case at bar, the fact that four of the six Members of the Board listed in the 1996 General Information Sheet[23] are already dead[24] at the time the March 31, 1997 Board Resolution was issued, does not automatically make the four signatories (i.e., Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said Board Resolution (whose name do not appear in 117

the 1996 General Information Sheet) as among the incumbent Members of the Board. This is because it was not established that they were duly elected to replace the said deceased Board Members. To correct the alleged error in the General Information Sheet, the retained accountant of the Corporation informed the SEC in its November 11, 1998 letter that the non-inclusion of the lawfully elected directors in the 1996 General Information Sheet was attributable to its oversight and not the fault of the Corporation.[25] This belated attempt, however, did not erase the doubt as to whether an election was indeed held. As previously stated, a corporation is mandated to inform the SEC of the names and the change in the composition of its officers and board of directors within 30 days after election if one was held, or 15 days after the death, resignation or cessation of office of any of its director, trustee or officer if any of them died, resigned or in any manner, ceased to hold office. This, the Corporation failed to do. The alleged election of the directors and officers who signed the March 31, 1997 Board Resolution was held on October 16, 1996, but the SEC was informed thereof more than two years later, or on November 11, 1998. The 4 Directors appearing in the 1996 General Information Sheet died between the years 1984 1987,[26] but the records do not show if such demise was reported to the SEC. What further militates against the purported election of those who signed the March 31, 1997 Board Resolution was the belated submission of the alleged Minutes of the October 16, 1996 meeting where the questioned officers were elected. The issue of legal capacity of Ma. Antonia M. Salvatierra was raised before the lower court by the group of Antonio Monfort III as early as 1997, but the Minutes of said October 16, 1996 meeting was presented by the Corporation only in its September 29, 1999 Comment before the Court of Appeals.[27] Moreover, the Corporation failed to prove that the same 118

October 16, 1996 Minutes was submitted to the SEC. In fact, the 1997 General Information Sheet[28] submitted by the Corporation does not reflect the names of the 4 Directors claimed to be elected on October 16, 1996. Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to prove that four of those who authorized her to represent the Corporation were the lawfully elected Members of the Board of the Corporation. As such, they cannot confer valid authority for her to sue on behalf of the corporation. The Court notes that the complaint in Civil Case No. 506-C, for replevin before the Regional Trial Court of Negros Occidental, Branch 60, has 2 causes of action, i.e., unlawful detention of the Corporations motor vehicle and tractors, and the unlawful detention of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon sought redress of the latter cause of action in his personal capacity, the dismissal of the complaint for lack of capacity to sue on behalf of the corporation should be limited only to the corporations cause of action for delivery of motor vehicle and tractors. In view, however, of the demise of Ramon on June 25, 1999,[29] substitution by his heirs is proper. WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542 is DENIED. The October 5, 2001 Decision of the Special Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which set aside the August 14, 1998 Decision of the Regional Trial Court of Negros Occidental, Branch 60 in Civil Case No. 822, is AFFIRMED. In G.R. No. 155472, the petition is GRANTED and the June 7, 2002 Decision rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251, dismissing the petition filed by the group of Antonio Monfort III, is REVERSED and SET ASIDE. 119

The complaint for forcible entry docketed as Civil Case No. 822 before the Municipal Trial Court of Cadiz City is DISMISSED. In Civil Case No. 506-C with the Regional Trial Court of Negros Occidental, Branch 60, the action for delivery of personal property filed by Monfort Hermanos Agricultural Development Corporation is likewise DISMISSED. With respect to the action filed by Ramon H. Monfort for the delivery of 387 fighting cocks, the Regional Trial Court of Negros Occidental, Branch 60, is ordered to effect the corresponding substitution of parties. No costs. SO ORDERED

SECOND DIVISION

120

UNITED PARAGON MINING CORPORATION, Petitioner,

G.R. No. 150959

Present:

PUNO, J., Chairperson, - versus SANDOVAL-GUTIERREZ, CORONA, AZCUNA, and GARCIA, JJ. 121

COURT OF APPEALS, former 12th DIVISION, ATTY. MURLY P. MENDEZ and CESARIO[1] F. ERMITA, Respondents. Promulgated:

August 4, 2006

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION GARCIA, J.: Assailed and sought to be set aside in this petition for review under Rule 45 of the Rules of Court is the Decision[2] dated July 24, 2001 of the Court of Appeals (CA), as reiterated in its Resolution[3] of November 7, 2001, dismissing the petition for certiorari with prayer for a temporary restraining order and preliminary injunction thereat filed by the herein petitioner in CA-G.R. SP No. 44450, entitled United Paragon Mining Corporation, represented by Feliciano M. Daniel v. Atty. Murly P. Mendez, in his capacity as Accredited Voluntary Arbitrator, Region V, and Cesario F. Ermita. The facts:

122

Prior to the instant controversy, private respondent Cesario F. Ermita (Cesario, for brevity) was a regular employee working as a foreman of petitioner United Paragon Mining Corporation (UPMC, hereafter) On January 18, 1996, Cesario received a termination letter bearing date January 16, 1996 and signed by UPMCs Personnel Superintendent, Feliciano M. Daniel, informing Cesario that his employment as foreman is terminated effective thirty days after his receipt of the letter. As stated in the letter, the termination was on account of Cesarios violation of company rules against infliction of bodily injuries on a co-employee, it being alleged therein that Cesario inflicted bodily injuries on a co-employee, a certain Jerry Romero, as well as for unlawfully possessing a deadly weapon, a bolo, again in violation of company rules. As a result of the termination, the matter was brought to the grievance machinery as mandated under the Collective Bargaining Agreement existing at that time between UPMC and the United Paragon Supervisors Union. Having failed to reach a settlement thereat, the parties agreed to submit the dispute to voluntary arbitration. Accordingly, the complaint for illegal dismissal was referred to Voluntary Arbitrator Atty. Murly P. Mendez of the National Conciliation and Mediation Board, Regional Branch No. V, Legaspi City, whereat the same was docketed as VA Case No.RB5-657-04-002-96. On February 28, 1997, Voluntary Arbitrator Mendez rendered a decision*4+ in Cesarios favor, stating that although the procedural requirements in the termination of an employee had been complied with, the termination of Cesario was unjustified because it was arrived at through gross misapprehension of facts. Explains the Voluntary Arbitrator:

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An analysis of the tenor of the termination letter would seem to indicate that Ceasario Ermita was separated from service simply because his explanation was not acceptable to the company. Stated more bluntly, Ermita was terminated not because there was a definite finding of fact relative to his supposed culpability, but because his answer did not find favor with management. xxx xxx xxx The evidence on record partakes of the uncorroborated statement of Jerry Romero claiming that he was assaulted by [Cesario]. This claim has been disputed and is denied by [Cesario] in the statement executed by him on January 2, 1996 as well as in his written explanation (Annex 6, Respondent's Position Paper). On this point, it can be argued that since this is a case of one's word against another, the best that could be said of management's evidence is that it has achieved a level at an equi-poise with that of the Constitution. The spirit of prevailing jurisprudence as well as a liberal interpretation of the new Constitutional provision on labor, would mandate that where a doubt exists, the same should be resolved in favor of labor. The position of [Cesario] appears to have been strengthened by the document jointly signed by [him] and Jerry Romero, the supposed victim of the assault charged. This amicable settlement would serve to negate the charge of physical injury against [Cesario] as a basis for termination, it appearing that even [his] supposed victim, Jerry Romero, who has been made to appear as a complainant in the proceedings which resulted in the termination letter, has admitted in this amicable settlement (Annex A, Complainant's Position Paper) that "hindi naming sinasadya yon at itong ginawa naming sulat na ito ay siya ang magpapatunay na ayos kaming dalawa at walang problema sa isa't isa." 124

This admission, that comes no less from the supposed accuser of [Cesario], clearly establishes the fact that whatever may have happened between them on New Year's eve was something that neither of them willfully and voluntarily did. Since it has been established that the supposed scuffle between [Cesario] and Romero was "hindi sinasadya," then it would necessarily follow that there could not have been a willful and voluntary assault by [Cesario] upon Romero. This situation is further rendered more puzzling by the fact that the suspected assailant was himself the bearer of the tell-tale marks of injury. xxx xxx xxx It has been established to the satisfaction of this Arbitrator that the bolo seen that night was used to chop wood to be burnt in the bonfire. This statement by people who happened to be unbiased and disinterested remains uncontested and undisputed. Further, the preponderance of evidence shows that it was not [Cesario] who used said bolo, but his son. xxx xxx xxx On these points, it is the finding of this Arbitrator, and it is so ruled, that Ceasario Ermita was unjustifiably terminated.[5] (Words in brackets supplied). On the basis of the above, the Voluntary Arbitrator, in his aforementioned decision of February 28, 1997, ordered Cesarios reinstatement, to wit: WHEREFORE, judgment is hereby issued ordering respondent United Paragon Mining Corporation to immediately reinstate Ceasario F. Ermita to his former position prior to the termination without loss of seniority nor interruption of service, and to pay said Ceasario F. Ermita his back wages, including such other fringe benefits as he would have been entitled to, from the date of his termination effective 125

February 17, 1996 up to the time of actual reinstatement. Attorney's fees are hereby granted equivalent to 10 per cent of such monetary award as the complainant is entitled to. For lack of merit, all other claims for damages are hereby dismissed. SO ORDERED. In time, UPMC moved for a reconsideration of the decision insofar as it ordered Cesarios reinstatement which UPMC sought to avert by offering separation pay instead. UPMC cites the following against the decreed reinstatement: 1) Cesarios position has already been filled up; and 2) reinstatement is no longer appropriate in view of the supposed strained relations between Cesario and UPMC. In his Order[6] of April 22, 1997, the Voluntary Arbitrator denied the desired reconsideration stressing that UPMCs management misapprehended the facts when it caused Cesarios termination, which cannot support the claim of the existence of strained relations between him and the corporation. Unsatisfied, UPMC, thru its Personnel Superintendent Feliciano M. Daniel, elevated the case to the CA on a Petition for Certiorari with Prayer for Temporary Restraining Order and Injunction, thereat docketed as CA-G.R. SP No. 44450, asserting that the Voluntary Arbitrator committed grave abuse of discretion, erroneous interpretation of the law and denial of substantial justice. In the herein assailed Decision[7] dated July 24, 2001, the CA, without going into the merits of the petition, dismissed the same on the following grounds: 1) The petition for certiorari was not the proper remedy in order to seek review or nullify decisions or final orders issued by the Labor Arbiter;

126

2) The verification in the petition is ineffective and insufficient because it was merely signed by the company's Personnel Superintendent without alleging or showing that he is authorized for the said purpose and that the verification was based on knowledge and information; 3) The petitioner's ground of grave abuse of discretion, erroneous interpretation of the law and denial of justice are actually dwelling on the appreciation of facts, which cannot be entertained in a petition for certiorari. With its motion for reconsideration having been denied by the CA in its Resolution of November 7, 2001,[8] petitioner UPMC is now with this Court via the present recourse, submitting for our consideration the following questions: WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PROPER REMEDY SHOULD HAVE BEEN A PETITION FOR REVIEW ON CERTIORARI AND NOT A PETITION FOR CERTIORARI; II WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE VERIFICATION PORTION OF THE PETITION WAS INEFFECTIVE AND INSUFFICIENT IN THE ABSENCE OF ALLEGATION OR SHOWING THAT FELICIANO DANIEL, AS PERSONNEL SUPERINTENDENT WAS DULY AUTHORIZED TO FILE THE PETITION; III

127

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PETITION LACKS MERIT BECAUSE IT DWELLED ON THE APPRECIATION OF FACTS WHICH IS NOT PROPER IN PETITION FOR CERTIORARI. The recourse must have to be DENIED, no reversible error having been committed by the CA in its challenged decision. We start with the basic concept that a corporation, like petitioner UPMC, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. It has thus been observed that the power of a corporation to sue and be sued in any court is lodged with its board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors.[9] It is petitioners posture that there is no necessity for a board resolution authorizing its Personnel Superintendent to file in its behalf the certiorari petition in CA-G.R. SP No. 44450 because said petition arose out of the labor dispute filed against it and its Personnel Superintendent, Feliciano M. Daniel. It is argued that in Cesarios complaint for illegal dismissal, Daniel was made a co-respondent of the corporation. Upon this premise, UPMC argues that Daniel has all the right to answer the complaint and to appeal an unfavorable judgment therein, which he actually did, in his capacity as the corporations Personnel Superintendent and as its representative. Plodding on, petitioner contends that were the CA to insist that Daniel could not represent the corporation, it follows that the proceedings before the 128

Voluntary Arbitrator could only be binding as against Daniel because the company then could not have been duly represented in said proceedings. Throughout the proceedings before the Voluntary Arbitrator, that is, from the filing of the position papers up to the filing of the motion for reconsideration, UPMC was duly represented by its counsel, Atty. Archimedes O. Yanto. True it is that Cesarios complaint for illegal dismissal was filed against the corporation and Daniel. It appears obvious to us, however, that Daniel was merely a nominal party in that proceedings, as in fact he was impleaded thereat in his capacity as UPMCs Personnel Superintendent who signed the termination letter. For sure, Cesarios complaint contains no allegation whatsoever for specific claim or charge against Daniel in whatever capacity. As it is, Daniel was not in anyway affected by the outcome of the illegal dismissal case because only the corporation was made liable therein to Cesario. Being not a real party-in-interest, Daniel has no right to file the petition in CAG.R. SP No. 44450 in behalf of the corporation without any authority from its board of directors. It is basic in law that a corporation has a legal personality entirely separate and distinct from that of its officers and the latter cannot act for and on its behalf without being so authorized by its governing board. In Premium Marble Resources, Inc. v. Court of Appeals,[10] we made it clear that in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the latter: We agree with the finding of public respondent Court of Appeals, that in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessary fail. The power of the corporation to sue and be sued in 129

any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellants subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities and Exchange Commission. Given the reality that the petition in CA-G.R. SP No. 44450 was filed by Daniel in behalf of and in representation of petitioner UPMC without an enabling resolution of the latters board of directors, that petition was fatally defective, inclusive of the verification and the certification of non-forum shopping executed by Daniel himself. True, ample jurisprudence exists to the effect that subsequent and substantial compliance of a petitioner may call for the relaxation of the rules of procedure in the interest of justice.[11] But to merit the Court's liberal consideration, petitioner must show reasonable cause justifying non-compliance with the rules and must convince the Court that the outright dismissal of the petition would defeat the administration of justice.[12] Here, petitioner has not adequately explained its failure to have the certification against forum shopping signed by its duly authorized officer. Instead, it merely persisted in its thesis that it was not necessary to show proof that its Personnel Superintendent was duly authorized to file that petition and to sign the verification thereof and the certification against forumshopping despite the absence of the necessary board authorization, thereby repeating in the process its basic submission that CA-G.R. SP No. 44450 is merely a continuation of the proceedings before the Voluntary Arbitrator and that its Personnel Superintendent was impleaded as one of the respondents in Cesarios complaint for illegal dismissal. With the view we take of this case, we deem it unnecessary to address petitioners other grievances. 130

WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are AFFIRMED.Costs against petitioner. SO ORDERED G.R. No. 129459 September 29, 1998 SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents. PANGANIBAN, J.: May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a parcel of land owned by the corporation?. May the veil of corporate fiction be pierced on the mere ground that almost all of the shares of stock of the corporation are owned by said treasurer and her husband? The Case These questions are answered in the negative by this Court in resolving the Petition for Review on Certiorari before us, assailing the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled: 131

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the downpayment of P100,000.00 which she received from plaintiff-appellant. There is no pronouncement as to costs. 4 The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. 5 The Facts The facts as found by the Court of Appeals are as follows: Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City. Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876: that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales Corporation requesting for a computation of the balance to be paid: that said letter was coursed through defendant-appellee's broker. Linda Aduca, who wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance, covered by Metrobank Cashier's Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to meet in the office of plaintiff-appellant but defendantappellee's treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales 132

Corporation despite repeated demands and in utter disregard of its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales Corporation: that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages which may be assessed against defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-appellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg and 133

Motorich Sales Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiffappellant, it has been constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos plus appearance fee for every appearance in court hearings. In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as affirmative defense that the President and Chairman of Motorich did not sign the agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew this from the very beginning as it was presented a copy of the Transfer of Rights (Annex B of amended complaint) at the time the Agreement (Annex B of amended complaint) was signed; that plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting, without admitting, the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the stipulated period (up to March 2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus they agreed that if the payment be in check, they will meet at a bank designated by plaintiff-appellant where they will encash the check and sign the Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check, by phone, only after banking hours. On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing plaintiff-appellant's complaint, ruling that:

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The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of absolute sale in accordance with the agreement of February 14, 1989: and if so, whether plaintiff is entitled to damage. As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was indeed authorized by defendant corporation. Motorich Sales, to dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is clearly owned by the corporation. Motorich Sales, then its disposition should be governed by the requirement laid down in Sec. 40. of the Corporation Code of the Philippines, to wit: Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combination and monopolies, a corporation may by a majority vote of its board of directors . . . sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets including its goodwill . . . when authorized by the vote of the stockholders representing at least two third (2/3) of the outstanding capital stock . . . No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff should have been on the look out under these circumstances. More so, plaintiff himself [owns] several corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on corporation matters. Regarding the question of damages, the Court likewise, does not find substantial evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not in anyway misrepresent herself to be authorized by the corporation to sell the property to plaintiff (tsn dated September 27, 1991, p. 8). 135

In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at instance for lack of merit. "Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35) For clarity, the Agreement dated February 14, 1989 is reproduced hereunder: AGREEMENT KNOW ALL MEN BY THESE PRESENTS: This Agreement, made and entered into by and between: MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del Pilar. Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the TRANSFEROR; and SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter referred to as the TRANSFEREE. WITNESSETH, That: WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila, containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the Transferee; 136

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as follows: 1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square meter; subject to the following terms: a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be paid upon the execution of this agreement and shall form part of the total purchase price; b. Balance shall be payable on or before March 2, 1989; 2. That the monthly amortization for the month of February 1989 shall be for the account of the Transferor; and that the monthly amortization starting March 21, 1989 shall be for the account of the Transferee; The transferor warrants that he [sic] is the lawful owner of the above-described property and that there [are] no existing liens and/or encumbrances of whatsoever nature; In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest money shall be forfeited in favor of the Transferor. That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE. IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at Greenhills, San Juan, Metro Manila, Philippines. MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS TRANSFEROR TRANSFEREE 137

[SGD.][SGD.] By. NENITA LEE GRUENBERG By: ANDRES T. CO Treasurer President Signed In the presence of: [SGD.][SGD.] 6 In its recourse before the Court of Appeals, petitioner insisted: 1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in accordance with the Agreement of February 14, 1989, 2. Plaintiff is entitled to damages. 7 As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount remitted as "downpayment" or "earnest money." Hence, this petition before us. 8 The Issues Before this Court, petitioner raises the following issues: I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case II. Whether or not the appellate court may consider matters which the parties failed to raise in the lower court

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III. Whether or not there is a valid and enforceable contract between the petitioner and the respondent corporation IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution of answer in the transcript of stenographic note[s]. V. Whether or not respondents are liable for damages and attorney's fees 9 The Court synthesized the foregoing and will thus discuss them seriatim as follows: 1. Was there a valid contract of sale between petitioner and Motorich? 2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich? 3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of stenographic notes material to the disposition of this case? 4. Are respondents liable for damages and attorney's fees? The Court's Ruling The petition is devoid of merit. First Issue: Validity of Agreement Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co affixed their signatures on the contract they both consented to be bound by the terms thereof." Ergo, petitioner contends that the contract is binding on the two corporations. We do not agree. 139

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized or ratified such sale. A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's board of directors. 10 Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides; Sec. 23.The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that "a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added 140

by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred." 12 Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether the assumed agency be a general or special one bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its assets. 14 In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court contained no proof of such authority. 16 It has not shown any provision of said respondent's articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power. That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property of the corporation. Selling is obviously foreign to a corporate treasurer's function, which generally has been described as "to receive and keep the funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers." 17 141

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of Motorich is marketing, distribution, export and import in relation to a general merchandising business. 18 Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell real property, an activity which falls way beyond the scope of her general authority. Art. 1874 and 1878 of the Civil Code of the Philippines provides: Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing: otherwise, the sale shall be void. Art. 1878. Special powers of attorney are necessary in the following case: xxx xxx xxx (5) To enter any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration; xxx xxx xxx. Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its "acceptance of benefits," as evidenced by the receipt issued by Respondent Gruenberg. 19 Petitioner is clutching at straws. As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But when these officers exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them." 20 In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests 142

its argument on the receipt which, however, does not prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove that her acts were authorized or ratified by Motorich. Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the obligation which is established." As found by the trial court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. This factual finding of the two courts is binding on this Court. 23 As the consent of the seller was not obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich. Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot be ratified. 24 Second Issue: Piercing the Corporate Veil Not Justified Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no authorization from the board to enter into the subject contract. 26 It adds that, being solely owned by the Spouses Gruenberg, the company can treated as a close corporation 143

which can be bound by the acts of its principal stockholder who needs no specific authority. The Court is not persuaded. First, petitioner itself concedes having raised the issue belatedly, 27 not having done so during the trial, but only when it filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of the proceedings. It is well-settled the points of law, theories and arguments not brought to the attention of the trial court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first time on appeal. 29 Allowing petitioner to change horses in midstream, as it were, is to run roughshod over the basic principles of fair play, justice and due process. Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no reason to uphold it. True, one of the advantages of a corporate form of business organization is the limitation of an investor's liability to the amount of the investment. 30 This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. 31 On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. 32 Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil

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with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals." 33 We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality or inequity committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner. Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close corporation as follows: Sec. 96.Definition and Applicability of Title. A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. . . . .

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The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation. 35 Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere ownership by a single stockholder or by another corporation of all or capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities." 36 So, too, a narrow distribution of ownership does not, by itself, make a close corporation. Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court ruled that ". . . petitioner corporation is classified as a close corporation and, consequently, a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president." 38 But the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of real property was contracted by the president of a close corporation with the knowledge and acquiescence of its board of directors. 39 In the present case, Motorich is not a close corporation, as previously discussed, and the agreement was entered into by the corporate treasurer without the knowledge of the board of directors. The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the controlling stockholder, may be considered as a binding corporate act and a board action as nothing more than a mere formality." 40 The present case, however, is not one of them.

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As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent Motorich. 41 Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned exception does not apply. Granting arguendo that the corporate veil of Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the same was acquired during their marriage. There being no indication that said spouses, who appear to have been married before the effectivity of the Family Code, have agreed to a different property regime, their property relations would be governed by conjugal partnership of gains. 42 As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in favor of another his or interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the partnership has been legally dissolved." 43 Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of property, the sale would still be invalid. Under this regime, "alienation of community property must have the written consent of the other spouse or he authority of the court without which the disposition or encumbrance is void." 44 Both requirements are manifestly absent in the instant case. Third Issue: Challenged Portion of TSN Immaterial Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN): Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property? 147

A Yes, sir. 45 Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an initial scribbled above it. 46 This, however, is insufficient to prove that Nenita Gruenberg was authorized to represent Respondent Motorich in the sale of its immovable property. Said excerpt be understood in the context of her whole testimony. During her cross-examination. Respondent Gruenberg testified: Q So, you signed in your capacity as the treasurer? [A] Yes, sir. Q Even then you kn[e]w all along that you [were] not authorized? A Yes, sir. Q You stated on direct examination that you did not represent that you were authorized to sell the property? A Yes, sir. Q But you also did not say that you were not authorized to sell the property, you did not tell that to Mr. Co, is that correct? A That was not asked of me. Q Yes, just answer it. A I just told them that I was the treasurer of the corporation and it [was] also the president who [was] also authorized to sign on behalf of the corporation. Q You did not say that you were not authorized nor did you say that you were authorized? 148

A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest money at that time. That was our first meeting. 47 Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand, her testimony demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw caution to the wind by offering and paying the earnest money without first verifying Gruenberg's authority to sell the lot. Fourth Issue: Damages and Attorney's Fees Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and bad faith, respondents attempted and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite the receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act." 48 Assuming that Respondent Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by [R]espondent [C]orporation." 49 As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack factual bases. Hence, an award of damages or attorney's fees cannot be justified. The amount paid as "earnest money" was not proven to have redounded to the benefit of Respondent 149

Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich, because "it was deposited with the account of Aren Commercial c/o Motorich Sales Corporation." 50 Respondent Gruenberg, however, disputes the allegations of petitioner. She testified as follows: Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was encashed. A Yes.sir, the check was paid in my name and I deposit[ed] it. Q In your account? A Yes, sir. 51 In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push through." 52 Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president of Petitioner Corporation for more than ten years and has also served as chief executive of two other corporate entities. 53 Co cannot feign ignorance of the scope of the authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's authorization to enter into a contract to sell a parcel of land belonging to Motorich. Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably, petitioner appears to be the victim of its own officer's negligence in entering into a contract with and paying an unauthorized officer of another corporation. As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the amount she received as earnest money, as "no one shall enrich himself at the expense of 150

another." 54 a principle embodied in Article 2154 of Civil Code. 55 Although there was no binding relation between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to sell the property of Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake in the contruction or application of a difficult question of law may come within the scope of the preceding article." WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. SO ORDERED.

THIRD DIVISION G.R. No. 84197 July 28, 1989 PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents. 151

G.R. No. 84157 July 28, 1989 JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents. Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation. Sycip, Salazar, Hernandez& Gatmaitan for Jacob S. Lim. Renato J. Robles for BORMAHECO, Inc. and Cervanteses. Leonardo B. Lucena for Constancio Maglana. GUTIERREZ, JR., J.: The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed. The dispositive portion of the trial court's decision reads as follows: WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages.

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It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the crosscomplaints until the amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two Cervanteses. Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's fees. xxx xxx xxx WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid. Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and costs. No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary damages.

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Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the exercise of its discretion. No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an act which is clearly within its power and which is the reason for its being, then nobody would engage in the insurance business. No further claim or counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16) In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owneroperator of Southern Air Lines (SAL) a single proprietorship. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965. On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be 154

their contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature. On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively. Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,

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On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana. In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question. After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. In all other respects the trial court's decision was affirmed. We first resolve G.R. No. 84197. Petitioner Pioneer Insurance and Surety Corporation avers that: RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10) The petitioner questions the following findings of the appellate court: We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to 156

P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be benefited or injured by the judgment. Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would be benefited or injured by the judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35). Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been paid by the reinsurer the sum of P295,000.00 the bulk of defendants' alleged obligation to Pioneer. In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00, 157

to the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25). The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would recover from the coindemnitor will be paid to the reinsurer. The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties. A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were: xxx xxx xxx

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1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been paid with reinsurance money? 2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157). In resolving these issues, the trial court made the following findings: It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer has any right to collect to the extent of the said amount. On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact. But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled

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that an action brought by an attorney-in-fact in his own name instead of that of the principal will not prosper, and this is so even where the name of the principal is disclosed in the complaint. Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name of the real party in interest.' This provision is mandatory. The real party in interest is the party who would be benefitted or injured by the judgment or is the party entitled to the avails of the suit. This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714. The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity agreement is still valid and effective. But since the amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363). The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis. 160

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925). The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134). Hence the applicable law is Article 2207 of the new Civil Code, to wit: Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]): Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied). 161

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer. Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents. Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention. On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court stated: Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of the chattel mortgage. Testimonies of defendants Francisco Cervantes and Modesto Cervantes. Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond provided that the same would be mortgaged to it, but this was not possible because the planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be cancelled. The following is averred under oath by Pioneer in the original complaint: 162

The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the security under the chattel mortgage and there is thus no other sufficient security for the claim sought to be enforced by this action. This is judicial admission and aside from the chattel mortgage there is no other security for the claim sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised Rules of Court. Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines. Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any further action to recover any unpaid balance of the price. SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law. Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall 163

have no further action against the purchaser to recover any unpaid balance and any agreement to the contrary is void.'Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6. The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124. The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these defendants from any liability as alleged indemnitors. The change of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the indemnitors. The principal hereof shall be paid in eight equal successive three months interval installments, the first of which shall be due and payable 25 August 1965, the remainder of which ... shall be due and payable on the 26th day x x x of each succeeding three months and the last of which shall be due and payable 26th May 1967. However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows: The principal hereof shall be paid in eight equal successive three month interval installments the first of which shall be due and payable 4 September 1965, the remainder of which ... shall be due and payable

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on the 4th day ... of each succeeding months and the last of which shall be due and payable 4th June 1967. Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last installment being July 15, 1967. These restructuring of the obligations with regard to their maturity dates, effected twice, were done without the knowledge, much less, would have it believed that these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant Maglana knew of and consented to the modification of the obligations. But if that were so, there would have been the corresponding documents in the form of a written notice to as well as written conformity of these defendants, and there are no such document. The consequence of this was the extinguishment of the obligations and of the surety bond secured by the indemnity agreement which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538. Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension time referred to herein, (New Civil Code).'

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Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571. Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently, Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from liability from the claim. Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity. Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or became illegal. These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by reason of the filing of the instant case against them and the attachment and garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157). We find no cogent reason to reverse or modify these findings. Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious. We now discuss the merits of G.R. No. 84157. Petitioner Jacob S. Lim poses the following issues: l. What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but who failed to incorporate the entity in which they had chosen to 166

invest? How are the losses to be treated in situations where their contributions to the intended 'corporation' were invested not through the corporate form? This Petition presents these fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6). These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must share in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings ordering him to reimburse certain amounts given by the respondents to the petitioner as their contributions to the intended corporation, to wit: However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74. We first state the principles. While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 167

Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a corporation for the development of land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee for the associates in an action between them for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders, who were also directors, will 168

not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied). In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses. It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim: ... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public convenience and necessity as well as the required permits for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to incorporate his airline in 169

accordance with their agreement and proceeded to acquire the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338). while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party complaint: Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and spare parts from Japan which the latter considered as their lawful contribution and participation in the proposed corporation to be known as SAL. Arrangements and negotiations were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two planes and their accessories and or return the amount advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341-342). Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of 170

the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts. WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED. SO ORDERED.

EN BANC G.R. No. L-32409 February 27, 1971 BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, petitioners, vs. HON. JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, et al, respondents. DECISION VILLAMOR, J:

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This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order respondents to desist from enforcing the same and/or keeping the documents, papers and effects seized by virtue thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to have been made on the basis of the said documents, papers and effects, and to order the return of the latter to petitioners. We gave due course to the petition but did not issue the writ of preliminary injunction prayed for therein. The pertinent facts of this case, as gathered from record, are as follows: On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to make and file the application for search warrant which was attached to the letter. In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers: respondent Veras aforesaid letter-request; an application for search warrant already filled up but still unsigned by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon; a deposition in printed form of respondent Logronio already accomplished and 172

signed by him but not yet subscribed; and a search warrant already accomplished but still unsigned by respondent Judge. At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned, respondent Judge was informed that the depositions had already been taken. The stenographer, upon request of respondent Judge, read to him her stenographic notes; and thereafter, respondent Judge asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis, he could be charged for perjury. Respondent Judge signed respondent de Leons application for search warrant and respondent Logronios deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and accordingly issued. Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners lawyers protested the search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The agents nevertheless proceeded with their search which yielded six boxes of documents. On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be issued, that the search warrant be declared null and void, and that the respondents be ordered to pay petitioners, jointly and severally, damages and attorneys fees. On March 18, 1970, the respondents, thru the Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent Judge, issued on July 29, 1970, an order dismissing the petition for 173

dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners came to this Court. The petition should be granted for the following reasons: 1. Respondent Judge failed to personally examine the complainant and his witness. The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court are: (3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized. (Art. III, Sec. 1, Constitution.) SEC. 3. Requisites for issuing search warrant. A search warrant shall not issue but upon probable cause in connection with one specific offense to be determined by the judge or justice of the peace after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched and the persons or things to be seized. No search warrant shall issue for more than one specific offense. SEC. 4.Examination of the applicant. The judge or justice of the peace must, before issuing the warrant, personally examine on oath or affirmation the complainant and any witnesses he may produce and take their depositions in writing, and attach them to the record, in addition to any affidavits presented to him. (Rule 126, Revised Rules of Court.)

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The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the judge himself and not by others. The phrase which shall be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, appearing in the said constitutional provision, was introduced by Delegate Francisco as an amendment to the draft submitted by the Sub-Committee of Seven. The following discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol. III, pp. 755-757) is enlightening: SR. ORENSE. Vamos a dejar compaero los piropos y vamos al grano. En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Seoria que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o si Su Seoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los derechos del individuo en su persona, bienes etcetera, etcetera. SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Seoria pregunta por la siguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se atendra solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos. 175

SR. ORENSE. No cree Su Seoria que el tomar le declaracion de ese denunciante por escrito siempre requeriria algun tiempo?. SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males debemos escoger. el menor. xxx xxx xxx MR. LAUREL.. . . The reason why we are in favor of this amendment is because we are incorporating in our constitution something of a fundamental character. Now, before a judge could issue a search warrant, he must be under the obligation to examine personally under oath the complainant and if he has any witness, the witnesses that he may produce . . . The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it requires the judge, before issuing a search warrant, to personally examine on oath or affirmation the complainant and any witnesses he may produce . . . Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of warrants except upon probable cause. The determination of whether or not a probable cause exists calls for the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the absence of any rule to the contrary.

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In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant (respondent De Leon) and his witness (respondent Logronio). While it is true that the complainants application for search warrant and the witness printed-form deposition were subscribed and sworn to before respondent Judge, the latter did not ask either of the two any question the answer to which could possibly be the basis for determining whether or not there was probable cause against herein petitioners. Indeed, the participants seem to have attached so little significance to the matter that notes of the proceedings before respondent Judge were not even taken. At this juncture it may be well to recall the salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the court below shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took the depositions of the complainant and his witness, and that stenographic notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala hearing a case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De Leon and witness Logronio went to respondent Judges chamber and informed the Judge that they had finished the depositions. Respondent Judge then requested the stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales testified as follows: A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them, requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and without legal basis, he can be charged criminally for perjury. The Honorable Court told Mr.

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Logronio whether he affirms the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon. Q And thereafter? A And thereafter, he signed the deposition of Mr. Logronio. Q Who is this he? A The Honorable Judge. Q The deposition or the affidavit? A The affidavit, Your Honor. Thereafter, respondent Judge signed the search warrant. The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M-70 was thus limited to listening to the stenographers readings of her notes, to a few words of warning against the commission of perjury, and to administering the oath to the complainant and his witness. This cannot be consider a personal examination. If there was an examination at all of the complainant and his witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the rules require a personal examination by the judge. It was precisely on account of the intention of the delegates to the Constitutional Convention to make it a duty of the issuing judge to personally examine the complainant and his witnesses that the question of how much time would be consumed by the judge in examining them came up before the Convention, as can be seen from the record of the proceedings quoted above. The reading of the stenographic notes to respondent Judge did not constitute sufficient compliance with the constitutional mandate and the rule; for by that manner respondent Judge did not have the opportunity to observe the demeanor of the complainant and his 178

witness, and to propound initial and follow-up questions which the judicial mind, on account of its training, was in the best position to conceive. These were important in arriving at a sound inference on the all-important question of whether or not there was probable cause. 2. The search warrant was issued for more than one specific offense. Search Warrant No. 2-M-70 was issued for *v+iolation of Sec. 46(a) of the National Internal Revenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209. The question is: Was the said search warrant issued in connection with one specific offense, as required by Sec. 3, Rule 126? To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to above. Thus we find the following: Sec. 46(a) requires the filing of income tax returns by corporations. Sec. 53 requires the withholding of income taxes at source. Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent returns. Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information required under the Tax Code. Sec. 208 penalizes *a+ny person who distills, rectifies, repacks, compounds, or manufactures any article subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of any article subject to specific

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tax . . ., and provides that in the case of a corporation, partnership, or association, the official and/or employee who caused the violation shall be responsible. Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed, or to pay the tax due thereon. The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated. The second is the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of Sec. 208 (unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209 (failure to make a return of receipts, sales, business or gross value of output actually removed or to pay the tax due thereon). Even in their classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and Occupation). Respondents argue that Stonehill, et al. vs. Diokno, et al., L-19550, June 19, 1967 (20 SCRA 383), is not applicable, because there the search warrants were issued for violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code; whereas, here Search Warrant No 2-M-70 was issued for violation of only one code, i.e., the National Internal Revenue Code. The distinction more apparent than real, because it was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of Court took effect on January 1, 1964, that this Court amended the former rule by inserting therein the phrase in connection with one specific offense, and adding the sentence No search warrant shall issue for more than one specific offense, in what is now Sec. 3, Rule 126. Thus we said in Stonehill: 180

Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that a search warrant shall not issue but upon probable cause in connection with one specific offense. Not satisfied with this qualification, the Court added thereto a paragraph, directing that no search warrant shall issue for more than one specific offense. 3. The search warrant does not particularly describe the things to be seized. The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this manner: Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books, customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory notes and deeds of sale; telex and coded messages; business communications, accounting and business records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign remittances, covering the years 1966 to 1970. The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the things to be seized. In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said: The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit: Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or paper showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements. 181

Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights that the things to be seized be particularly described as well as tending to defeat its major objective: the elimination of general warrants. While the term all business transactions does not appear in Search Warrant No. 2-M-70, the said warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general warrants, for the language used therein is so all-embracing as to include all conceivable records of petitioner corporation, which, if seized, could possibly render its business inoperative. In Uy Kheytin, et al. vs. Villareal, etc., et al., 42 Phil. 886, 896, this Court had occasion to explain the purpose of the requirement that the warrant should particularly describe the place to be searched and the things to be seized, to wit: . . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search warrant should particularly describe the place to be searched and the things to be seized. The evident purpose and intent of this requirement is to limit the things to be seized to those, and only those, particularly described in the search warrant to leave the officers of the law with no discretion regarding what articles they shall seize, to the end that unreasonable searches and seizures may not be made, that abuses may not be committed. That this is the correct interpretation of this constitutional provision is borne out by American authorities.

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The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in this case. A search warrant may be said to particularly describe the things to be seized when the description therein is as specific as the circumstances will ordinarily allow (People vs. Rubio; 57 Phil. 384); or when the description expresses a conclusion of fact not of law by which the warrant officer may be guided in making the search and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited to those which bear direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein search warrant does not conform to any of the foregoing tests. If the articles desired to be seized have any direct relation to an offense committed, the applicant must necessarily have some evidence, other than those articles, to prove the said offense; and the articles subject of search and seizure should come in handy merely to strengthen such evidence. In this event, the description contained in the herein disputed warrant should have mentioned, at least, the dates, amounts, persons, and other pertinent data regarding the receipts of payments, certificates of stocks and securities, contracts, promissory notes, deeds of sale, messages and communications, checks, bank deposits and withdrawals, records of foreign remittances, among others, enumerated in the warrant. Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration of respondent Judges order of July 29, 1970. The contention is without merit. In the first place, when the questions raised before this Court are the same as those which were squarely raised in and passed upon by the court below, the filing of a motion for reconsideration in said court 183

before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc., et al. vs. Ago, et al., 108 Phil., 905). In the second place, the rule requiring the filing of a motion for reconsideration before an application for a writ of certiorari can be entertained was never intended to be applied without considering the circumstances. (Matutina vs. Buslon, et al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax assessments sought to be enforced by respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account of which immediate and more direct action becomes necessary. (Matute vs. Court of Appeals, et al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners fundamental right to due process taints the proceeding against them in the court below not only with irregularity but also with nullity. (Matute vs. Court of Appeals, et al., supra.) It is next contended by respondents that a corporation is not entitled to protection against unreasonable search and seizures. Again, we find no merit in the contention. Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not wish to be understood as holding that a corporation is not entitled to immunity, under the 4th Amendment, against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is

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protected, under the 14th Amendment, against unlawful discrimination . . . (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.) In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a corporation, the ground that it was not privileged from producing its books and papers. But the rights of a corporation against unlawful search and seizure are to be protected even if the same result might have been achieved in a lawful way. (Silverthorne Lumber Company, et al. v. United States of America, 251 U.S. 385, 64 L. ed. 319.) In Stonehill, et al. vs. Diokno, et al., supra, this Court impliedly recognized the right of a corporation to object against unreasonable searches and seizures, thus: As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or the interest of each of them in said corporations, whatever, the offices they hold therein may be. Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby, and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the

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corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity . . . In the Stonehill case only the officers of the various corporations in whose offices documents, papers and effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized documents belong, and whose rights have thereby been impaired, is itself a petitioner. On that score, petitioner corporation here stands on a different footing from the corporations in Stonehill. The tax assessments referred to earlier in this opinion were, if not entirely as claimed by petitioners at least partly as in effect admitted by respondents based on the documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized served as basis for the assessments. Those assessments should therefore not be enforced. PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent Judge is declared null and void; respondents are permanently enjoined from enforcing the said search warrant; the documents, papers and effects seized thereunder are ordered to be returned to petitioners; and respondent officials the Bureau of Internal Revenue and their representatives are permanently enjoined from enforcing the assessments mentioned in Annex G of the present petition, as well as other assessments based on the documents, papers and effects seized under the search warrant herein nullified, and from using the same against petitioners in any criminal or other proceeding. No pronouncement as to costs.

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FIRST DIVISION G.R. No. 126297 January 31, 2007 PROFESSIONAL SERVICES, INC., Petitioner, vs. NATIVIDAD and ENRIQUE AGANA, Respondents. x-----------------------x G.R. No. 126467 January 31, 2007 NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA, Petitioners, vs. JUAN FUENTES, Respondent. x- - - - - - - - - - - - - - - - - - - -- - - - x G.R. No. 127590 January 31, 2007 MIGUEL AMPIL, Petitioner, vs. NATIVIDAD AGANA and ENRIQUE AGANA, Respondents. DECISION SANDOVAL-GUTIERREZ, J.: Hospitals, having undertaken one of mankinds most important and delicate endeavors, must assume the grave responsibility of pursuing it with appropriate care. The care and service dispensed through this 187

high trust, however technical, complex and esoteric its character may be, must meet standards of responsibility commensurate with the undertaking to preserve and protect the health, and indeed, the very lives of those placed in the hospitals keeping.1 Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198 affirming with modification the Decision3 dated March 17, 1993 of the Regional Trial Court (RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its Order dated September 21, 1993. The facts, as culled from the records, are: On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City Hospital) because of difficulty of bowel movement and bloody anal discharge. After a series of medical examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be suffering from "cancer of the sigmoid." On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital, performed an anterior resection surgery on Natividad. He found that the malignancy in her sigmoid area had spread on her left ovary, necessitating the removal of certain portions of it. Thus, Dr. Ampil obtained the consent of Natividads husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to perform hysterectomy on her. After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation and closed the incision.

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However, the operation appeared to be flawed. In the corresponding Record of Operation dated April 11, 1984, the attending nurses entered these remarks: "sponge count lacking 2 "announced to surgeon searched (sic) done but to no avail continue for closure." On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including the doctors fees, amounted to P60,000.00. After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural consequence of the surgery. Dr. Ampil then recommended that she consult an oncologist to examine the cancerous nodes which were not removed during the operation. On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further treatment. After four months of consultations and laboratory examinations, Natividad was told she was free of cancer. Hence, she was advised to return to the Philippines. On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks thereafter, her daughter found a piece of gauze protruding from her vagina. Upon being informed about it, Dr. Ampil proceeded to her house where he managed to extract by hand a piece of gauze measuring 1.5 inches in width. He then assured her that the pains would soon vanish. Dr. Ampils assurance did not come true. Instead, the pains intensified, prompting Natividad to seek treatment at the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez detected the presence of another foreign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in width 189

which badly infected her vaginal vault. A recto-vaginal fistula had formed in her reproductive organs which forced stool to excrete through the vagina. Another surgical operation was needed to remedy the damage. Thus, in October 1984, Natividad underwent another surgery. On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged that the latter are liable for negligence for leaving two pieces of gauze inside Natividads body and malpractice for concealing their acts of negligence. Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr. Fuentes, docketed as Administrative Case No. 1690. The PRC Board of Medicine heard the case only with respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who was then in the United States. On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly substituted by her above-named children (the Aganas). On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and Dr. Fuentes liable for negligence and malpractice, the decretal part of which reads: WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to the plaintiffs, jointly and severally, except in respect of the award for exemplary damages and the interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as follows: 1. As actual damages, the following amounts: 190

a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of P21.60-US$1.00, as reimbursement of actual expenses incurred in the United States of America; b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter; c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic Hospital, medical fees, and cost of the saline solution; 2. As moral damages, the sum of P2,000,000.00; 3. As exemplary damages, the sum of P300,000.00; 4. As attorneys fees, the sum of P250,000.00; 5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the complaint until full payment; and 6. Costs of suit. SO ORDERED. Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals, docketed as CAG.R. CV No. 42062. Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon certain properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount to the Aganas. Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr. Fuentes to indefinitely suspend any further execution of the RTC Decision. However, not long thereafter, the Aganas again filed a motion for an alias writ of execution against the properties of PSI and Dr. Fuentes. 191

On September 21, 1993, the RTC granted the motion and issued the corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a petition for certiorari and prohibition, with prayer for preliminary injunction, docketed as CA-G.R. SP No. 32198. During its pendency, the Court of Appeals issued a Resolution5 dated October 29, 1993 granting Dr. Fuentes prayer for injunctive relief. On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062. Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6 in Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the prosecution failed to show that Dr. Fuentes was the one who left the two pieces of gauze inside Natividads body; and that he concealed such fact from Natividad. On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198, thus: WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan Fuentes is hereby DISMISSED, and with the pronouncement that defendant-appellant Dr. Miguel Ampil is liable to reimburse defendant-appellant Professional Services, Inc., whatever amount the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is hereby AFFIRMED and the instant appeal DISMISSED. Concomitant with the above, the petition for certiorari and prohibition filed by herein defendantappellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged order of the respondent judge dated September 21, 1993, as well as the alias writ of execution issued pursuant

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thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the petitioner in connection with the writ of preliminary injunction issued by this Court on November 29, 1993 is hereby cancelled. Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc. SO ORDERED. Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7 dated December 19, 1996. Hence, the instant consolidated petitions. In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable with Dr. Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI contends that Dr. Ampil is not its employee, but a mere consultant or independent contractor. As such, he alone should answer for his negligence. In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr. Fuentes is not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa loquitur. They contend that the pieces of gauze are prima facie proofs that the operating surgeons have been negligent. Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him liable for negligence and malpractice sans evidence that he left the two pieces of gauze in Natividads vagina. He pointed to other probable causes, such as: (1) it was Dr. Fuentes who used gauzes in performing the hysterectomy; (2) the attending nurses failure to properly count the gauzes used during surgery; and (3) the medical intervention of the American doctors who examined Natividad in the United States of America. 193

For our resolution are these three vital issues: first, whether the Court of Appeals erred in holding Dr. Ampil liable for negligence and malpractice; second, whether the Court of Appeals erred in absolving Dr. Fuentes of any liability; and third, whether PSI may be held solidarily liable for the negligence of Dr. Ampil. I - G.R. No. 127590 Whether the Court of Appeals Erred in Holding Dr. Ampil Liable for Negligence and Malpractice. Dr. Ampil, in an attempt to absolve himself, gears the Courts attention to other possible causes of Natividads detriment. He argues that the Court should not discount either of the following possibilities: first, Dr. Fuentes left the gauzes in Natividads body after performing hysterectomy; second, the attending nurses erred in counting the gauzes; and third, the American doctors were the ones who placed the gauzes in Natividads body. Dr. Ampils arguments are purely conjectural and without basis. Records show that he did not present any evidence to prove that the American doctors were the ones who put or left the gauzes in Natividads body. Neither did he submit evidence to rebut the correctness of the record of operation, particularly the number of gauzes used. As to the alleged negligence of Dr. Fuentes, we are mindful that Dr. Ampil examined his (Dr. Fuentes) work and found it in order. The glaring truth is that all the major circumstances, taken together, as specified by the Court of Appeals, directly point to Dr. Ampil as the negligent party, thus:

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First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of the patient during the surgical operation. Second, immediately after the operation, the nurses who assisted in the surgery noted in their report that the sponge count (was) lacking 2; that such anomaly was announced to surgeon and that a search was done but to no avail prompting Dr. Ampil to continue for closure x x x. Third, after the operation, two (2) gauzes were extracted from the same spot of the body of Mrs. Agana where the surgery was performed. An operation requiring the placing of sponges in the incision is not complete until the sponges are properly removed, and it is settled that the leaving of sponges or other foreign substances in the wound after the incision has been closed is at least prima facie negligence by the operating surgeon.8 To put it simply, such act is considered so inconsistent with due care as to raise an inference of negligence. There are even legions of authorities to the effect that such act is negligence per se.9 Of course, the Court is not blind to the reality that there are times when danger to a patients life precludes a surgeon from further searching missing sponges or foreign objects left in the body. But this does not leave him free from any obligation. Even if it has been shown that a surgeon was required by the urgent necessities of the case to leave a sponge in his patients abdomen, because of the dangers attendant upon delay, still, it is his legal duty to so inform his patient within a reasonable time thereafter by advising her of what he had been compelled to do. This is in order that she might seek relief from the effects of the foreign object left in her body as her condition might permit. The ruling in Smith v. Zeagler10 is explicit, thus:

195

The removal of all sponges used is part of a surgical operation, and when a physician or surgeon fails to remove a sponge he has placed in his patients body that should be removed as part of the operation, he thereby leaves his operation uncompleted and creates a new condition which imposes upon him the legal duty of calling the new condition to his patients attention, and endeavoring with the means he has at hand to minimize and avoid untoward results likely to ensue therefrom. Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even misled her that the pain she was experiencing was the ordinary consequence of her operation. Had he been more candid, Natividad could have taken the immediate and appropriate medical remedy to remove the gauzes from her body. To our mind, what was initially an act of negligence by Dr. Ampil has ripened into a deliberate wrongful act of deceiving his patient. This is a clear case of medical malpractice or more appropriately, medical negligence. To successfully pursue this kind of case, a patient must only prove that a health care provider either failed to do something which a reasonably prudent health care provider would have done, or that he did something that a reasonably prudent provider would not have done; and that failure or action caused injury to the patient.11 Simply put, the elements are duty, breach, injury and proximate causation. Dr, Ampil, as the lead surgeon, had the duty to remove all foreign objects, such as gauzes, from Natividads body before closure of the incision. When he failed to do so, it was his duty to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused injury to Natividad, necessitating her further examination by American doctors and another surgery. That Dr. Ampils negligence is the proximate cause12 of Natividads injury could be traced from his act of closing the incision despite the information given by the attending nurses that two pieces of gauze were still missing. That they were later on extracted from 196

Natividads vagina established the causal link between Dr. Ampils negligence and the injury. And what further aggravated such injury was his deliberate concealment of the missing gauzes from the knowledge of Natividad and her family. II - G.R. No. 126467 Whether the Court of Appeals Erred in Absolving Dr. Fuentes of any Liability The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the ground that it is contrary to the doctrine of res ipsa loquitur. According to them, the fact that the two pieces of gauze were left inside Natividads body is a prima facie evidence of Dr. Fuentes negligence. We are not convinced. Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the occurrence of an injury, taken with the surrounding circumstances, may permit an inference or raise a presumption of negligence, or make out a plaintiffs prima facie case, and present a question of fact for defendant to meet with an explanation.13 Stated differently, where the thing which caused the injury, without the fault of the injured, is under the exclusive control of the defendant and the injury is such that it should not have occurred if he, having such control used proper care, it affords reasonable evidence, in the absence of explanation that the injury arose from the defendants want of care, and the burden of proof is shifted to him to establish that he has observed due care and diligence.14 From the foregoing statements of the rule, the requisites for the applicability of the doctrine of res ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury was under the control 197

and management of the defendant; (3) the occurrence was such that in the ordinary course of things, would not have happened if those who had control or management used proper care; and (4) the absence of explanation by the defendant. Of the foregoing requisites, the most instrumental is the "control and management of the thing which caused the injury."15 We find the element of "control and management of the thing which caused the injury" to be wanting. Hence, the doctrine of res ipsa loquitur will not lie. It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found that the malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes performed the surgery and thereafter reported and showed his work to Dr. Ampil. The latter examined it and finding everything to be in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil then resumed operating on Natividad. He was about to finish the procedure when the attending nurses informed him that two pieces of gauze were missing. A "diligent search" was conducted, but the misplaced gauzes were not found. Dr. Ampil then directed that the incision be closed. During this entire period, Dr. Fuentes was no longer in the operating room and had, in fact, left the hospital. Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of the surgery room and all personnel connected with the operation. Their duty is to obey his orders.16 As stated before, Dr. Ampil was the lead surgeon. In other words, he was the "Captain of the Ship." That he discharged such role is evident from his following conduct: (1) calling Dr. Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order; (3) granting Dr. Fuentes permission to leave; and (4) ordering the closure of the incision. To our mind, it was this act of ordering 198

the closure of the incision notwithstanding that two pieces of gauze remained unaccounted for, that caused injury to Natividads body. Clearly, the control and management of the thing which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes. In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se create or constitute an independent or separate ground of liability, being a mere evidentiary rule.17 In other words, mere invocation and application of the doctrine does not dispense with the requirement of proof of negligence. Here, the negligence was proven to have been committed by Dr. Ampil and not by Dr. Fuentes. III - G.R. No. 126297 Whether PSI Is Liable for the Negligence of Dr. Ampil The third issue necessitates a glimpse at the historical development of hospitals and the resulting theories concerning their liability for the negligence of physicians. Until the mid-nineteenth century, hospitals were generally charitable institutions, providing medical services to the lowest classes of society, without regard for a patients ability to pay.18 Those who could afford medical treatment were usually treated at home by their doctors.19 However, the days of house calls and philanthropic health care are over. The modern health care industry continues to distance itself from its charitable past and has experienced a significant conversion from a not-for-profit health care to for-profit hospital businesses. Consequently, significant changes in health law have accompanied the business-related changes in the hospital industry. One important legal change is an increase in hospital liability for medical malpractice. Many courts now allow claims for hospital vicarious liability under the theories of respondeat superior, apparent authority, ostensible authority, or agency by estoppel. 20 199

In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code, which reads: Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter. A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine of respondeat superior, thus: ART. 2180. The obligation imposed by Article 2176 is demandable not only for ones own acts or omissions, but also for those of persons for whom one is responsible. x x x x x x The owners and managers of an establishment or enterprise are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks even though the former are not engaged in any business or industry. x x x x x x The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage.

200

A prominent civilist commented that professionals engaged by an employer, such as physicians, dentists, and pharmacists, are not "employees" under this article because the manner in which they perform their work is not within the control of the latter (employer). In other words, professionals are considered personally liable for the fault or negligence they commit in the discharge of their duties, and their employer cannot be held liable for such fault or negligence. In the context of the present case, "a hospital cannot be held liable for the fault or negligence of a physician or surgeon in the treatment or operation of patients."21 The foregoing view is grounded on the traditional notion that the professional status and the very nature of the physicians calling preclude him from being classed as an agent or employee of a hospital, whenever he acts in a professional capacity.22 It has been said that medical practice strictly involves highly developed and specialized knowledge,23 such that physicians are generally free to exercise their own skill and judgment in rendering medical services sans interference.24 Hence, when a doctor practices medicine in a hospital setting, the hospital and its employees are deemed to subserve him in his ministrations to the patient and his actions are of his own responsibility.25 The case of Schloendorff v. Society of New York Hospital26 was then considered an authority for this view. The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an independent contractor because of the skill he exercises and the lack of control exerted over his work. Under this doctrine, hospitals are exempt from the application of the respondeat superior principle for fault or negligence committed by physicians in the discharge of their profession. However, the efficacy of the foregoing doctrine has weakened with the significant developments in medical care. Courts came to realize that modern hospitals are increasingly taking active role in 201

supplying and regulating medical care to patients. No longer were a hospitals functions limited to furnishing room, food, facilities for treatment and operation, and attendants for its patients. Thus, in Bing v. Thunig,27 the New York Court of Appeals deviated from the Schloendorff doctrine, noting that modern hospitals actually do far more than provide facilities for treatment. Rather, they regularly employ, on a salaried basis, a large staff of physicians, interns, nurses, administrative and manual workers. They charge patients for medical care and treatment, even collecting for such services through legal action, if necessary. The court then concluded that there is no reason to exempt hospitals from the universal rule of respondeat superior. In our shores, the nature of the relationship between the hospital and the physicians is rendered inconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals28 that for purposes of apportioning responsibility in medical negligence cases, an employer-employee relationship in effect exists between hospitals and their attending and visiting physicians. This Court held: "We now discuss the responsibility of the hospital in this particular incident. The unique practice (among private hospitals) of filling up specialist staff with attending and visiting "consultants," who are allegedly not hospital employees, presents problems in apportioning responsibility for negligence in medical malpractice cases. However, the difficulty is more apparent than real. In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the conduct of their work within the hospital premises. Doctors who apply for consultant slots, visiting or attending, are required to submit proof of completion of residency, their educational qualifications, generally, evidence of accreditation by the appropriate board (diplomate), evidence of fellowship in most cases, and references. These requirements are carefully scrutinized by members of the hospital 202

administration or by a review committee set up by the hospital who either accept or reject the application. x x x. After a physician is accepted, either as a visiting or attending consultant, he is normally required to attend clinico-pathological conferences, conduct bedside rounds for clerks, interns and residents, moderate grand rounds and patient audits and perform other tasks and responsibilities, for the privilege of being able to maintain a clinic in the hospital, and/or for the privilege of admitting patients into the hospital. In addition to these, the physicians performance as a specialist is generally evaluated by a peer review committee on the basis of mortality and morbidity statistics, and feedback from patients, nurses, interns and residents. A consultant remiss in his duties, or a consultant who regularly falls short of the minimum standards acceptable to the hospital or its peer review committee, is normally politely terminated. In other words, private hospitals, hire, fire and exercise real control over their attending and visiting consultant staff. While consultants are not, technically employees, x x x, the control exercised, the hiring, and the right to terminate consultants all fulfill the important hallmarks of an employeremployee relationship, with the exception of the payment of wages. In assessing whether such a relationship in fact exists, the control test is determining. Accordingly, on the basis of the foregoing, we rule that for the purpose of allocating responsibility in medical negligence cases, an employer-employee relationship in effect exists between hospitals and their attending and visiting physicians. " But the Ramos pronouncement is not our only basis in sustaining PSIs liability. Its liability is also anchored upon the agency principle of apparent authority or agency by estoppel and the doctrine of corporate negligence which have gained acceptance in the determination of a hospitals liability for 203

negligent acts of health professionals. The present case serves as a perfect platform to test the applicability of these doctrines, thus, enriching our jurisprudence. Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the law of agency. It imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of a principal or an employer in somehow misleading the public into believing that the relationship or the authority exists.30 The concept is essentially one of estoppel and has been explained in this manner: "The principal is bound by the acts of his agent with the apparent authority which he knowingly permits the agent to assume, or which he holds the agent out to the public as possessing. The question in every case is whether the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such agent has authority to perform the particular act in question.31 The applicability of apparent authority in the field of hospital liability was upheld long time ago in Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there does not appear to be any rational basis for excluding the concept of apparent authority from the field of hospital liability." Thus, in cases where it can be shown that a hospital, by its actions, has held out a particular physician as its agent and/or employee and that a patient has accepted treatment from that physician in the reasonable belief that it is being rendered in behalf of the hospital, then the hospital will be liable for the physicians negligence.

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Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the Civil Code reads: ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority. In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and specializations of the physicians associated or accredited by it, including those of Dr. Ampil and Dr. Fuentes. We concur with the Court of Appeals conclusion that it "is now estopped from passing all the blame to the physicians whose names it proudly paraded in the public directory leading the public to believe that it vouched for their skill and competence." Indeed, PSIs act is tantamount to holding out to the public that Medical City Hospital, through its accredited physicians, offers quality health care services. By accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their qualifications, the hospital created the impression that they were its agents, authorized to perform medical or surgical services for its patients. As expected, these patients, Natividad being one of them, accepted the services on the reasonable belief that such were being rendered by the hospital or its employees, agents, or servants. The trial court correctly pointed out: x x x regardless of the education and status in life of the patient, he ought not be burdened with the defense of absence of employer-employee relationship between the hospital and the independent physician whose name and competence are certainly certified to the general public by the hospitals act of listing him and his specialty in its lobby directory, as in the case herein. The high costs of todays medical and health care should at least exact on the hospital greater, if not broader, legal responsibility 205

for the conduct of treatment and surgery within its facility by its accredited physician or surgeon, regardless of whether he is independent or employed."33 The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are capable of acting only through other individuals, such as physicians. If these accredited physicians do their job well, the hospital succeeds in its mission of offering quality medical services and thus profits financially. Logically, where negligence mars the quality of its services, the hospital should not be allowed to escape liability for the acts of its ostensible agents. We now proceed to the doctrine of corporate negligence or corporate responsibility. One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that PSI as owner, operator and manager of Medical City Hospital, "did not perform the necessary supervision nor exercise diligent efforts in the supervision of Drs. Ampil and Fuentes and its nursing staff, resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in the performance of their duties as surgeons."34 Premised on the doctrine of corporate negligence, the trial court held that PSI is directly liable for such breach of duty. We agree with the trial court. Recent years have seen the doctrine of corporate negligence as the judicial answer to the problem of allocating hospitals liability for the negligent acts of health practitioners, absent facts to support the application of respondeat superior or apparent authority. Its formulation proceeds from the judiciarys acknowledgment that in these modern times, the duty of providing quality medical service is no longer the sole prerogative and responsibility of the physician. The modern hospitals have changed structure. Hospitals now tend to organize a highly professional medical staff whose competence and performance 206

need to be monitored by the hospitals commensurate with their inherent responsibility to provide quality medical care.35 The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the Supreme Court of Illinois held that "the jury could have found a hospital negligent, inter alia, in failing to have a sufficient number of trained nurses attending the patient; failing to require a consultation with or examination by members of the hospital staff; and failing to review the treatment rendered to the patient." On the basis of Darling, other jurisdictions held that a hospitals corporate negligence extends to permitting a physician known to be incompetent to practice at the hospital.37 With the passage of time, more duties were expected from hospitals, among them: (1) the use of reasonable care in the maintenance of safe and adequate facilities and equipment; (2) the selection and retention of competent physicians; (3) the overseeing or supervision of all persons who practice medicine within its walls; and (4) the formulation, adoption and enforcement of adequate rules and policies that ensure quality care for its patients.38 Thus, in Tucson Medical Center, Inc. v. Misevich,39 it was held that a hospital, following the doctrine of corporate responsibility, has the duty to see that it meets the standards of responsibilities for the care of patients. Such duty includes the proper supervision of the members of its medical staff. And in Bost v. Riley,40 the court concluded that a patient who enters a hospital does so with the reasonable expectation that it will attempt to cure him. The hospital accordingly has the duty to make a reasonable effort to monitor and oversee the treatment prescribed and administered by the physicians practicing in its premises. In the present case, it was duly established that PSI operates the Medical City Hospital for the purpose and under the concept of providing comprehensive medical services to the public. Accordingly, it has the 207

duty to exercise reasonable care to protect from harm all patients admitted into its facility for medical treatment. Unfortunately, PSI failed to perform such duty. The findings of the trial court are convincing, thus: x x x PSIs liability is traceable to its failure to conduct an investigation of the matter reported in the nota bene of the count nurse. Such failure established PSIs part in the dark conspiracy of silence and concealment about the gauzes. Ethical considerations, if not also legal, dictated the holding of an immediate inquiry into the events, if not for the benefit of the patient to whom the duty is primarily owed, then in the interest of arriving at the truth. The Court cannot accept that the medical and the healing professions, through their members like defendant surgeons, and their institutions like PSIs hospital facility, can callously turn their backs on and disregard even a mere probability of mistake or negligence by refusing or failing to investigate a report of such seriousness as the one in Natividads case. It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the Medical City Hospitals staff, composed of resident doctors, nurses, and interns. As such, it is reasonable to conclude that PSI, as the operator of the hospital, has actual or constructive knowledge of the procedures carried out, particularly the report of the attending nurses that the two pieces of gauze were missing. In Fridena v. Evans,41 it was held that a corporation is bound by the knowledge acquired by or notice given to its agents or officers within the scope of their authority and in reference to a matter to which their authority extends. This means that the knowledge of any of the staff of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI, despite the attending nurses report, to investigate 208

and inform Natividad regarding the missing gauzes amounts to callous negligence. Not only did PSI breach its duties to oversee or supervise all persons who practice medicine within its walls, it also failed to take an active step in fixing the negligence committed. This renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own negligence under Article 2176. In Fridena, the Supreme Court of Arizona held: x x In recent years, however, the duty of care owed to the patient by the hospital has expanded. The emerging trend is to hold the hospital responsible where the hospital has failed to monitor and review medical services being provided within its walls. See Kahn Hospital Malpractice Prevention, 27 De Paul .Rev. 23 (1977). Among the cases indicative of the emerging trend is Purcell v. Zimbelman, 18 Ariz. App. 75,500 P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for the malpractice of a medical practitioner because he was an independent contractor within the hospital. The Court of Appeals pointed out that the hospital had created a professional staff whose competence and performance was to be monitored and reviewed by the governing body of the hospital, and the court held that a hospital would be negligent where it had knowledge or reason to believe that a doctor using the facilities was employing a method of treatment or care which fell below the recognized standard of care. Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain inherent responsibilities regarding the quality of medical care furnished to patients within its walls and it must meet the standards of responsibility commensurate with this undertaking. Beeck v. Tucson 209

General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has confirmed the rulings of the Court of Appeals that a hospital has the duty of supervising the competence of the doctors on its staff. x x x. x x x x x x In the amended complaint, the plaintiffs did plead that the operation was performed at the hospital with its knowledge, aid, and assistance, and that the negligence of the defendants was the proximate cause of the patients injuries. We find that such general allegations of negligence, along with the evidence produced at the trial of this case, are sufficient to support the hospitals liability based on the theory of negligent supervision." Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be emphasized that PSI, apart from a general denial of its responsibility, failed to adduce evidence showing that it exercised the diligence of a good father of a family in the accreditation and supervision of the latter. In neglecting to offer such proof, PSI failed to discharge its burden under the last paragraph of Article 2180 cited earlier, and, therefore, must be adjudged solidarily liable with Dr. Ampil. Moreover, as we have discussed, PSI is also directly liable to the Aganas. One final word. Once a physician undertakes the treatment and care of a patient, the law imposes on him certain obligations. In order to escape liability, he must possess that reasonable degree of learning, skill and experience required by his profession. At the same time, he must apply reasonable care and diligence in the exercise of his skill and the application of his knowledge, and exert his best judgment. WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198. 210

Costs against petitioners PSI and Dr. Miguel Ampil. SO ORDERED.

FIRST DIVISION G. R. No. 164317 February 6, 2006 ALFREDO CHING, Petitioner, vs. THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES, Respondents. DECISION CALLEJO, SR., J.: Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CAG.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the motion for reconsideration thereof. Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial Banking 211

Corporation (respondent bank) for the issuance of commercial letters of credit to finance its importation of assorted goods.3 Respondent bank approved the application, and irrevocable letters of credit were issued in favor of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust receipts4 as surety, acknowledging delivery of the following goods: T/R Nos. Date Granted Maturity Date Principal Description of Goods 1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand Synthetic Graphite Electrode 1853 12-08-80 212

03-06-81 P198,150.67 3,000 pcs. (15 bundles) Calorized Lance Pipes 1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired Refractory Tundish Bricks 1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for CCM 1808 11-21-80 02-19-81 P370,332.52 200 pcs.ingot moulds 2042 01-30-81 213

04-30-81 P469,669.29 High Fired Refractory Nozzle Bricks 1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite Electrode [with] tapered pitch filed nipples 1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles calorized lance pipes [)] 1895 12-17-80 03-17-81 P67,652.04 Spare parts for Spectrophotometer 1911 12-22-80 214

03-20-81 P91,497.85 50 pcs. Ingot moulds 204 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds 2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for rolling mills 2100 02-10-81 05-12-81 P210,748.00 Spare parts for Lacolaboratory Equipment5 Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell but not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to turn over 215

the proceeds thereof as soon as received, to apply against the relative acceptances and payment of other indebtedness to respondent bank. In case the goods remained unsold within the specified period, the goods were to be returned to respondent bank without any need of demand. Thus, said "goods, manufactured products or proceeds thereof, whether in the form of money or bills, receivables, or accounts separate and capable of identification" were respondent banks property. When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return their value amounting to P6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for estafa6 against petitioner in the Office of the City Prosecutor of Manila. After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13) Informations were filed against the petitioner before the Regional Trial Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 8642169 to 86-42181, raffled to Branch 31 of said court. Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its reconsideration. On December 23, 1987, the Minister of Justice granted the motion, thus reversing the previous resolution finding probable cause against petitioner.8 The City Prosecutor was ordered to move for the withdrawal of the Informations. This time, respondent bank filed a motion for reconsideration, which, however, was denied on February 24, 1988.9 The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the ground that the material allegations therein did not amount to estafa.10 216

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoez,11 holding that the penal provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions involving goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold. The Court also ruled that "the non-payment of the amount covered by a trust receipt is an act violative of the obligation of the entrustee to pay."12 On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614. Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no probable cause to charge petitioner with violating P.D. No. 115, as petitioners liability was only civil, not criminal, having signed the trust receipts as surety.13 Respondent bank appealed the resolution to the Department of Justice (DOJ) via petition for review, alleging that the City Prosecutor erred in ruling: 1. That there is no evidence to show that respondent participated in the misappropriation of the goods subject of the trust receipts; 2. That the respondent is a mere surety of the trust receipts; and 3. That the liability of the respondent is only civil in nature.14 On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition and reversing the assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts and as such, was the one responsible for the offense. Thus, the execution of said receipts is enough to indict the petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary also declared that petitioner could 217

not contend that P.D. No. 115 covers only goods ultimately destined for sale, as this issue had already been settled in Allied Banking Corporation v. Ordoez,16 where the Court ruled that P.D. No. 115 is "not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or not otherwise disposed of in accordance with the terms of the trust receipts." The Justice Secretary further stated that the respondent bound himself under the terms of the trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could be proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in Rizal Commercial Banking Corporation v. Court of Appeals;17 and second, as the corporate official responsible for the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without prejudice to the civil liabilities arising from the criminal offense." Thus, according to the Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed is clearly separate and distinct from the criminal liability of the accused under P.D. No. 115. Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before Branch 52 of said court. Petitioner filed a motion for reconsideration, which the Secretary of Justice denied in a Resolution18 dated January 17, 2000. 218

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of the Secretary of Justice on the following grounds: 1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS. 2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE. 3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19 In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice."20 In its Comment on the petition, the Office of the Solicitor General alleged that A.

219

THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE. B. THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY HAS MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL. C. THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED.21 On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by petitioner and incorporated in the petition was defective for failure to comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and mandamus was not the proper remedy of the petitioner. On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b) the issue raised by 220

the petitioner, on whether he violated P.D. No. 115 by his actuations, had already been resolved and laid to rest in Allied Bank Corporation v. Ordoez;22 and (c) petitioner was estopped from raising the City Prosecutors delay in the final disposition of the preliminary investigation because he failed to do so in the DOJ. Thus, petitioner filed the instant petition, alleging that: I THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS DEFECTIVE. II THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS.23 The Court will delve into and resolve the issues seriatim. The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the rules of procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of Court should be construed liberally especially when, as in this case, his substantial rights are adversely affected; hence, the deficiency in his certification of non-forum shopping should not result in the dismissal of his petition. The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the certificate of non-forum shopping incorporated in the petition before the CA is defective because it 221

failed to disclose essential facts about pending actions concerning similar issues and parties. It asserts that petitioners failure to comply with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of Appeals.24 We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in his petition before the appellate court is defective. The certification reads: It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice.25 Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part: SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. The petition shall contain the full names and actual addresses of all the petitioners and respondents, a concise statement of the matters involved, the factual background of the case and the grounds relied upon for the relief prayed for. xxx The petitioner shall also submit together with the petition a sworn certification that he has not theretofore commenced any other action involving the same issues in the Supreme Court, the Court of 222

Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days therefrom. xxx Compliance with the certification against forum shopping is separate from and independent of the avoidance of forum shopping itself. The requirement is mandatory. The failure of the petitioner to comply with the foregoing requirement shall be sufficient ground for the dismissal of the petition without prejudice, unless otherwise provided.26 Indubitably, the first paragraph of petitioners certification is incomplete and unintelligible. Petitioner failed to certify that he "had not heretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or the different divisions thereof or any other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the Revised Rules of Court. We agree with petitioners contention that the certification is designed to promote and facilitate the orderly administration of justice, and therefore, should not be interpreted with absolute literalness. In his works on the Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states that, with respect to the contents of the certification which the pleader may prepare, the rule of substantial compliance may be availed of.27 However, there must be a special circumstance or compelling reason which makes the strict application of the requirement clearly unjustified. The instant petition has not alleged any such extraneous circumstance. Moreover, as worded, the certification cannot even be regarded as substantial compliance with the procedural requirement. Thus, the CA was 223

not informed whether, aside from the petition before it, petitioner had commenced any other action involving the same issues in other tribunals. On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in finding probable cause against the petitioner for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated: Be that as it may, even on the merits, the arguments advanced in support of the petition are not persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely abused its discretion in coming out with his assailed Resolutions. Petitioner posits that, except for his being the Senior Vice-President of the PBMI, there is no iota of evidence that he was a participes crimines in violating the trust receipts sued upon; and that his liability, if at all, is purely civil because he signed the said trust receipts merely as a xxx surety and not as the entrustee. These assertions are, however, too dull that they cannot even just dent the findings of the respondent Secretary, viz: "x x x it is apropos to quote section 13 of PD 115 which states in part, viz: xxx If the violation or offense is committed by a corporation, partnership, association or other judicial entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. "There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense. 224

Since a corporation cannot be proceeded against criminally because it cannot commit crime in which personal violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough to indict him as the official responsible for violation of PD 115. "Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture. This issue has already been settled in the Allied Banking Corporation case, supra, where he was also a party, when the Supreme Court ruled that PD 115 is not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component or a product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms of the trust receipts. "In regard to the other assigned errors, we note that the respondent bound himself under the terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is evident that these are two (2) capacities which do not exclude the other. Logically, he can be proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate official responsible for the offense under PD 115, the present case is an appropriate remedy under our penal law. "Moreover, PD 115 explicitly allows the prosecution of corporate officers without prejudice to the civil liabilities arising from the criminal offense thus, the civil liability imposed on respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his criminal liability under PD 115."28 225

Petitioner asserts that the appellate courts ruling is erroneous because (a) the transaction between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never received the goods as an entrustee for PBMI, hence, could not have committed any dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods and used the same in operating its machineries and equipment and not for resale. The OSG, for its part, submits a contrary view, to wit: 34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held criminally liable as the transactions sued upon were clearly entered into in his capacity as an officer of the corporation" and that [h]e never received the goods as an entrustee for PBM as he never had or took possession of the goods nor did he commit dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of merit. 35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him from any liability. Petitioners responsibility as the corporate official of PBM who received the goods in trust is premised on Section 13 of P.D. No. 115, which provides: Section 13.Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, 226

punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied) 36. Petitioner having participated in the negotiations for the trust receipts and having received the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded against by virtue of the PBMs violation of P.D. No. 115.29 The ruling of the CA is correct. In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a quasijudicial officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a) when necessary to afford adequate protection to the constitutional rights of the accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the officer are without or in excess of authority; (d) where the charges are manifestly false and motivated by the lust for vengeance; and (e) when there is clearly no prima facie case against the accused.31 The Court also declared that, if the officer conducting a preliminary investigation (in that case, the Office of the Ombudsman) acts without or in excess of his authority and resolves to file an Information despite the absence of probable cause, such act may be nullified by a writ of certiorari.32 Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the Information shall be prepared by the Investigating Prosecutor against the respondent only if he or she finds probable cause 227

to hold such respondent for trial. The Investigating Prosecutor acts without or in excess of his authority under the Rule if the Information is filed against the respondent despite absence of evidence showing probable cause therefor.34 If the Secretary of Justice reverses the Resolution of the Investigating Prosecutor who found no probable cause to hold the respondent for trial, and orders such prosecutor to file the Information despite the absence of probable cause, the Secretary of Justice acts contrary to law, without authority and/or in excess of authority. Such resolution may likewise be nullified in a petition for certiorari under Rule 65 of the Revised Rules of Civil Procedure.35 A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b) whether there is probable cause to believe that the accused is guilty thereof. It is a means of discovering the person or persons who may be reasonably charged with a crime. Probable cause need not be based on clear and convincing evidence of guilt, as the investigating officer acts upon probable cause of reasonable belief. Probable cause implies probability of guilt and requires more than bare suspicion but less than evidence which would justify a conviction. A finding of probable cause needs only to rest on evidence showing that more likely than not, a crime has been committed by the suspect.36 However, while probable cause should be determined in a summary manner, there is a need to examine the evidence with care to prevent material damage to a potential accuseds constitutional right to liberty and the guarantees of freedom and fair play37 and to protect the State from the burden of unnecessary expenses in prosecuting alleged offenses and holding trials arising from false, fraudulent or groundless charges.38

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In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence. Section 4 of P.D. No. 115 defines a trust receipt transaction, thus: Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal with them in a manner preliminary or necessary to their sale; or 229

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewal. The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement.39 The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.40

230

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt; provided, such are not contrary to the provisions of the document.41 In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as entruster. The agreement was as follows: And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its property with liberty to sell the same within ____days from the date of the execution of this Trust Receipt and for the Banks account, but without authority to make any other disposition whatsoever of the said goods or any part thereof (or the proceeds) either by way of conditional sale, pledge or otherwise. I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or other casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK, with the understanding that the BANK is, not to be chargeable with the storage premium or insurance or any other expenses incurred on said goods. In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to apply against the relative acceptances (as described above) and for the payment of any other

231

indebtedness of mine/ours to the BANK. In case of non-sale within the period specified herein, I/we agree to return the goods under this Trust Receipt to the BANK without any need of demand. I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of money or bills, receivables, or accounts separate and capable of identification as property of the BANK.42 It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal sanctions.43 The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation v. Ordoez.44 The law applies to goods used by the entrustee in the operation of its machineries and equipment. The non-payment of the amount covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or otherwise not disposed of, violate the entrustees obligation to pay the amount or to return the goods to the entruster. In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner.46 Thus, failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said goods if they were not disposed of 232

in accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but more to the public interest.47 The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI and had no physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115. The penalty clause of the law, Section 13 of P.D. No. 115 reads: Section 13.Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code.1wphi1 If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a 233

corporation or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article 315, which reads: ARTICLE 315.Swindling (estafa). Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: 1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In such cases, and in connection with the accessory penalties which may be imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be; 2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos; 3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and 4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the 234

offense. The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law.48 If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.49 However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.50 A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A necessary part of the definition of every crime is the designation of the author of the crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty.51 Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime.52 235

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions or other similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the corporation, they had the power to prevent the act.53 Moreover, all parties active in promoting a crime, whether agents or not, are principals.54 Whether such officers or employees are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative fact. In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect himself behind a corporation where he is the actual, present and efficient actor.55 IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner. SO ORDERED.

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SECOND DIVISION [G.R. No. 124062. January 21, 1999] REYNALDO T. COMETA and STATE INVESTMENT TRUST, INC., petitioners, vs. COURT OF APPEALS, HON.GEORGE MACLI-ING, in his capacity as Presiding Judge, Regional Trial Court, Quezon City Branch 100, REYNALDO S. GUEVARA and HONEYCOMB BUILDERS, INC. respondents. DECISION MENDOZA, J.: This is a petition for review of the decision[1] of the Court of Appeals, dated July 28, 1995, affirming the trial courts order denying petitioners Motion to Dismiss Civil Case No. Q-93-15691 for alleged failure of private respondents to state in their complaint a cause of action against petitioners and the appellate courts resolution, dated March 1, 1996, denying reconsideration of the same. Petitioner State Investment Trust, Inc. (SITI), formerly State Investment House, Inc. (SIHI), is an investment house engaged in quasi-banking activities. Petitioner Reynaldo Cometa is its president. Private respondent Honeycomb Builders, Inc. (HBI), on the other hand, is a corporation engaged in the 237

business of developing, constructing, and selling townhouses and condominium units. Private respondent Reynaldo Guevara is president of HBI and chairman of the board of directors of Guevent Industrial Development Corp. (GIDC). Sometime in 1979, petitioner SITI extended loans in various amounts to GIDC which the latter failed to pay on the dates they became due. For this reason, a rehabilitation plan was agreed upon for GIDC under which it mortgaged several parcels of land to petitioner SITI. Among those mortgaged was a Mandaluyong lot covered by TCT No. 462855 (20510). However, GIDC again defaulted. Hence, petitioner SITI foreclosed the mortgages and, in the foreclosure sale, acquired the properties as highest bidder.[2] Alleging irregularities in the foreclosure of the mortgages and the sale of properties to petitioner SITI, GIDC filed a case entitled Guevent Industrial Development Corp. et al., plaintiffs v. State Investment House Inc. et al., defendants, in the Regional Trial Court of Pasig. The case was eventually settled through a compromise agreement which became the basis of the trial courts judgment. A dispute later arose concerning the interpretation of the compromise agreement, as respondent HBI offered to purchase from GIDC the lot covered by TCT No. 462855 (20510) and the latter agreed but petitioner SITI (the mortgagee) refused to give its consent to the sale and release its lien on the property.[3] For this reason, GIDC asked the trial court for a clarification of its decision.[4]

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Subsequently, the trial court directed petitioner SITI to accept the offer of respondent HBI to purchase the property covered by TCT No. 462855 (20510). Petitioner SITI appealed the order to the Court of Appeals which affirmed the same. On appeal to this Court, the decision of the Court of Appeals was affirmed.[5] Meanwhile, respondent HBI applied to the Housing and Land Use Regulatory Board for a permit to develop the property in question. Its application was granted, on account of which respondent HBI built a condominium on the property called RSG Condominium Gueventville II. When respondent HBI applied for a license to sell the condominium units it was required by the HLURB to submit an Affidavit of Undertaking which in effect stated that the mortgagee (SITI) of the property to be developed agrees to release the mortgage on the said property as soon as the full purchase price of the same is paid by the buyer. Respondent HBI submitted the required affidavit purportedly executed by petitioner Cometa as president of SITI (mortgagee). Petitioner Cometa denied, however, that he ever executed the affidavit. He asked the National Bureau of Investigation for assistance to determine the authenticity of the signature on the affidavit. The NBI found Cometas signature on the Affidavit of Undertaking to be a forgery on the basis of which a complaint for falsification of public document was filed against HBI president Guevara.[6] However, the Rizal Provincial Prosecutors Office found no probable cause against private respondent Guevara and accordingly dismissed the complaint in its resolution of September 25, 1989.[7]

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Petitioners appealed the matter to then Secretary of Justice Franklin Drilon who reversed the Provincial Prosecutors Office and ordered it to file an information against private respondent Guevara for falsification of public document.[8] Private respondent Guevara moved for a reconsideration of the aforesaid resolution, but his motion was denied.[9] An information for Falsification of Public Document was thus filed against private respondent Guevara in the Regional Trial Court of Makati where it was docketed as Criminal Case No. 90-3018.[10] After the prosecution presented its evidence, Guevara filed a demurrer to evidence which the trial court, presided over by Judge Fernando V. Gorospe, Jr., granted.[11] Following the dismissal of the criminal case against him, private respondents Reynaldo S. Guevara and HBI filed a complaint for malicious prosecution against petitioners Cometa and SITI in the Regional Trial Court of Quezon City.[12] Petitioners SITI and Cometa filed their respective answers. After the pre-trial of the case, they filed a joint motion to dismiss with alternative motion to drop respondent HBI as a party plaintiff, upon the following grounds:[13] 1. The complaint states no cause of action.

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2. Secretary Drilon, Undersecretary Bello and the prosecutor, not impleaded herein, are the real parties in-interest-defendants, which again makes the complaint lack a cause of action. At the least, the above public official are indispensable parties, and their non-inclusion renders this court without jurisdiction over the case. 3. The action seeks to impose a penalty on the right to litigate and for that reason is unconstitutional and against settled public policy. On May 30, 1994, the trial court, through Judge George Macli-ing, denied petitioners joint motion for the following reasons: Acting on the MOTION TO DISMISS With Alternative Motion to Drop Honeycomb Builders, Inc. as Party Plaintiff filed by Defendants Reynaldo T. Cometa and State Investment House, Inc. (SIHI) thru counsel, together with the OPPOSITION filed by Plaintiffs thru counsel, after a thorough perusal of the contents embodied in said pleadings, the Court in the exercise of its sound judicial discretion finds that there are sufficient allegations of cause of action in the Complaint, and in the interest of justice, the Plaintiff thru counsel should be given an opportunity to introduce proof in support of his allegations, which could at best be attained thru a full blown hearing on the merits of the case. The defense of lack of cause of action, and that defendants are not the real parties in interest, in the considered opinion of this Court, are matters of defense, which will be considered, after the contending parties thru counsel shall have rested their cases, and the case submitted for Decision. 241

As regards the Alternative Motion to Drop Honeycomb Builders, Inc. as Party Plaintiff, the Complaint shows that Reynaldo Guevara, is the President, Chairman of the Board and Majority Stockholder of HBI, the same will likewise be taken into consideration when proofs will be introduced for or against this particular matter. At this point in time, let Honeycomb Builders, Inc. remain as party plaintiff.[14] Petitioners, in separate motions, asked for a reconsideration but their motions were denied on August 12, 1994.[15] They then filed a petition for certiorari and prohibition. The Court of Appeals immediately issued a temporary restraining order on September 22, 1994 and, on October 28, 1994, upon petitioners posting of a P1,000.00 bond, issued a writ of preliminary injunction enjoining the trial court from conducting further proceedings in the case. On July 28, 1995, the Court of Appeals rendered its decision[16] denying the petition for certiorari and prohibition of petitioners. Petitioners filed a motion for reconsideration but the appellate court denied their motion in a resolution,[17] dated March 1, 1996. Hence, this petition. The principal question for decision is whether the complaint filed by private respondents against petitioners in the Regional Trial Court states a cause of action. First, petitioners maintain it does not as the allegations in the complaint are insufficient and indispensable parties were not impleaded in the case. Secondly, they contend that private respondent HBI should have been dropped as a party plaintiff upon petitioners motion therefor.

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Both contentions are without merit. First. A complaint for malicious prosecution states a cause of action if it alleges 1. that the defendant was himself the prosecutor or that at least he instigated the prosecution; 2. that the prosecution finally terminated in the plaintiffs acquittal; 3. that in bringing the action the prosecutor acted without probable cause; and 4. that the prosecutor was actuated by malice, i.e., by improper and sinister motives.[18] Thus, the question is: whether the facts pleaded and the substantive law entitle plaintiff to a judgment.[19] Otherwise stated, can a judgment be rendered upon the facts alleged and deemed admitted, in accordance with the prayer in the complaint?[20] To resolve this, the allegations of the complaint must be examined. Paragraphs 12 to 13[21] of the complaint allege that SITI and Cometa (petitioners herein) filed a complaint against respondent Guevara which led to the filing by the provincial prosecutor of an information for falsification of public documents against him (Guevara) in the RTC. It is thus alleged that petitioners instigated the prosecution of private respondents.[22] 243

Paragraph 17*23+ of the complaint alleges that the trial court granted respondent Guevaras demurrer to the evidence and ordered the dismissal of the criminal case against him as shown in the order of the trial court acquitting respondent Guevara, a copy of which is made part of the complaint.[24] The second requisite, namely, that the criminal case terminated in plaintiffs (private respondent Guevara) acquittal is thus alleged. With regard to the requirement of malice, paragraphs 7 to 12 and paragraph 18[25] of the complaint allege: 1) that a compromise agreement was entered into between GIDC and SITI in connection with contracts of loan; 2) that in the course of implementing the agreement, HBI offered to purchase from GIDC one of the mortgaged properties; 3) that GIDC accepted the offer but despite tender of the purchase price, SITI refused to approve the sale and the release of its mortgage lien on the property; 4) that a dispute arose between the parties regarding the interpretation and implementation of the compromise agreement; 244

5) that GIDC filed a Motion for Clarification and to Suspend Sales in the Regional Trial Court (which had approved the Compromise Agreement), while SITI filed a Motion for Execution praying for consolidation in its favor of the titles over GIDCs remaining properties; 6) that the trial court granted GIDCs motion and ordered SITI to accept HBIs offer to purchase one of the mortgaged properties; 7) that SITI appealed the order to the Court of Appeals and, when it lost, appealed the matter to the Supreme Court which sustained both the appellate court and the lower court; 8) that while SITIs appeal was still pending, SITI and its president, Cometa, filed a criminal case against Guevara; and 9) that petitioners filed the aforesaid case with the sole intent of harassing and pressuring Guevara, in his capacity as chairman of GIDC, to give in to their illicit and malicious desire to appropriate the remaining unsold properties of GIDC. The foregoing statements sufficiently allege malice. These allegations are averments of malice in accordance with Rule 6, 5 of the Rules of Civil Procedure which provides:

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Sec. 5.Fraud, mistake, condition of mind. - In all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity. Malice, intent, knowledge or other condition of the mind of a person may be averred generally (emphasis added). Contrary to petitioners contention, they are not mere conclusions. As regards the requirement of lack of probable cause, paragraph 18[26] of the complaint alleges that the criminal case filed had absolutely no basis in fact and in law in light of the factual allegations mentioned earlier and that a reading of the order[27] of the trial court in the criminal case, a copy of which is annexed to the complaint and made an integral part thereof, will show that the prosecution failed to establish even a prima facie case against Guevara. Clearly, the complaint alleges that there was no probable cause for respondent Guevaras prosecution. As held in Far East Marble (Phils.), Inc. v. Court of Appeals,[28] a complaint is sufficient if it contains sufficient notice of the cause of action even though the allegations may be vague or indefinite, for, in such case, the recourse of the defendant is to file a motion for a bill of particulars. Pleadings should be liberally construed so that litigants can have ample opportunity to prove their claims and thus prevent a denial of justice due to legal technicalities. It is nonetheless pointed out that the complaint itself alleges that a preliminary investigation was conducted, that the Secretary of Justice ordered the filing of the information, and that the trial court 246

issued a warrant of arrest against private respondent Guevara. Such allegations in the complaint, petitioners claim, negate the existence of probable cause. Petitioners cite the case of Martinez v. UFC[29] in which this Court sustained the dismissal of a complaint for malicious prosecution for failure to state a cause of action on the basis of similar allegations in the complaint and the findings of the criminal court in acquitting the plaintiff, which this Court ruled belied the allegations of malice and want of probable cause in the complaint. The mere allegation in a complaint for malicious prosecution that an information was filed after preliminary investigation and that a warrant of arrest was thereafter issued does not by itself negate allegations in the same complaint that the prosecution was malicious. All criminal prosecutions are by direction and control of the public prosecutor.*30+ To sustain petitioners stand that an allegation in a complaint for malicious prosecution that the information in the criminal case was filed after appropriate preliminary investigation negates a contrary allegation that the filing of the case was malicious would result in the dismissal of every action for malicious prosecution. What was decisive in Martinez was the finding in the criminal case that complainant had acted in good faith in bringing the charge against accused. For the fact in that case was that accused was acquitted because, although it was true he had disposed of properties, he did not do so prior to or simultaneously with the fraud. There was deceit, but it was not the efficient cause of the defraudation. On this basis, this Court found that in bringing the case the complainant in that case acted in good faith.

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Said this Court:[31] The findings of fact made by the Court in its decision of acquittal bear materially on the question of malice and want of probable cause. The evidence, said the court, showed that when the plaintiff executed the chattel mortgage on the stock inventory in his store on November 29, 1960 he was the owner thereof, and therefore made no false representation when he executed said mortgage to secure the loan of P58,381.13 he obtained from the defendant; but that some weeks or months after November 29, 1960, with intent to defraud the complainant United Finance Corporation, the accused succeeded in disposing of the whole or a part of said store and stock merchandise in favor of a third party, to the complainants prejudice... The basis of the acquittal, according to the court, was that deceit, to constitute estafa, should be the efficient cause of the defraudation and as such should either be prior to, or simultaneous with the act of fraud, citing People vs. Fortune, 73 Phil. 407. The foregoing facts, alleged in the complaint for malicious prosecution either directly or by reference to its annexes, show that in filing the criminal charge the defendant was not actuated by malice, nor was there want of probable cause. It had been the victim of deceit committed by the plaintiff, and whether or not such deceit constituted estafa was a legal question properly submitted first to the City Fiscal and then to the court after the necessary preliminary investigation was conducted. The very fact that the plaintiffs acquittal was based on reasonable doubt as to his guilt demonstrates that the defendant was justified in submitting its grievances to the said authorities for ruling and possible redress.

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In contrast, the decision of the criminal court in the present case indicates that there was not even prima facie evidence to prove the alleged guilt of the accused. Consequently, a trial was in fact unnecessary and the criminal court dismissed the case against private respondent Guevara on the basis of a demurrer to evidence. A court, dealing with a motion to dismiss an action for malicious prosecution, has only to determine whether the allegations of the complaint, assuming them to be true, entitle the plaintiff to a judgment. The trial court is not to inquire into the truth of the allegations. Indeed, it cannot do so without depriving the plaintiff an opportunity to be heard on his allegations.[32] The case of Martinez is exceptional. This is not the first time we are clarifying its scope. In Ventura v. Bernabe,[33] we stated: It is true that in that case of Martinez, this Court sustained the order of dismissal of the complaint for malicious prosecution partly because a preliminary investigation had been conducted by the fiscal who had found probable cause for the filing of an estafa case against Martinez, but the main consideration for such action of this Court was the fact that from the recitals in the judgment acquitting the plaintiff, it appeared that although the court found that said plaintiff had been guilty of deceit, the issue resolved by the court was that in law such deceit did not constitute estafa, a matter which had been passed upon by the fiscal in a different way, naturally, without any fault on the part of the defendant. In other words,

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in Martinez case, the findings of the criminal court in the decision of acquittal negatived the imputation of malice on the part of the defendant in charging plaintiff with estafa before the fiscal. ... For the rest, it might just as well be clarified here, lest some statements in Martinez and Buenaventura relative to the materiality of the fiscals having filed an information on the question of malice of the accuser may be misunderstood, that such participation of the fiscal is not decisive and that malice may still be shown, the holding of a preliminary investigation and the finding of probable cause by the fiscal notwithstanding. The same may be said of cases where preliminary investigations are conducted by judges. The determination of the issue of malice must always be made to rest on all the attendant circumstances, including the possibility of the fiscal or judge being somehow misled by the accusers evidence. No doubt, the very purpose of preliminary investigations is to avoid baseless and malicious prosecutions, still, whether or not in a particular case such an objective has been duly pursued is a matter of proof. . . . It is hardly necessary to say that to allow the present action to proceed is not to impose a penalty on the right to litigate. For trial is still to be conducted and liability is not automatic. It is only to acknowledge the truism that

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Just as it is bad to encourage the indiscriminate filing of actions for damages by accused persons after they have been acquitted, whether correctly or incorrectly, a blanket clearance of all who may be minded to charge others with offenses, fancied or otherwise, without any chance of the aggrieved parties in the appropriate cases of false accusation to obtain relief, is in Our Opinion short of being good law.[34] Second. Petitioners contend that the Secretary and the Undersecretary of the Department of Justice and the Assistant Provincial Prosecutor should have been included in the case for malicious prosecution because it was they who found probable cause against private respondents and under the law the prosecution of criminal actions is vested in the public prosecutor. According to petitioners, they did not conduct the preliminary investigation or order the filing of an information and their participation was limited to initiating the investigation in the NBI and testifying.[35] In support of their contention, they cite the ruling in Lagman v. Intermediate Appellate Court[36] which expounded on the ruling in Buenaventura v. Sto. Domingo:[37] The mere act of submitting a case to the authorities for prosecution does not make one liable for malicious prosecution for generally, it is the Government or representative of the State that takes charge of the prosecution of the offense. There must be proof that the prosecution was prompted by a sinister design to vex and humiliate a person for if the rule were otherwise, every acquitted person can turn against the complainant in a civil action for damages.

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There is no merit in this contention. The issue in those cases was not whether the complaint stated a cause of action against defendants who were complainants in the criminal cases which led to the filing of civil cases for damages but whether they were liable to the plaintiffs. The Court merely ruled in those cases that the complainant in the criminal case is not necessarily liable simply because he initiated the criminal case which eventually was dismissed. It is noteworthy that, in the case at bar, private respondents do not only allege that petitioners initiated the filing of the criminal case against them but that because of the evidence they (petitioners) presented, the Department of Justice could have been induced to order the filing of a criminal case in court.[38] Third. It is contended that HBI is not a real-party-in-interest, whatever interest it may have being purely speculative.[39] On this point, we think the Court of Appeals correctly ruled:[40] Section 11 of Rule 3 of the Rules of Court provides: Misjoinder and non-joinder of parties. Misjoinder of parties is not a ground for dismissal of an action. Parties may be dropped or added by order of the court or on motion of any party or on its own initiative at any stage of the action and on such terms as are just. .... Given (1) the foregoing rule, (2), the fact that Guevara, in his capacity as president of HBI, filed HBIs application to sell at the HLURB and it was in the same capacity and in connection with the application that he was criminally charged, and (3) the allegations in the complaint including that stating that by the 252

filing of the criminal case against Guevara, the application of HBI with the HLURB for a regular license to sell the condominium units . . . had been delayed, resulting in the corresponding delay in the sale thereof on account of which plaintiffs incurred over runs in development, marketing and financial costs and charges, resulting in actual damages, the deferral by public respondent of petitioners motion to drop HBI as party plaintiff cannot be said to have been attended with grave abuse of discretion. It bears emphasis that the phraseology of Section 11 of Rule 3 is that parties may be dropped . . . at any stage of the action. It is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself.[41] It does not follow from this, however, that the corporation cannot be a realparty-in-interest for the purpose of bringing a civil action for malicious prosecution. Lastly, the statement of the judge in the assailed order of May 30, 1994 that *t+he defense of lack of cause of action and that the defendants are not the real parties in interest .... are matters of defense was correctly held by the appellate court as mere dictum, said judge having earlier stated in the same order that there are sufficient allegations of causes of action in the Complaint. WHEREFORE, the decision of the Court of Appeals is AFFIRMED. SO ORDERED.

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FIRST DIVISION [G.R. No. 128690. January 21, 1999] ABS-CBN BROADCASTING CORPORATION, petitioners, vs. HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP., VIVA PRODUCTIONS, INC., and VICENTE DEL ROSARIO, respondents. DECISION DAVIDE, JR., C.J.: In this petition for review on certiorari, petitioners ABS-CBN Broadcasting Corp. (hereinafter ABS-CBN) seeks to reverse and set aside the decision[1] of 31 October 1996 and the resolution[2] of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the decision[3] of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-12309. The latter denied the motion to reconsider the decision of 31 October 1996. The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows: In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement (Exh. A) whereby Viva gave ABSCBN an exclusive right to exhibit some Viva films. Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said agreement stating that1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV telecast under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN from the actual offer in writing.

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Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-Concio, a list of three (3) film packages (36 title) from which ABS-CBN may exercise its right of first refusal under the afore-said agreement (Exhs. 1 par. 2, 2, 2-A and 2-B Viva). ABS-CBN, however through Mrs. Concio, can tick off only ten (10) titles (from the list) we can purchase (Exh. 3 Viva) and therefore did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of the case at bar except the film Maging Sino Ka Man. For further enlightenment, this rejection letter dated January 06, 1992 (Exh 3 Viva) is hereby quotedJanuary 1992 Dear Vic, This is not a very formal business letter I am writing to you as I would like to express my difficulty in recommending the purchase of the three film packages you are offering ABS-CBN. From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I hope you will understand my position. Most of the action pictures in the list do not have big action stars in the cast. They are not for primetime. In line with this I wish to mention that I have not scheduled for telecast several action pictures in our very first contract because of the cheap production value of these movies as well as the lack of big action stars. As a film producer, I am sure you understand what I am trying to say as Viva produces only big action pictures. In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in out non-primetime slots. We have to cover the amount that was paid for these movies because as you very well know that non-primetime advertising rates are very low. These are the unaired titles in the first contract. 255

1. Kontra Persa [sic] 2. Raider Platoon 3. Underground guerillas 4. Tiger Command 5. Boy de Sabog 6. lady Commando 7. Batang Matadero 8. Rebelyon I hope you will consider this request of mine. The other dramatic films have been offered to us before and have been rejected because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very adult themes. As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other Viva movies produced last year, I have quite an attractive offer to make. Thanking you and with my warmest regards. (Signed) Charo Santos-Concio

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On February 27, 1992, defendant Del Rosario approached ABS-CBNs Ms. Concio, with a list consisting of 52 original movie titles (i.e., not yet aired on television) including the 14 titles subject of the present case, as well as 104 re-runs (previously aired on television) from which ABS-CBN may choose another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and P30,000,000.00 worth of television spots (Exh. 4 to 4-C Viva; 9 Viva). On April 2, 1992, defendant Del Rosario and ABS-CBNs general manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of VIVA. What transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-CBN was granted exclusive film rights to fourteen (14) films for a total consideration of P36 million; that he allegedly put this agreement as to the price and number of films in a napkin and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand. Del Rosario denied having made any agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez discussed at the lunch meeting was Vivas film package offer of 104 films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal which came in the form of a proposal contract Annex C of the complaint (Exh. 1 Viva; Exh C ABS-CBN). On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance discussed the terms and conditions of Vivas offer to sell the 104 films, after the rejection of the same package by ABS-CBN.

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On April 07, 1992, defendant Del Rosario received through his secretary , a handwritten note from Ms. Concio, (Exh. 5 Viva), which reads: Heres the draft of the contract. I hope you find everything in order, to which was attached a draft exhibition agreement (Exh. C ABS-CBN; Exh. 9 Viva p. 3) a counter-proposal covering 53 films, 52 of which came from the list sent by defendant Del Rosario and one film was added by Ms. Concio, for a consideration of P35 million. Exhibit C provides that ABS-CBN is granted film rights to 53 films and contains a right of first refusal to 1992 Viva Films. The said counter proposal was however rejected by Vivas Board of Directors *in the+ evening of the same day, April 7, 1992, as Viva would not sell anything less than the package of 104 films for P60 million pesos (Exh. 9 Viva), and such rejection was relayed to Ms. Concio. On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings defendant Del Rosario and Vivas President Teresita Cruz, in consideration of P60 million, signed a letter of agreement dated April 24, 1992, granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh. 7-A - RBS; Exh. 4 RBS) including the fourteen (14) films subject of the present case.[4] On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a writ of preliminary injunction and/or temporary restraining order against private respondents Republic Broadcasting Corporation[5] (hereafter RBS), Viva Production (hereafter VIVA), and Vicente del Rosario. The complaint was docketed as Civil Case No. Q-92-12309. On 28 May 1992, the RTC issued a temporary restraining order[6] enjoining private respondents from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the

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controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private respondent RBS channel 7 at seven oclock in the evening of said date. On 17 June 1992, after appropriate proceedings, the RTC issued an order[7] directing the issuance of a writ of preliminary injunction upon ABS-CBNs posting of a P35 million bond. ABS-CBN moved for the reduction of the bond,[8] while private respondents moved for reconsideration of the order and offered to put up a counterbond.[9] In the meantime, private respondents filed separate answer with counterclaim.[10] RBS also set up a cross-claim against VIVA. On 3 August 1992, the RTC issued an order[11] dissolving the writ of preliminary injunction upon the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioners injunction bond to P15 million as a condition precedent for the reinstatement of the writ of preliminary injunction should private respondents be unable to post a counterbond. At the pre-trial[12] on 6 August 1992, the parties upon suggestion of the court, agreed to explore the possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable time within which to put up a P30 million counterbond in the event that no settlement would be reached. As the parties failed to enter into an amicable settlement, RBS posted on 1 October 1992 a counterbond, which the RTC approved in its Order of 15 October 1992.[13]

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On 19 October 1992, ABS-CBN filed a motion for reconsideration[14] of the 3 August and 15 October 1992 Orders, which RBS opposed.[15] On 29 October, the RTC conducted a pre-trial.[16] Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a petition*17+ challenging the RTCs Order of 3 August and 15 October 1992 and praying for the issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case was docketed as CA-G.R. SP No. 29300. On 3 November 1992, the Court of Appeals issued a temporary restraining order[18] to enjoin the airing, broadcasting, and televising of any or all of the films involved in the controversy. On 18 December 1992, the Court of Appeals promulgated a decision[19] dismissing the petition in CAG.R. SP No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review filed with this Court on 19 January 1993, which was docketed s G.R. No. 108363. In the meantime the RTC received the evidence for the parties in Civil Case No. Q-92-12309. Thereafter, on 28 April 1993, it rendered a decision[20] in favor of RBS and VIVA and against ABS-CBN disposing as follows: WHEREFORE, under cool reflection and prescinding from the foregoing, judgment is rendered in favor of defendants and against the plaintiff. (1) The complaint is hereby dismissed; (2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

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a) P107,727.00 the amount of premium paid by RBS to the surety which issued defendants RBSs bond to lift the injunction; b) P191,843.00 for the amount of print advertisement for Maging Sino Ka Man in various newspapers; c) Attorneys fees in the amount of P1 million; d) P5 million as and by way of moral damages; e) P5 million as and by way of exemplary damages; (3) For the defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of reasonable attorneys fees. (4) The cross-claim of defendant RBS against defendant VIVA is dismissed. (5) Plaintiff to pay the costs. According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA Board of Directors, and said agreement was disapproved during the meeting of the Board on 7 April 1992. Hence, there was no basis for ABS-CBNs demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had previously been exercised per Ms. Concios letter to Del Rosario ticking off ten titles acceptable to them, which would have made the 1992 agreement an entirely new contract. On 21 June 1993, this Court denied[21] ABS-CBNs petition for review in G.R. No. 108363, as no reversible error was committed by the Court of Appeals in its challenged decision and the case had

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become moot and academic in view of the dismissal of the main action by the court a quo in its decision of 28 April 1993. Aggrieved by the RTCs decision, ABS-CBN appealed to the Court of Appeals claiming that there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral and exemplary damages and additional attorneys fees. In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of Directors of whatever Del Rosario, its agent, might have agreed with Lopez III. The appellate court did not even believe ABS-CBNs evidence that Lopez III actually wrote down such an agreement on a napkin, as the same was never produced in court. It likewise rejected ABS-CBNs insistence on its right of first refusal and ratiocinated as follows: As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was entered into between Appellant ABS-CBN and appellant VIVA under Exhibit A in 1990 and that parag. 1.4 thereof provides: 1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films for TV telecast under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be exercised by ABS-CBN within a period of fifteen (15) days from the actual offer in writing (Records, p. 14).

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[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subjected to such terms as may be agreed upon by the parties thereto, and that the said right shall be exercised by ABS-CBN within fifteen (15) days from the actual offer in writing. Said parag. 1.4 of the agreement Exhibit A on the right of first refusal did not fix the price of the film right to the twenty-four (24) films, nor did it specify the terms thereof. The same are still left to be agreed upon by the parties. In the instant case, ABS-CBNs letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick off ten (10) films, and the draft contract Exhibit C accepted only fourteen (14) films, while parag. 1.4 of Exhibit A speaks of the next twenty-four (24) films. The offer of VIVA was sometime in December 1991, (Exhibits 2, 2-A, 2-B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Mrs. Charo Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by rejecting the offer of VIVA. As aptly observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABS-CBN shall exercise its right of first refusal has already expired.[22] Accordingly, respondent court sustained the award factual damages consisting in the cost of print advertisements and the premium payments for the counterbond, there being adequate proof of the pecuniary loss which RBS has suffered as a result of the filing of the complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable basis therefor, holding that RBSs 263

reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the nonshowing of the film Maging Sino Ka Man. Respondent court also held that exemplary damages were correctly imposed by way of example or correction for the public good in view of the filing of the complaint despite petitioners knowledge that the contract with VIVA had not been perfected. It also upheld the award of attorneys fees, reasoning that with ABS-CBNs act of instituting Civil Case No. Q-9212309, RBS was unnecessarily forced to litigate. The appellate court, however, reduced the awards of moral damages to P 2 million, exemplary damages to P2 million, and attorneys fees to P500,000.00. On the other hand, respondent Court of Appeals denied VIVA and Del Rosarios appeal because it was RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN. Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending that the Court of Appeals gravely erred in I RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONFERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE CONTRARY. II IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS. III IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS. IV 264

 IN AWARDING ATORNEYS FEES OF RBS. ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we give credence to Lopezs testimony that he and Del Rosario met at the Tamarind Grill Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin. It also asserts that the contract has already been effective, as the elements thereof, namely, consent, object, and consideration were established. It then concludes that the Court of Appeals pronouncements were not supported by law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals,[23] which cited Toyota Shaw, Inc. v. Court of Appeals;[24] Ang Yu Asuncion v. Court of Appeals,[25] and Villonco Realty Company v. Bormaheco, Inc.[26] Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the premium on the counterbond of its own volition in order to negate the injunction issued by the trial court after the parties had ventilated their respective positions during the hearings for the purpose. The filing of the counterbond was an option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move for the dissolution of the injunction; or if it was determined to put up a counterbond, it could have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss injury is also required to exercise the diligence of a good father of a family to minimize the damages resulting from the act or omission. As regards the cost of print advertisements, RBS had not convincingly established that this was a loss attributable to the non-showing of Maging Sino Ka Man; on the contrary, it was 265

brought out during trial that with or without the case or injunction, RBS would have spent such an amount to generate interest in the film. ABS-CBN further contends that there was no other clear basis for the awards of moral and exemplary damages. The controversy involving ABS-CBN and RBS did not in any way originate from business transaction between them. The claims for such damages did not arise from any contractual dealings or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing of the complaint. An award of moral and exemplary damages is not warranted where the record is bereft of any proof that a party acted maliciously or in bad faith in filing an action.[27] In any case, free resort to courts for redress of wrongs is a matter of public policy. The law recognizes the right of every one to sue for that which he honestly believes to be his right without fear of standing trial for damages where by lack of sufficient evidence, legal technicalities, or a different interpretation of the laws on the matter, the case would lose ground.[28] One who, makes use of his own legal right does no injury.[29] If damage results from filing of the complaint, it is damnum absque injuria.[30] Besides, moral damages are generally not awarded in favor of a juridical person, unless it enjoys a good reputation that was debased by the offending party resulting in social humiliation.[31] As regards the award of attorneys fees, ABS-CBN maintains that the same had no factual, legal, or equitable justification. In sustaining the trial courts award, the Court of Appeals acted in clear disregard of the doctrine laid down in Buan v. Camaganacan[32] that the text of the decision should state the reason why attorneys fees are being awarded; otherwise, the award should be disallowed. Besides, no bad faith has been imputed on, much less proved as having been committed by, ABS-CBN. It has been 266

held that where no sufficient showing of bad faith would be reflected in a partys persistence in a case other than an erroneous conviction of the righteousness of his cause, attorneys fees shall not be recovered as cost.*33+ On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA absent meeting of minds between them regarding the object and consideration of the alleged contract. It affirms that ABS-CBNs claim of a right of first refusal was correctly rejected by the trial court. RBS insists the premium it had paid for the counterbond constituted a pecuniary loss upon which it may recover. It was obliged to put up the counterbond due to the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent to the cost of money RBS would forego in case the P30 million came from its funds or was borrowed from banks. RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the film Maging Sino Ka Man because the print advertisements were out to announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not as series to be shown on a periodic basis. Hence, the print advertisements were good and relevant for the particular date of showing, and since the film could not be shown on that particular date and hour because of the injunction, the expenses for the advertisements had gone to waste. As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Articles 19 and 21 267

of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino,[34] damages may be awarded in cases of abuse of rights even if the done is not illicit, and there is abuse of rights where a plaintiff institutes an action purely for the purpose of harassing or prejudicing the defendant. In support of its stand that a juridical entity can recover moral and exemplary damages, private respondent RBS cited People v. Manero,[35] where it was stated that such entity may recover moral and exemplary damages if it has a good reputation that is debased resulting in social humiliation. It then ratiocinates; thus: There can be no doubt that RBS reputation has been debased by ABS-CBNs acts in this case. When RBS was not able to fulfill its commitment to the viewing public to show the film Maging Sino Ka Man on the scheduled dates and times (and on two occasions that RBS advertised), it suffered serious embarrassment and social humiliation. When the showing was cancelled, irate viewers called up RBS offices and subjected RBS to verbal abuse (Announce kayo ng announce, hindi ninyo naman ilalabas, nanloloko yata kayo) (Exh. 3-RBS, par.3). This alone was not something RBS brought upon itself. It was exactly what ABS-CBN had planted to happen. The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify the amount of the award. The first is that the humiliation suffered by RBS, is national in extent. RBS operations as a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who own and watch television. It is not an exaggeration to state, and it is a matter of judicial notice that almost every other person in the country watches television. The humiliation suffered by RBS is multiplied by the number of televiewers who had anticipated the showing of the film, Maging Sino Ka Man on May 28 and 268

November 3, 1992 but did not see it owing to the cancellation. Added to this are the advertisers who had placed commercial spots for the telecast and to whom RBS had a commitment in consideration of the placement to show the film in the dates and times specified. The second is that it is a competitor that caused RBS suffer the humiliation. The humiliation and injury are far greater in degree when caused by an entity whose ultimate business objective is to lure customers (viewers in this case) away from the competition.[36] For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the Court of Appeals do not support ABS-CBNs claim that there was a perfected contract. Such factual findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the arguments of RBS. The key issues for our consideration are (1) whether there was a perfected contract between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorneys fees. It may be noted that that award of attorneys fees of P212,000 in favor of VIVA is not assigned as another error. I The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two persons whereby one binds himself to give something or render some service to another[37] for a consideration. There is no contract unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the obligation, which is established.[38] A contract undergoes three stages:

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(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the parties; (b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and (c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract.[39] Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of payment a contract is produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer.[40] When Mr. Del Rosario of Viva met Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss the package of films, said package of 104 VIVA films was VIVAs offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent through Ms. Concio, counter-proposal in the form a draft contract proposing exhibition of 53 films for a consideration of P35 million. This counter-proposal could be nothing less than the counter-offer of Mr. Lopez during his conference with Del Rosario at Tamarind

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Grill Restaurant. Clearly, there was no acceptance of VIVAs offer, for it was met by a counter-offer which substantially varied the terms of the offer. ABS-CBNs reliance in Limketkai Sons Milling, Inc. v. Court of Appeals*41+ and Villonco Realty Company v. Bormaheco, Inc.,[42] is misplaced. In these cases, it was held that an acceptance may contain a request for certain changes in the terms of the offer and yet be a binding acceptance as long as it is clear that the meaning of the acceptance is positively and unequivocally to accept the offer, whether such request is granted or not. This ruling was, however, reversed in the resolution of 29 March 1996,[43] which ruled that the acceptance of an offer must be unqualified and absolute, i.e., it must be identical in all respects with that of the offer so as to produce consent or meetings of the minds. On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer were not material but merely clarificatory of what had previously been agreed upon. It cited the statement in Stuart v. Franklin Life Insurance Co.[44] that a vendors change in a phrase of the offer to purchase, which change does not essentially change the terms of the offer, does not amount to a rejection of the offer and the tender of a counter-offer.*45+ However, when any of the elements of the contract is modified upon acceptance, such alteration amounts to a counter-offer. In the case at bar, ABS-CBN made no unqualified acceptance of VIVAs offer hence, they underwent period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft contract. VIVA through its Board of Directors, rejected such counter-offer. Even if it be conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.

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Under the Corporation Code,[46] unless otherwise provided by said Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers. The delegation, except for the executive committee, must be for specific purposes.[47] Delegation to officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the binding effects of their acts would apply.[48] For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. that Del Rosario did not have the authority to accept ABS-CBNs counter-offer was best evidenced by his submission of the draft contract to VIVAs Board of Directors for the latters approval. In any event, there was between Del Rosario and Lopez III no meeting of minds. The following findings of the trial court are instructive: A number of considerations militate against ABS-CBNs claim that a contract was perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill. FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and the number of films, which he wrote on a napkin. However, Exhibit C contains numerous provisions which were not discussed at the Tamarind Grill, if Lopez testimony was to be believed nor could they have been physically written on a napkin. There was even doubt as to whether it was a paper napkin or cloth napkin. In short what were written in Exhibit C were not discussed, and therefore could not have been agreed upon, by the parties. How then could this court compel the parties to sign Exhibit C when the provisions thereof were not previously agreed upon? SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit C mentions 53 films as its 272

subject matter. Which is which? If Exhibit C reflected the true intent of the parties, then ABS-CBNs claim for 14 films in its complaint is false or if what it alleged in the complaint is true, then Exhibit C did not reflect what was agreed upon by the parties. This underscores the fact that there was no meeting of the minds as to the subject matter of the contract, so as to preclude perfection thereof. For settled is the rule that there can be no contract where there is no object certain which is its subject matter (Art. 1318, NCC). THIRD, Mr. Lopez [sic+ answer to question 29 of his affidavit testimony (Exh. D) States: We were able to reach an agreement. VIVA gave us the exclusive license to show these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00 as well as grant Viva commercial slots worth P19,950,000.00. We had already earmarked this P16,050,000.00. which gives a total consideration of P36 million (P19,951,000.00 plus P16,050,000.00 equals P36,000,000.00). On cross-examination Mr. Lopez testified: Q What was written in this napkin? A The total price, the breakdown the known Viva movies, the 7 blockbuster movies and the other 7 Viva movies because the price was broken down accordingly. The none [sic] Viva and the seven other Viva movies and the sharing between the cash portion and the concerned spot portion in the total amount of P35 million pesos. Now, which is which? P36 million or P35 million? This weakens ABS-CBNs claim.

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FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit C to Mr. Del Rosario with a handwritten note, describing said Exhibit C as a draft. (Exh.5 Viva; tsn pp. 23-24, June 08, 1992). The said draft has a well defined meaning. Since Exhibit C is only a draft, or a tentative, provisional or preparatory writing prepared for discussion, the terms and conditions thereof could not have been previously agreed upon by ABS-CBN and Viva. Exhibit C could not therefore legally bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and conditions embodied in Exhibit C were prepared by ABS-CBNs lawyers and there was no discussion on said terms and conditions. As the parties had not yet discussed the proposed terms and conditions in Exhibit C, and there was no evidence whatsoever that Viva agreed to the terms and conditions thereof, said document cannot be a binding contract. The fact that Viva refused to sign Exhibit C reveals only two *sic+ well that it did not agree on its terms and conditions, and this court has no authority to compel Viva to agree thereto. FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind Grill was only provisional, in the sense that it was subject to approval by the Board of Directors of Viva. He testified: Q Now, Mr. Witness, and after that Tamarinf meeting the second meeting wherein you claimed that you have the meeting of the minds between you and Mr. Vic del Rosario, what happened? A Vic Del Rosario was supposed to call us up and tell us specifically the result of the discussion with the Board of Directors. Q And you are referring to the so-called agreement which you wrote in [sic] a piece of paper? 274

A Q A Q

Yes, sir. So, he was going to forward that to the board of Directors for approval? Yes, sir (Tsn, pp. 42-43, June 8, 1992) Did Mr. Del Rosario tell you that he will submit it to his Board for approval?

A Yes, sir.(Tsn, p. 69, June 8, 1992). The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority to bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario is the Executive Producer of defendant Viva which is a corporation. (par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by its Directors. (Vicente vs.Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario could not be held liable jointly and severally with Viva and his inclusion as party defendant has no legal basis. (Salonga vs. Warner Barnes [sic],COLTA, 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556). The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was not a binding agreement. It is as it should be because corporate power to enter into a contract is lodged in the Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva board, whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced shows that the Board of 275

Directors of Viva rejected Exhibit C and insisted that the film package for 104 films be maintained (Exh. 7-1 Cica).[49] The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBNs right of first refusal had already been exercised when Ms. Concio wrote to Viva ticking off ten films. Thus: [T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an entirely different package. Ms. Concio herself admitted on cross-examination to having used or exercised the right of first refusal. She stated that the list was not acceptable and was indeed not accepted by ABSCBN, (Tsn, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of first refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its right of first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11).[50] II However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory damages. Except as provided by law or by stipulation, one is entitled to compensation for actual damages only for such pecuniary loss suffered by him as he has duly proved.[51] The indemnification shall comprehend not only the value of the loss suffered, but also that of the profits that the obligee failed to obtain.[52] In contracts and quasi-contracts the damages which may be awarded are dependent on whether the 276

obligor acted with good faith or otherwise. In case of good faith, the damages recoverable are those which are the natural and probable consequences of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.[53] In crimes and quasidelicts, the defendants shall be liable for all damages which are the natural and probable consequences of the act or omission complained of, whether or not such damages have been foreseen or could have reasonably been foreseen by the defendant.[54] Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of temporary or permanent personal injury, or for injury to the plaintiffs business standing or commercial credit.[55] The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBNs alleged knowledge of lack of cause of action. Thus paragraph 12 of RBSs Answer with Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically alleges: 12. ABS-CBN filed the complaint knowing fully well that it has no cause of action against RBS. As a result thereof, RBS suffered actual damages in the amount of P6,621,195.32.[56] Needless to state the award of actual damages cannot be comprehended under the above law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which read as follows: 277

ART. 19. Every person must, in the exercise of hid rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. ART. 20. Every person who, contrary to law, wilfully or negligently causes damage to another shall indemnify the latter for the same. ART. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. It may further be observed that in cases where a writ of preliminary injunction is issued, the damages which the defendant may suffer by reason of the writ are recoverable from the injunctive bond.[57] In this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge the order on the matter. Clearly then, it was not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond. Neither could ABS-CBN be liable for the print advertisements for Maging Sino Ka Man for lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary injunction on the basis of its determination that there existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual basis, but because of the plea of RBS that it be allowed to put up a counterbond. As regards attorneys fees, the law is clear that in the absence of stipulation, attorneys fees may be recovered as actual or compensatory damages under any of the circumstances provided for in Article 2208 of the Civil Code.[58]

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The general rule is that attorneys fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate.[59] They are not to be awarded every time a party wins a suit. The power of the court t award attorneys fees under Article 2208 demands factual, legal, and equitable justification.[60] Even when a claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still attorneys fees may not be awarded where no sufficient showing of bad faith could be reflected in a partys persistence in a case other than an erroneous conviction of the righteousness of his cause.[61] As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217 thereof defines what are included in moral damages, while Article 2219 enumerates the cases where they may be recovered. Article 2220 provides that moral damages may be recovered in breaches of contract where the defendant acted fraudulently or in bad faith. RBSs claim for moral damages could possibly fall only under item (10) of Article 2219, thereof which reads: (10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35. Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer.[62] The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted.[63] Trial courts must then guard against the award of exorbitant

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damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to passion, prejudice, or corruption or the part of the trial court.[64] The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.[65] The statement in People v. Manero[66] and Mambulao Lumber Co. v. PNB*67+ that a corporation may recover moral damages if it has a good reputation that is debased, resulting in social humiliation is an obiter dictum. On this score alone the award for damages must be set aside, since RBS is a corporation. The basic law on exemplary damages is Section 5 Chapter 3, Title XVIII, Book IV of the Civil Code. These are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages.[68] They are recoverable in criminal cases as part of the civil liability when the crime was committed with one or more aggravating circumstances;[69] in quasidelicts, if the defendant acted with gross negligence;[70] and in contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.[71] It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract, delict, or quasi-delict. Hence, the claims for moral and exemplary damages can only be based on Articles 19, 20, and 21 of the Civil Code. The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another. Article 20 speaks of the general sanction for all provisions of law which do not especially provide for 280

their own sanction; while Article 21 deals with acts contra bonus mores, and has the following elements: (1) there is an act which is legal, (2) but which is contrary to morals, good custom, public order, or public policy, and (3) and it is done with intent to injure.[72] Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity.[73] Such must be substantiated by evidence.[74] There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly convinced of the merits of its cause after it had undergone serious negotiations culminating in its formal submission of a draft contract. Settled is the rule that the adverse result of an action does not per se make the action wrongful and subject the actor to damages, for the law could not have meant impose a penalty on the right to litigate. If damages result from a persons exercise of a right, it is damnum absque injuria.[75] WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CAG.R. CV No. 44125 is hereby REVERSED except as to unappealed award of attorneys fees in favor of VIVA Productions, Inc. No pronouncement as to costs. SO ORDERED.

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SECOND DIVISION G.R. No. L-35767 April 15, 1988 RAYMUNDO A. CRYSTAL, petitioner, vs. COURT OF APPEALS AND PELAGIA OCANG, PACITA, TEODULO, FELICISIMO PABLO, LYDIA DIOSCORA and, RODRIGO, all surnamed DE GRACIA, respondents. Gonzales B. Callantes for respondents. PARAS, J.: 282

This is urgent motion for contempt and lifting of the temporary restraining order issued by tile Court on April 16, 1975 enjoining the private respondents from taking possession of the four parcels of land under litigation in the petition for certiorari with preliminary injunction filed with the Court by petitioner Crystal on November 3,1972. The antecedents of the case are quoted from the decision of the Court promulgated on February 25, 1975, as follows: In Civil Case No. R-1666, of the Court of First Instance of Cebu, entitled Pelagia Ocang, et al. vs. Vidal Montayre, as administrator of the estate of Nicolas Rafols, judgment was rendered ordering the defendant to pay the plaintiffs P 30,609.00 as damages. On appeal, this Court affirmed the decision of the trial court. After the judgment had become final, a writ of execution was issued and five (5) parcels of land belonging to the estate, situated at Toledo, Cebu, were on May 24, 1957 sold at public auction to Pelagia Ocang as the highest bidder for P 10,000.00 (Annex A) On May 17, 1958, the heirs of Nicolas Rafols assigned their rigth of redemption over four (4) of the five (5) parcels of land to Raymundo Crystal (Annex 'B'), which assignment was approved by the probate court on May 23, 1958. By virtue of the order, Crystal deposited a check for P ll,200.00 with the Provincial Sheriff of Cebu on Id date and on May 28, 1958, the Provincial Sheriff issued a deed of redemption (Annex B) Crystal took possession of the lands and cultivated the same.

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In February 1960, Ocang took in contempt of the four (4) parcels of land, claiming that since the check for the redemption was dishonored for lack of sufficient finds, the redemption was null and void. Crystal then filed a motion in Civil Case No. R-1666 seeking to cite Ocang in contempt of court. On June 4, 1960, the trial court denied the motion to hold Ocang in contempt of court, observing that another action, and not contempt proceedings, is the proper proceeding where the validity of the redemption may be raised (Annex "D"). Following the observation of the trial court, Crystal filed Civil case No. 62-T agent Ocang seeking declaration of ownership in his favor, plus damage. During the pendency of Civil Case No. 62-T, however, Crystal was able to regain possession of the four (4) parcels of land. On June 23, 1969, the trial court in Civil Case No. R-1666 granted a writ of possession of the four (4) parcels of land to Ocang (Annex "F") Upon Crystal's motion, the trial court set aside the order of June 23, 1969 and annulled the writ of possession issued in Ocang's favor. Ocang then moved to recorder the order annulling the writ of possession, which motion was opposed by Crystal, The trial court held abeyance the various incindents of the case. Subsequently, Ocang filed an ex-parte motion for the issuance of an alias writ of possession and this was reiterated on August 15, 1970. On May 31, 1971, the court issued an order reviving the order for the issuance of a writ of possession dated June 23, 1969 and declaring the definite deed of sale executed by the Provincial Sheriff of Cebu 284

and the writ of possession issued by the clerk of court on June 24, 1969 in full force and effect (Annex "I"). Crystal moved to reconsider the order of May 31, 1971, which was, however, denied by the trial court (Annex "K"). In view of the denial of his motion for reconsideration, petitioner filed with respondent Court of Appeals a petition for certiorari with preliminary injunction, CA-G.R. No. S.P.-00506, seeking the annulment and setting aside of the order of the Court of First Instance of Cebu in Civil Case No. R-1666 dated May 31, 1971. Responding Court of Appeals, however, dismissed the petition and lifted the preliminary injunction issued when the petition was filed (Rollo, 124). Hence, the petition for certiorari, with.preliminary injunctions filed with this Court on November 3, 1972 (Rollo, p. 1). On February 25, 1975 the Court rendered its decision * on the petition, affirming the appealed decision of respondent Court of Appeals. The Court also ordered lifted the restraining order it had previously issued in the case (Rollo, p. 250). It, however, resolved to grant on April 18, 1975 the urgent motion of petitioner for extension of time to file a motion for reconsideration and issued a new temporary restraining order effective on the same date (Rollo, p. 268). On April 25, 1975 petitioner filed his motion for reconsideration (Rollo, P. 272). After the opposition to the motion (Rollo, p. 380 reply to the opposition to the motion (Rollo, p. 408), and the rejoinder to petitioner's reply (Rollo, p. 417) had been submitted, the Court decided through a Resolution dated June 18, 1976, to reconsider and modify the decision promulgated on February 25, 1975 by remanding the case to the trial court for other proceedings. The proceedings contemplated are to be held in Civil Case

285

No. R-1666, rendering academic Civil Case No. 62-T and another case reviewing the same, not specifically Identified in the decision (Rollo, p. 434). The decision as modified became final and executory on July 30, 1976 (Rollo, p. 446). On February 23, 1979, exactly two years, six months and twenty-three days after the judgment had became final and executory, private respondents filed their urgent motion for contempt and for lifting the temporary restraining order (Rollo, p. 458). On June 3, 1986 one of the movants, Pablito Ocang de Gracia, filed a motion for resolution of the urgent motion for contempt and for lifting of the temporary restraining order (Rollo, p. 491). On July 14, 1986 the Court resolved to require the petitioner to comment on the motion (Rollo, p. 494). The comment of petitioner on the motion of respondent Pablito O. de Gracia asking the Court for a resolution on their motion for contempt and to lift the temporary restraining order was filed on October 9,1986 (Rollo, p. 495). The reply of private respondent and movant Pablito O. de Gracia was filed on January 23, 1987 (Rollo, p. 508); the rejoinder to the reply, on April 14, 1987 (Rollo, p. 518). Private respondents impute the following acts to petitioner Private which according to them constitute grievous contempt committed against the Court: a) that petitioner Crystal deceitfully concealed from the Court the fact that Civil Case No. 62-T had already been dismissed on September 19, 1974, a year prior to his filing a motion for reonsideration of the decision of the Court promulgated on February 25, 1975; and b) that petitioner falsified the temporary restraining order issued by the Court on April 16, 1975 by intercalating or imposing at the bottom of said temporary restraining order a small sketch map of Cadastral Lot No. 4126, with intent to deceive and mislead the police that complied with it accordingly 286

depriving respondents of the possession and enjoyment of Lot No. 4126 which in the Cadastral Survey of 1963 rightfully belongs to them (Rollo, p. 460-462). The isue of dismissal of Civil case No. 62-T was first brought up by respondents in their opposition to the motion for reconsideration filed by petitioner on April 25, 1975. The fact was admitted by petitioner in his reply to the opposition to the motion for reconsideration wherein petitioner explained that when he learned about the dismissal of the case, which was very much later he immediately instructed his counsel to a motion for reconsideration or a petition for relief from judgment or order with the trial court. The counsel, however, decided to refile the case instead since the dismissal of the case was without prejudice (Rollo, p. 464) and the period for filing a petition for relief from judgment or order had already expired (Rollo, p. 409). It appears that the case had been refiled on April 15,1975 as Civil Case No. 492-T (Rollo, p. 389). Respondents filed with the trial court a motion to dismiss the case on May 5, 1975 (Rollo, p. 396). Thus when petitioner filed his motion for reconsideration the case was indeed pending in the trial Court. The Court granted petitioner's motion for reconsideration. In the light of the Court's ruling on the motion that "since it was the trial Court in that Civil Case No. R-1666 that rendered the judgment and subsequently ordered the execution from which the disputed redemption was made, it should be the one to settle the whole controversy among all the interested parties, including even the judgment debtors, the heirs of Nicolas Rafols themselves, who, according to the records, have claims of their own relative to the same redemption, which might just as well be inquired into in said case, rather than in Case No. 62-T in which they are not parties' it becomes irrelevant for the Court to delve further into the

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issue as to whether or not Civil Case No. 62-T had been dismissed by the trial court prior to petitioner's filing of his motion for reconsideration. As to the second ground raised by private respondents in their urgent motion for contempt there is no showing how at this point when Civil Case No. R-1666 had long became final and executory the restraining order issued by the Court on April 16, 1975 could still prejudice private respondents even with the alleged imposition at the bottom of the last page of the restraining order of a small sketch map of Cadastral Lot No. 4126. Petitioner was in possession of the lots in litigation at the time the petition for certiorari in G.R. No. L-35767 was filed. The Court then issued a restraining order to maintain the status quo, that is, to restrain respondent Court of Appeals and private respondents from implementing the decision of respondent Court dated September 13, 1972 affirming the order of the trial court in Civil Case No. R-1666 reviving its previous order for the issuance of a writ of possession in favor of private respondents.When this Court promulgated a decision in G.R. No. L-35767 on February 25, 1975 affirming the decision of respondent Court of Appeals, it ordered in the same decision the lifting of the temporary restraining order. It was upon the urgent motion of petitioner, for extension of time to file a motion for reconsideration that the Court again issued on April 16, 1975 the restraining Order which private respondents would now want lifted. The Court had reconsidered its decision of February 25, 1976 and had the case remanded to the trial court to continue the proceedings for the settlement of the whole controversy in Civil Case No. R-1666. The police force of Toledo City did not use the restraining order to dispossess private respondents of Lot No. 4126. Petitioner remained in possession of the lots in litigation since his filing of Civil Case No. 62-T in the Court of First Instance and throughout the pendency of G.R. No. 35767 in the Court. 288

The trial court had already rendered a decision in Civil Case No. R-1666 on December 8, 1982, the dispositive portion of which was quoted by petitioner in his comment on the motion of respondent Pablito O. Gracia asking the Court for a resolution on their motion for contempt and to lift the temporary restraining order (Rollo, p. 496), as follows: In view of all the foregoing considerations, this Court hereby declares and so holds that respondents Pelagia Ocang and her children have been fully paid the redemption price of the four (4) parcels of land in dispute and therefore, the Deed of Redemption is hereby also declared valid and effective as of the date it was executed. Accordingly, petitioner-redemptioner, Raymundo Crystal, Filipino, of legal age, and married to Desamparados Crystal, is hereby declare owner of all the disputed parcels of land described in the Deed of Redemption executed by the Provincial Sheriff of Cebu in his favor in Civil Case No. 1666 which parcels are now known as Lot Nos. 3816, 4129, 4143, 4126 and 4127 of Toledo City Cadastre all situated at Poog, Toledo City. The claim of the intervenors, Roso Sabalones and Luis Sabalones, are rendered moot and academic with the passing out of the right of Pelagia Ocang.The above-quoted dispositive portion of the decision shows that Lot No. 4126 is among the four lots described in the Deed of Redemption executed by the Provincial Sheriff of Cebu in favor of petitioner. Accordingly, the petitioner was declared owner of the four lots in the same decision. The decision of the trial court in Civil Case No. R-1666 was appealed by Private respondents as AC-G.R. CV NO. 3132 UDK and is still pending decision in the Court of Appeals (Rollo, p. 497).

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G.R. No. L-35767 was terminated in this Court and became final and executory on July 30, 1976. The case has been remanded to the trial court which had also rendered its decision on the controversy. The Court no longer has jurisdiction in the case to resolve, by a mere motion therein, issues having to do with the rights of parties to the case (National Investment and Development Corporation v. Angeles, 40 SCRA [1971]). When the case reaches the court again on appeal, then and only then will it regain jurisdiction over the case. Under the circumstances, the following passage from the decision in Lim Kim Tho v. Go Sin Kaw is applicable: Litigation must end and terminate sometime and somewhere and it is essential to an effective and efficient administration of justice that once a judgment has become final, the winning party be not, through a mere subterfuge, deprived of the fruits of the verdict. Courts must therefore guard against any scheme calculated to bring about that result. Constituted as they are to put an end to controversies, courts should frown upon any attempt to prolong them. (82 Phil. 776, cited in Phil.Blooming Mills Employees Co. v. Blooming Mills Co., v. 51 SCRA 189 [1973]). PREMISES CONSIDERED, the motion is DISMISSED for having become moot and academic. SO ORDERED.

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SECOND DIVISION G.R. No. 172671 April 16, 2009 MARISSA R. UNCHUAN, Petitioner, vs. ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER OF DEEDS OF CEBU CITY, Respondents. DECISION QUISUMBING, J.: 291

For review are the Decision1 dated February 23, 2006 and Resolution2 dated April 12, 2006 of the Court of Appeals in CA-G.R. CV. No. 73829. The appellate court had affirmed with modification the Order3 of the Regional Trial Court (RTC) of Cebu City, Branch 10 reinstating its Decision4 dated June 9, 1997. The facts of the case are as follows: Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were the registered co-owners of Lot Nos. 898-A-3 and 898-A-4 covered by Transfer Certificates of Title (TCT) Nos. 532585 and 532576 in Cebu City. The sisters, who were based in the United States, sold the lots to their nephew Antonio J.P. Lozada (Antonio) under a Deed of Sale7 dated March 11, 1994. Armed with a Special Power of Attorney8 from Anita, Peregrina went to the house of their brother, Dr. Antonio Lozada (Dr. Lozada), located at 4356 Faculty Avenue, Long Beach California.9 Dr. Lozada agreed to advance the purchase price of US$367,000 or P10,000,000 for Antonio, his nephew. The Deed of Sale was later notarized and authenticated at the Philippine Consuls Office. Dr. Lozada then forwarded the deed, special power of attorney, and owners copies of the titles to Antonio in the Philippines. Upon receipt of said documents, the latter recorded the sale with the Register of Deeds of Cebu. Accordingly, TCT Nos. 12832210 and 12832311 were issued in the name of Antonio Lozada. Pending registration of the deed, petitioner Marissa R. Unchuan caused the annotation of an adverse claim on the lots. Marissa claimed that Anita donated an undivided share in the lots to her under an unregistered Deed of Donation12 dated February 4, 1987.

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Antonio and Anita brought a case against Marissa for quieting of title with application for preliminary injunction and restraining order. Marissa for her part, filed an action to declare the Deed of Sale void and to cancel TCT Nos. 128322 and 128323. On motion, the cases were consolidated and tried jointly. At the trial, respondents presented a notarized and duly authenticated sworn statement, and a videotape where Anita denied having donated land in favor of Marissa. Dr. Lozada testified that he agreed to advance payment for Antonio in preparation for their plan to form a corporation. The lots are to be eventually infused in the capitalization of Damasa Corporation, where he and Antonio are to have 40% and 60% stake, respectively. Meanwhile, Lourdes G. Vicencio, a witness for respondents confirmed that she had been renting the ground floor of Anitas house since 1983, and tendering rentals to Antonio. For her part, Marissa testified that she accompanied Anita to the office of Atty. Cresencio Tomakin for the signing of the Deed of Donation. She allegedly kept it in a safety deposit box but continued to funnel monthly rentals to Peregrinas account. A witness for petitioner, one Dr. Cecilia Fuentes, testified on Peregrinas medical records. According to her interpretation of said records, it was physically impossible for Peregrina to have signed the Deed of Sale on March 11, 1994, when she was reported to be suffering from edema. Peregrina died on April 4, 1994. In a Decision dated June 9, 1997, RTC Judge Leonardo B. Caares disposed of the consolidated cases as follows: WHEREFORE, judgment is hereby rendered in Civil Case No. CEB-16145, to wit: 1. Plaintiff Antonio J.P. Lozada is declared the absolute owner of the properties in question; 293

2. The Deed of Donation (Exh. "9") is declared null and void, and Defendant Marissa R. Unchuan is directed to surrender the original thereof to the Court for cancellation; 3. The Register of Deeds of Cebu City is ordered to cancel the annotations of the Affidavit of Adverse Claim of defendant Marissa R. Unchuan on TCT Nos. 53257 and 53258 and on such all other certificates of title issued in lieu of the aforementioned certificates of title; 4. Defendant Marissa R. Unchuan is ordered to pay Antonio J.P. Lozada and Anita Lozada Slaughter the sum of P100,000.00 as moral damages; exemplary damages of P50,000.00; P50,000.00 for litigation expenses and attorneys fees of P50,000.00; and 5. The counterclaims of defendant Marissa R. Unchuan [are] DISMISSED. In Civil Case No. CEB-16159, the complaint is hereby DISMISSED. In both cases, Marissa R. Unchuan is ordered to pay the costs of suit. SO ORDERED.13 On motion for reconsideration by petitioner, the RTC of Cebu City, Branch 10, with Hon. Jesus S. dela Pea as Acting Judge, issued an Order14 dated April 5, 1999. Said order declared the Deed of Sale void, ordered the cancellation of the new TCTs in Antonios name, and directed Antonio to pay Marissa P200,000 as moral damages, P100,000 as exemplary damages, P100,000 attorneys fees and P50,000 for expenses of litigation. The trial court also declared the Deed of Donation in favor of Marissa valid. The RTC gave credence to the medical records of Peregrina.

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Respondents moved for reconsideration. On July 6, 2000, now with Hon. Soliver C. Peras, as Presiding Judge, the RTC of Cebu City, Branch 10, reinstated the Decision dated June 9, 1997, but with the modification that the award of damages, litigation expenses and attorneys fees were disallowed. Petitioner appealed to the Court of Appeals. On February 23, 2006 the appellate court affirmed with modification the July 6, 2000 Order of the RTC. It, however, restored the award of P50,000 attorneys fees and P50,000 litigation expenses to respondents. Thus, the instant petition which raises the following issues: I. WHETHER THE COURT OF APPEALS ERRED AND VIOLATED PETITIONERS RIGHT TO DUE PROCESS WHEN IT FAILED TO RESOLVE PETITIONERS THIRD ASSIGNED ERROR. II. WHETHER THE HONORABLE SUPREME COURT MAY AND SHOULD REVIEW THE CONFLICTING FACTUAL FINDINGS OF THE HONORABLE REGIONAL TRIAL COURT IN ITS OWN DECISION AND RESOLUTIONS ON THE MOTIONS FOR RECONSIDERATION, AND THAT OF THE HONORABLE COURT OF APPEALS. III. WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS CASE IS BARRED BY LACHES. IV. WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF DONATION EXECUTED IN FAVOR OF PETITIONER IS VOID. 295

V. WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT ANITA LOZADAS VIDEOTAPED STATEMENT IS HEARSAY.15 Simply stated, the issues in this appeal are: (1) Whether the Court of Appeals erred in upholding the Decision of the RTC which declared Antonio J.P. Lozada the absolute owner of the questioned properties; (2) Whether the Court of Appeals violated petitioners right to due process; and (3) Whether petitioners case is barred by laches. Petitioner contends that the appellate court violated her right to due process when it did not rule on the validity of the sale between the sisters Lozada and their nephew, Antonio. Marissa finds it anomalous that Dr. Lozada, an American citizen, had paid the lots for Antonio. Thus, she accuses the latter of being a mere dummy of the former. Petitioner begs the Court to review the conflicting factual findings of the trial and appellate courts on Peregrinas medical condition on March 11, 1994 and Dr. Lozadas financial capacity to advance payment for Antonio. Likewise, petitioner assails the ruling of the Court of Appeals which nullified the donation in her favor and declared her case barred by laches. Petitioner finally challenges the admissibility of the videotaped statement of Anita who was not presented as a witness. On their part, respondents pray for the dismissal of the petition for petitioners failure to furnish the Register of Deeds of Cebu City with a copy thereof in violation of Sections 316 and 4,17 Rule 45 of the Rules. In addition, they aver that Peregrinas unauthenticated medical records were merely falsified to make it appear that she was confined in the hospital on the day of the sale. Further, respondents question the credibility of Dr. Fuentes who was neither presented in court as an expert witness18 nor professionally involved in Peregrinas medical care. 296

Further, respondents impugn the validity of the Deed of Donation in favor of Marissa. They assert that the Court of Appeals did not violate petitioners right to due process inasmuch as it resolved collectively all the factual and legal issues on the validity of the sale. Faithful adherence to Section 14,19 Article VIII of the 1987 Constitution is indisputably a paramount component of due process and fair play. The parties to a litigation should be informed of how it was decided, with an explanation of the factual and legal reasons that led to the conclusions of the court.20 In the assailed Decision, the Court of Appeals reiterates the rule that a notarized and authenticated deed of sale enjoys the presumption of regularity, and is admissible without further proof of due execution. On the basis thereof, it declared Antonio a buyer in good faith and for value, despite petitioners contention that the sale violates public policy. While it is a part of the right of appellant to urge that the decision should directly meet the issues presented for resolution,21 mere failure by the appellate court to specify in its decision all contentious issues raised by the appellant and the reasons for refusing to believe appellants contentions is not sufficient to hold the appellate courts decision contrary to the requirements of the law22 and the Constitution.23 So long as the decision of the Court of Appeals contains the necessary findings of facts to warrant its conclusions, we cannot declare said court in error if it withheld "any specific findings of fact with respect to the evidence for the defense."24 We will abide by the legal presumption that official duty has been regularly performed,25 and all matters within an issue in a case were laid down before the court and were passed upon by it.26 In this case, we find nothing to show that the sale between the sisters Lozada and their nephew Antonio violated the public policy prohibiting aliens from owning lands in the Philippines. Even as Dr. Lozada advanced the money for the payment of Antonios share, at no point were the lots registered in Dr. 297

Lozadas name. Nor was it contemplated that the lots be under his control for they are actually to be included as capital of Damasa Corporation. According to their agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the shares in said corporation, respectively. Under Republic Act No. 7042,27 particularly Section 3,28 a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, is considered a Philippine National. As such, the corporation may acquire disposable lands in the Philippines. Neither did petitioner present proof to belie Antonios capacity to pay for the lots subjects of this case. Petitioner, likewise, calls on the Court to ascertain Peregrinas physical ability to execute the Deed of Sale on March 11, 1994. This essentially necessitates a calibration of facts, which is not the function of this Court.29 Nevertheless, we have sifted through the Decisions of the RTC and the Court of Appeals but found no reason to overturn their factual findings. Both the trial court and appellate court noted the lack of substantial evidence to establish total impossibility for Peregrina to execute the Deed of Sale. In support of its contentions, petitioner submits a copy of Peregrinas medical records to show that she was confined at the Martin Luther Hospital from February 27, 1994 until she died on April 4, 1994. However, a Certification30 from Randy E. Rice, Manager for the Health Information Management of the hospital undermines the authenticity of said medical records. In the certification, Rice denied having certified or having mailed copies of Peregrinas medical records to the Philippines. As a rule, a document to be admissible in evidence, should be previously authenticated, that is, its due execution or genuineness should be first shown.31 Accordingly, the unauthenticated medical records were excluded from the evidence. Even assuming that Peregrina was confined in the cited hospital, the Deed of Sale 298

was executed on March 11, 1994, a month before Peregrina reportedly succumbed to Hepato Renal Failure caused by Septicemia due to Myflodysplastic Syndrome.32 Nothing in the records appears to show that Peregrina was so incapacitated as to prevent her from executing the Deed of Sale. Quite the contrary, the records reveal that close to the date of the sale, specifically on March 9, 1994, Peregrina was even able to issue checks33 to pay for her attorneys professional fees and her own hospital bills. At no point in the course of the trial did petitioner dispute this revelation. Now, as to the validity of the donation, the provision of Article 749 of the Civil Code is in point: art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. When the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable.34 Here, the Deed of Donation does not appear to be duly notarized. In page three of the deed, the stamped name of Cresencio Tomakin appears above the words Notary Public until December 31, 1983 but below it were the typewritten words Notary Public until December 31, 1987. A closer examination of the document further reveals that the number 7 in 1987 and Series of 1987 were merely superimposed.35 This was confirmed by petitioners nephew Richard Unchuan who testified that he saw petitioners husband write 299

7 over 1983 to make it appear that the deed was notarized in 1987. Moreover, a Certification36 from Clerk of Court Jeoffrey S. Joaquino of the Notarial Records Division disclosed that the Deed of Donation purportedly identified in Book No. 4, Document No. 48, and Page No. 35 Series of 1987 was not reported and filed with said office. Pertinent to this, the Rules require a party producing a document as genuine which has been altered and appears to have been altered after its execution, in a part material to the question in dispute, to account for the alteration. He may show that the alteration was made by another, without his concurrence, or was made with the consent of the parties affected by it, or was otherwise properly or innocently made, or that the alteration did not change the meaning or language of the instrument. If he fails to do that, the document shall, as in this case, not be admissible in evidence.371avvphi1 Remarkably, the lands described in the Deed of Donation are covered by TCT Nos. 7364538 and 73646,39 both of which had been previously cancelled by an Order40 dated April 8, 1981 in LRC Record No. 5988. We find it equally puzzling that on August 10, 1987, or six months after Anita supposedly donated her undivided share in the lots to petitioner, the Unchuan Development Corporation, which was represented by petitioners husband, filed suit to compel the Lozada sisters to surrender their titles by virtue of a sale. The sum of all the circumstances in this case calls for no other conclusion than that the Deed of Donation allegedly in favor of petitioner is void. Having said that, we deem it unnecessary to rule on the issue of laches as the execution of the deed created no right from which to reckon delay in making any claim of rights under the instrument. Finally, we note that petitioner faults the appellate court for not excluding the videotaped statement of Anita as hearsay evidence. Evidence is hearsay when its probative force depends, in whole or in part, on 300

the competency and credibility of some persons other than the witness by whom it is sought to be produced. There are three reasons for excluding hearsay evidence: (1) absence of cross-examination; (2) absence of demeanor evidence; and (3) absence of oath.41 It is a hornbook doctrine that an affidavit is merely hearsay evidence where its maker did not take the witness stand.42 Verily, the sworn statement of Anita was of this kind because she did not appear in court to affirm her averments therein. Yet, a more circumspect examination of our rules of exclusion will show that they do not cover admissions of a party;43 the videotaped statement of Anita appears to belong to this class. Section 26 of Rule 130 provides that "the act, declaration or omission of a party as to a relevant fact may be given in evidence against him. It has long been settled that these admissions are admissible even if they are hearsay.44 Indeed, there is a vital distinction between admissions against interest and declaration against interest. Admissions against interest are those made by a party to a litigation or by one in privity with or identified in legal interest with such party, and are admissible whether or not the declarant is available as a witness. Declaration against interest are those made by a person who is neither a party nor in privity with a party to the suit, are secondary evidence and constitute an exception to the hearsay rule. They are admissible only when the declarant is unavailable as a witness.45 Thus, a mans acts, conduct, and declaration, wherever made, if voluntary, are admissible against him, for the reason that it is fair to presume that they correspond with the truth, and it is his fault if they do not.46 However, as a further qualification, object evidence, such as the videotape in this case, must be authenticated by a special testimony showing that it was a faithful reproduction.47 Lacking this, we are constrained to exclude as evidence the videotaped statement of Anita. Even so, this does not detract from our conclusion

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concerning petitioners failure to prove, by preponderant evidence, any right to the lands subject of this case. Anent the award of moral damages in favor of respondents, we find no factual and legal basis therefor. Moral damages cannot be awarded in the absence of a wrongful act or omission or fraud or bad faith. When the action is filed in good faith there should be no penalty on the right to litigate. One may have erred, but error alone is not a ground for moral damages.48 The award of moral damages must be solidly anchored on a definite showing that respondents actually experienced emotional and mental sufferings. Mere allegations do not suffice; they must be substantiated by clear and convincing proof.49 As exemplary damages can be awarded only after the claimant has shown entitlement to moral damages,50 neither can it be granted in this case. WHEREFORE, the instant petition is DENIED. The Decision dated February 23, 2006, and Resolution dated April 12, 2006 of the Court of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED with MODIFICATION. The awards of moral damages and exemplary damages in favor of respondents are deleted. No pronouncement as to costs. SO ORDERED.

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EN BANC PHILIPPINE SOCIETY FOR THE PREVENTION OF CRUELTY TO ANIMALS, G.R. No. 169752 Petitioners, - versus 303

COMMISSION ON AUDIT, DIR. RODULFO J. ARIESGA (in his official capacity as Director of the Commission on Audit), MS. MERLE M. VALENTIN and MS. SUSAN GUARDIAN (in their official capacities as Team Leader and Team Member, respectively, of the audit Team of the Commission on Audit), Promulgated: Respondents. September 25, 2007 x----------------------------------------------------------- x DECISION AUSTRIA-MARTINEZ, J.: Before the Court is a special civil action for Certiorari and Prohibition under Rule 65 of the Rules of Court, in relation to Section 2 of Rule 64, filed by the petitioner assailing Office Order No. 2005-021[1] dated September 14, 2005 issued by the respondents which constituted the audit team, as well as its September 23, 2005 Letter[2] informing the petitioner that respondents audit team shall conduct an 304

audit survey on the petitioner for a detailed audit of its accounts, operations, and financial transactions. No temporary restraining order was issued. The petitioner was incorporated as a juridical entity over one hundred years ago by virtue of Act No. 1285, enacted on January 19, 1905, by the Philippine Commission. The petitioner, at the time it was created, was composed of animal aficionados and animal propagandists. The objects of the petitioner, as stated in Section 2 of its charter, shall be to enforce laws relating to cruelty inflicted upon animals or the protection of animals in the Philippine Islands, and generally, to do and perform all things which may tend in any way to alleviate the suffering of animals and promote their welfare.[3] At the time of the enactment of Act No. 1285, the original Corporation Law, Act No. 1459, was not yet in existence. Act No. 1285 antedated both the Corporation Law and the constitution of the Securities and Exchange Commission. Important to note is that the nature of the petitioner as a corporate entity is distinguished from the sociedad anonimas under the Spanish Code of Commerce. For the purpose of enhancing its powers in promoting animal welfare and enforcing laws for the protection of animals, the petitioner was initially imbued under its charter with the power to apprehend violators of animal welfare laws. In addition, the petitioner was to share one-half (1/2) of the fines imposed and collected through its efforts for violations of the laws related thereto. As originally worded, Sections 4 and 5 of Act No. 1285 provide: SEC. 4. The said society is authorized to appoint not to exceed five agents in the City of Manila, and not to exceed two in each of the provinces of the Philippine Islands who shall have all the power and authority of a police officer to make arrests for violation of the laws enacted for the prevention of cruelty to animals and the protection of animals, and to serve any process in connection with the 305

execution of such laws; and in addition thereto, all the police force of the Philippine Islands, wherever organized, shall, as occasion requires, assist said society, its members or agents, in the enforcement of all such laws.

SEC. 5. One-half of all the fines imposed and collected through the efforts of said society, its members or its agents, for violations of the laws enacted for the prevention of cruelty to animals and for their protection, shall belong to said society and shall be used to promote its objects. (emphasis supplied) Subsequently, however, the power to make arrests as well as the privilege to retain a portion of the fines collected for violation of animal-related laws were recalled by virtue of Commonwealth Act (C.A.) No. 148,[4] which reads, in its entirety, thus: Be it enacted by the National Assembly of the Philippines: Section 1. Section four of Act Numbered Twelve hundred and eighty-five as amended by Act Numbered Thirty five hundred and forty-eight, is hereby further amended so as to read as follows: Sec. 4. The said society is authorized to appoint not to exceed ten agents in the City of Manila, and not to exceed one in each municipality of the Philippines who shall have the authority to denounce to regular peace officers any violation of the laws enacted for the prevention of cruelty to animals and the protection of animals and to cooperate with said peace officers in the prosecution of transgressors of such laws. 306

Sec. 2. The full amount of the fines collected for violation of the laws against cruelty to animals and for the protection of animals, shall accrue to the general fund of the Municipality where the offense was committed. Sec. 3. This Act shall take effect upon its approval. Approved, November 8, 1936. (Emphasis supplied) Immediately thereafter, then President Manuel L. Quezon issued Executive Order (E.O.) No. 63 dated November 12, 1936, portions of which provide: Whereas, during the first regular session of the National Assembly, Commonwealth Act Numbered One Hundred Forty Eight was enacted depriving the agents of the Society for the Prevention of Cruelty to Animals of their power to arrest persons who have violated the laws prohibiting cruelty to animals thereby correcting a serious defect in one of the laws existing in our statute books. xxxx Whereas, the cruel treatment of animals is an offense against the State, penalized under our statutes, which the Government is duty bound to enforce; Now, therefore, I, Manuel L. Quezon, President of the Philippines, pursuant to the authority conferred upon me by the Constitution, hereby decree, order, and direct the Commissioner of Public Safety, the Provost Marshal General as head of the Constabulary Division of the Philippine Army, every Mayor of a chartered city, and every municipal president to detail and organize special members of the police force, local, national, and the Constabulary to watch, capture, and prosecute offenders against the laws enacted to prevent cruelty to animals. (Emphasis supplied)

307

On December 1, 2003, an audit team from respondent Commission on Audit (COA) visited the office of the petitioner to conduct an audit survey pursuant to COA Office Order No. 2003-051 dated November 18, 2003[5] addressed to the petitioner. The petitioner demurred on the ground that it was a private entity not under the jurisdiction of COA, citing Section 2(1) of Article IX of the Constitution which specifies the general jurisdiction of the COA, viz: Section 1. General Jurisdiction. The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and officers that have been granted fiscal autonomy under the Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government, and for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied) Petitioner explained thus:

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a. Although the petitioner was created by special legislation, this necessarily came about because in January 1905 there was as yet neither a Corporation Law or any other general law under which it may be organized and incorporated, nor a Securities and Exchange Commission which would have passed upon its organization and incorporation. b. That Executive Order No. 63, issued during the Commonwealth period, effectively deprived the petitioner of its power to make arrests, and that the petitioner lost its operational funding, underscore the fact that it exercises no governmental function. In fine, the government itself, by its overt acts, confirmed petitioners status as a private juridical entity. The COA General Counsel issued a Memorandum[6] dated May 6, 2004, asserting that the petitioner was subject to its audit authority. In a letter dated May 17, 2004,[7] respondent COA informed the petitioner of the result of the evaluation, furnishing it with a copy of said Memorandum dated May 6, 2004 of the General Counsel. Petitioner thereafter filed with the respondent COA a Request for Re-evaluation dated May 19, 2004,[8] insisting that it was a private domestic corporation. Acting on the said request, the General Counsel of respondent COA, in a Memorandum dated July 13, 2004,[9] affirmed her earlier opinion that the petitioner was a government entity that was subject to the audit jurisdiction of respondent COA. In a letter dated September 14, 2004, the respondent COA informed the petitioner of the result of the re-evaluation, maintaining its position that the petitioner was subject to its audit jurisdiction, and requested an initial conference with the respondents.

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In a Memorandum dated September 16, 2004, Director Delfin Aguilar reported to COA Assistant Commissioner Juanito Espino, Corporate Government Sector, that the audit survey was not conducted due to the refusal of the petitioner because the latter maintained that it was a private corporation. Petitioner received on September 27, 2005 the subject COA Office Order 2005-021 dated September 14, 2005 and the COA Letter dated September 23, 2005. Hence, herein Petition on the following grounds: A. RESPONDENT COMMISSION ON AUDIT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT RULED THAT PETITIONER IS SUBJECT TO ITS AUDIT AUTHORITY. B. PETITIONER IS ENTITLED TO THE RELIEF SOUGHT, THERE BEING NO APPEAL, NOR ANY PLAIN, SPEEDY AND ADEQUATE REMEDY IN THE ORDINARY COURSE OF LAW AVAILABLE TO IT.[10] The essential question before this Court is whether the petitioner qualifies as a government agency that may be subject to audit by respondent COA. Petitioner argues: first, even though it was created by special legislation in 1905 as there was no general law then existing under which it may be organized or incorporated, it exercises no governmental functions because these have been revoked by C.A. No. 148 and E.O. No. 63; second, nowhere in its charter is it indicated that it is a public corporation, unlike, for instance, C.A. No. 111 which created the Boy Scouts of the Philippines, defined its powers and purposes, and specifically stated that it was An Act to Create a Public Corporation in which, even as amended by Presidential Decree No. 460, the law 310

still adverted to the Boy Scouts of the Philippines as a public corporation, all of which are not obtaining in the charter of the petitioner; third, if it were a government body, there would have been no need for the State to grant it tax exemptions under Republic Act No. 1178, and the fact that it was so exempted strengthens its position that it is a private institution; fourth, the employees of the petitioner are registered and covered by the Social Security System at the latters initiative and not through the Government Service Insurance System, which should have been the case had the employees been considered government employees; fifth, the petitioner does not receive any form of financial assistance from the government, since C.A. No. 148, amending Section 5 of Act No. 1285, states that the full amount of the fines, collected for violation of the laws against cruelty to animals and for the protection of animals, shall accrue to the general fund of the Municipality where the offense was committed; sixth, C.A. No. 148 effectively deprived the petitioner of its powers to make arrests and serve processes as these functions were placed in the hands of the police force; seventh, no government appointee or representative sits on the board of trustees of the petitioner; eighth, a reading of the provisions of its charter (Act No. 1285) fails to show that any act or decision of the petitioner is subject to the approval of or control by any government agency, except to the extent that it is governed by the law on private corporations in general; and finally, ninth, the Committee on Animal Welfare, under the Animal Welfare Act of 1998, includes members from both the private and the public sectors. The respondents contend that since the petitioner is a body politic created by virtue of a special legislation and endowed with a governmental purpose, then, indubitably, the COA may audit the financial activities of the latter. Respondents in effect divide their contentions into six strains: first, the test to determine whether an entity is a government corporation lies in the manner of its creation, and, 311

since the petitioner was created by virtue of a special charter, it is thus a government corporation subject to respondents auditing power; second, the petitioner exercises sovereign powers, that is, it is tasked to enforce the laws for the protection and welfare of animals which ultimately redound to the public good and welfare, and, therefore, it is deemed to be a government instrumentality as defined under the Administrative Code of 1987, the purpose of which is connected with the administration of government, as purportedly affirmed by American jurisprudence; third, by virtue of Section 23,[11] Title II, Book III of the same Code, the Office of the President exercises supervision or control over the petitioner; fourth, under the same Code, the requirement under its special charter for the petitioner to render a report to the Civil Governor, whose functions have been inherited by the Office of the President, clearly reflects the nature of the petitioner as a government instrumentality; fifth, despite the passage of the Corporation Code, the law creating the petitioner had not been abolished, nor had it been re-incorporated under any general corporation law; and finally, sixth, Republic Act No. 8485, otherwise known as the Animal Welfare Act of 1998, designates the petitioner as a member of its Committee on Animal Welfare which is attached to the Department of Agriculture. In view of the phrase One-half of all the fines imposed and collected through the efforts of said society, the Court, in a Resolution dated January 30, 2007, required the Office of the Solicitor General (OSG) and the parties to comment on: a) petitioner's authority to impose fines and the validity of the provisions of Act No. 1285 and Commonwealth Act No. 148 considering that there are no standard measures provided for in the aforecited laws as to the manner of implementation, the specific violations of the law, the person/s authorized to impose fine and in what amount; and, b) the effect of the 1935

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and 1987 Constitutions on whether petitioner continues to exist or should organize as a private corporation under the Corporation Code, B.P. Blg. 68 as amended. Petitioner and the OSG filed their respective Comments. Respondents filed a Manifestation stating that since they were being represented by the OSG which filed its Comment, they opted to dispense with the filing of a separate one and adopt for the purpose that of the OSG. The petitioner avers that it does not have the authority to impose fines for violation of animal welfare laws; it only enjoyed the privilege of sharing in the fines imposed and collected from its efforts in the enforcement of animal welfare laws; such privilege, however, was subsequently abolished by C.A. No. 148; that it continues to exist as a private corporation since it was created by the Philippine Commission before the effectivity of the Corporation law, Act No. 1459; and the 1935 and 1987 Constitutions. The OSG submits that Act No. 1285 and its amendatory laws did not give petitioner the authority to impose fines for violation of laws[12] relating to the prevention of cruelty to animals and the protection of animals; that even prior to the amendment of Act No. 1285, petitioner was only entitled to share in the fines imposed; C.A. No. 148 abolished that privilege to share in the fines collected; that petitioner is a public corporation and has continued to exist since Act No. 1285; petitioner was not repealed by the 1935 and 1987 Constitutions which contain transitory provisions maintaining all laws issued not inconsistent therewith until amended, modified or repealed. The petition is impressed with merit. The arguments of the parties, interlaced as they are, can be disposed of in five points. First, the Court agrees with the petitioner that the charter test cannot be applied. 313

Essentially, the charter test as it stands today provides: [T]he test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. xxx (Emphasis supplied)[13] The petitioner is correct in stating that the charter test is predicated, at best, on the legal regime established by the 1935 Constitution, Section 7, Article XIII, which states: Sec. 7. The National Assembly shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof.[14] The foregoing proscription has been carried over to the 1973 and the 1987 Constitutions. Section 16 of Article XII of the present Constitution provides: Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. Section 16 is essentially a re-enactment of Section 7 of Article XVI of the 1935 Constitution and Section 4 of Article XIV of the 1973 Constitution. During the formulation of the 1935 Constitution, the Committee on Franchises recommended the foregoing proscription to prevent the pressure of special interests upon the lawmaking body in the 314

creation of corporations or in the regulation of the same. To permit the lawmaking body by special law to provide for the organization, formation, or regulation of private corporations would be in effect to offer to it the temptation in many cases to favor certain groups, to the prejudice of others or to the prejudice of the interests of the country.[15] And since the underpinnings of the charter test had been introduced by the 1935 Constitution and not earlier, it follows that the test cannot apply to the petitioner, which was incorporated by virtue of Act No. 1285, enacted on January 19, 1905. Settled is the rule that laws in general have no retroactive effect, unless the contrary is provided.[16] All statutes are to be construed as having only a prospective operation, unless the purpose and intention of the legislature to give them a retrospective effect is expressly declared or is necessarily implied from the language used. In case of doubt, the doubt must be resolved against the retrospective effect.[17] There are a few exceptions. Statutes can be given retroactive effect in the following cases: (1) when the law itself so expressly provides; (2) in case of remedial statutes; (3) in case of curative statutes; (4) in case of laws interpreting others; and (5) in case of laws creating new rights.[18] None of the exceptions is present in the instant case. The general principle of prospectivity of the law likewise applies to Act No. 1459, otherwise known as the Corporation Law, which had been enacted by virtue of the plenary powers of the Philippine Commission on March 1, 1906, a little over a year after January 19, 1905, the time the petitioner emerged as a juridical entity. Even the Corporation Law respects the rights and powers of juridical entities organized beforehand, viz:

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SEC. 75. Any corporation or sociedad anonima formed, organized, and existing under the laws of the Philippine Islands and lawfully transacting business in the Philippine Islands on the date of the passage of this Act, shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled at its option either to continue business as such corporation or to reform and organize under and by virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the old corporation according to their interests. (Emphasis supplied). As pointed out by the OSG, both the 1935 and 1987 Constitutions contain transitory provisions maintaining all laws issued not inconsistent therewith until amended, modified or repealed.[19] In a legal regime where the charter test doctrine cannot be applied, the mere fact that a corporation has been created by virtue of a special law does not necessarily qualify it as a public corporation. What then is the nature of the petitioner as a corporate entity? What legal regime governs its rights, powers, and duties? As stated, at the time the petitioner was formed, the applicable law was the Philippine Bill of 1902, and, emphatically, as also stated above, no proscription similar to the charter test can be found therein. The textual foundation of the charter test, which placed a limitation on the power of the legislature, first appeared in the 1935 Constitution. However, the petitioner was incorporated in 1905 by virtue of Act No. 1258, a law antedating the Corporation Law (Act No. 1459) by a year, and the 1935 Constitution, by thirty years. There being neither a general law on the formation and organization of private corporations nor a restriction on the legislature to create private corporations by direct 316

legislation, the Philippine Commission at that moment in history was well within its powers in 1905 to constitute the petitioner as a private juridical entity. Time and again the Court must caution even the most brilliant scholars of the law and all constitutional historians on the danger of imposing legal concepts of a later date on facts of an earlier date.[20] The amendments introduced by C.A. No. 148 made it clear that the petitioner was a private corporation and not an agency of the government. This was evident in Executive Order No. 63, issued by then President of the Philippines Manuel L. Quezon, declaring that the revocation of the powers of the petitioner to appoint agents with powers of arrest corrected a serious defect in one of the laws existing in the statute books. As a curative statute, and based on the doctrines so far discussed, C.A. No. 148 has to be given retroactive effect, thereby freeing all doubt as to which class of corporations the petitioner belongs, that is, it is a quasi-public corporation, a kind of private domestic corporation, which the Court will further elaborate on under the fourth point. Second, a reading of petitioners charter shows that it is not subject to control or supervision by any agency of the State, unlike government-owned and -controlled corporations. No government representative sits on the board of trustees of the petitioner. Like all private corporations, the successors of its members are determined voluntarily and solely by the petitioner in accordance with its by-laws, and may exercise those powers generally accorded to private corporations, such as the powers to hold property, to sue and be sued, to use a common seal, and so forth. It may adopt by-laws for its

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internal operations: the petitioner shall be managed or operated by its officers in accordance with its by-laws in force. The pertinent provisions of the charter provide: Section 1. Anna L. Ide, Kate S. Wright, John L. Chamberlain, William F. Tucker, Mary S. Fergusson, Amasa S. Crossfield, Spencer Cosby, Sealy B. Rossiter, Richard P. Strong, Jose Robles Lahesa, Josefina R. de Luzuriaga, and such other persons as may be associated with them in conformity with this act, and their successors, are hereby constituted and created a body politic and corporate at law, under the name and style of The Philippines Society for the Prevention of Cruelty to Animals. As incorporated by this Act, said society shall have the power to add to its organization such and as many members as it desires, to provide for and choose such officers as it may deem advisable, and in such manner as it may wish, and to remove members as it shall provide. It shall have the right to sue and be sued, to use a common seal, to receive legacies and donations, to conduct social enterprises for the purpose of obtaining funds, to levy dues upon its members and provide for their collection to hold real and personal estate such as may be necessary for the accomplishment of the purposes of the society, and to adopt such by-laws for its government as may not be inconsistent with law or this charter. xxxx Sec. 3. The said society shall be operated under the direction of its officers, in accordance with its bylaws in force, and this charter. xxxx

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Sec. 6. The principal office of the society shall be kept in the city of Manila, and the society shall have full power to locate and establish branch offices of the society wherever it may deem advisable in the Philippine Islands, such branch offices to be under the supervision and control of the principal office. Third. The employees of the petitioner are registered and covered by the Social Security System at the latters initiative, and not through the Government Service Insurance System, which should be the case if the employees are considered government employees. This is another indication of petitioners nature as a private entity. Section 1 of Republic Act No. 1161, as amended by Republic Act No. 8282, otherwise known as the Social Security Act of 1997, defines the employer: Employer Any person, natural or juridical, domestic or foreign, who carries on in the Philippines any trade, business, industry, undertaking or activity of any kind and uses the services of another person who is under his orders as regards the employment, except the Government and any of its political subdivisions, branches or instrumentalities, including corporations owned or controlled by the Government: Provided, That a self-employed person shall be both employee and employer at the same time. (Emphasis supplied) Fourth. The respondents contend that the petitioner is a body politic because its primary purpose is to secure the protection and welfare of animals which, in turn, redounds to the public good. This argument, is, at best, specious. The fact that a certain juridical entity is impressed with public interest does not, by that circumstance alone, make the entity a public corporation, inasmuch as a corporation may be private although its charter contains provisions of a public character, incorporated solely for the public good. This class of corporations may be considered quasi-public corporations, which are private corporations that render public service, supply public wants,[21] or pursue other 319

eleemosynary objectives. While purposely organized for the gain or benefit of its members, they are required by law to discharge functions for the public benefit. Examples of these corporations are utility,[22] railroad, warehouse, telegraph, telephone, water supply corporations and transportation companies.[23] It must be stressed that a quasi-public corporation is a species of private corporations, but the qualifying factor is the type of service the former renders to the public: if it performs a public service, then it becomes a quasi-public corporation.[24] Authorities are of the view that the purpose alone of the corporation cannot be taken as a safe guide, for the fact is that almost all corporations are nowadays created to promote the interest, good, or convenience of the public. A bank, for example, is a private corporation; yet, it is created for a public benefit. Private schools and universities are likewise private corporations; and yet, they are rendering public service. Private hospitals and wards are charged with heavy social responsibilities. More so with all common carriers. On the other hand, there may exist a public corporation even if it is endowed with gifts or donations from private individuals. The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of the relation of the corporation to the State. If the corporation is created by the State as the latters own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise, it is private. Applying the above test, provinces, chartered cities, and barangays can best exemplify public corporations. They are created by the State as its own device and agency for the accomplishment of parts of its own public works.[25] It is clear that the amendments introduced by C.A. No. 148 revoked the powers of the petitioner to arrest offenders of animal welfare laws and the power to serve processes in connection therewith. 320

Fifth. The respondents argue that since the charter of the petitioner requires the latter to render periodic reports to the Civil Governor, whose functions have been inherited by the President, the petitioner is, therefore, a government instrumentality. This contention is inconclusive. By virtue of the fiction that all corporations owe their very existence and powers to the State, the reportorial requirement is applicable to all corporations of whatever nature, whether they are public, quasi-public, or private corporationsas creatures of the State, there is a reserved right in the legislature to investigate the activities of a corporation to determine whether it acted within its powers. In other words, the reportorial requirement is the principal means by which the State may see to it that its creature acted according to the powers and functions conferred upon it. These principles were extensively discussed in Bataan Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government.[26] Here, the Court, in holding that the subject corporation could not invoke the right against self-incrimination whenever the State demanded the production of its corporate books and papers, extensively discussed the purpose of reportorial requirements, viz: x x x The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve[d] right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how 321

these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780.)[27] WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a private domestic corporation subject to the jurisdiction of the Securities and Exchange Commission. The respondents are ENJOINED from investigating, examining and auditing the petitioner's fiscal and financial affairs. SO ORDERED.

322

EN BANC G.R. No. L-19550

June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners, vs. HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his capacity as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents. Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for petitioners. Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro, Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for respondents. CONCEPCION, C.J.:

323

Upon application of the officers of the government named on the margin1 hereinafter referred to as Respondents-Prosecutors several judges2 hereinafter referred to as Respondents-Judges issued, on different dates,3 a total of 42 search warrants against petitioners herein4 and/or the corporations of which they were officers,5 directed to the any peace officer, to search the persons above-named and/or the premises of their offices, warehouses and/or residences, and to seize and take possession of the following personal property to wit: Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursements receipts, balance sheets and profit and loss statements and Bobbins (cigarette wrappers). as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended to be used as the means of committing the offense," which is described in the applications adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal Code." Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the Rules of Court because, inter alia: (1) they do not describe with particularity the documents, books and things to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants were issued to fish evidence against the aforementioned petitioners in deportation cases filed against them; (4) the searches and seizures were made in an illegal manner; and (5) the documents, 324

papers and cash money seized were not delivered to the courts that issued the warrants, to be disposed of in accordance with law on March 20, 1962, said petitioners filed with the Supreme Court this original action for certiorari, prohibition, mandamus and injunction, and prayed that, pending final disposition of the present case, a writ of preliminary injunction be issued restraining RespondentsProsecutors, their agents and /or representatives from using the effects seized as aforementioned or any copies thereof, in the deportation cases already adverted to, and that, in due course, thereafter, decision be rendered quashing the contested search warrants and declaring the same null and void, and commanding the respondents, their agents or representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash moneys seized or confiscated under the search warrants in question. In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid and have been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners' consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners, regardless of the alleged illegality of the aforementioned searches and seizures. On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the papers, documents and things seized from the offices of the corporations above mentioned are concerned; but, the injunction was maintained as regards the papers, documents and things found and seized in the residences of petitioners herein.7

325

Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may be split into two (2) major groups, namely: (a) those found and seized in the offices of the aforementioned corporations, and (b) those found and seized in the residences of petitioners herein. As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or of the interest of each of them in said corporations, and whatever the offices they hold therein may be.8 Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby,9 and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. 10 Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity. 11 Indeed, it has been held: . . . that the Government's action in gaining possession of papers belonging to the corporation did not relate to nor did it affect the personal defendants. If these papers were unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the rights of the corporation and not the rights of the other defendants. Next, it is clear that a question of the lawfulness of a seizure can be raised only by one whose rights have been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had not been seized or the privacy of 326

whose homes had not been disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its violation, if any, was with reference to the rights of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It follows, therefore, that the question of the admissibility of the evidence based on an alleged unlawful search and seizure does not extend to the personal defendants but embraces only the corporation whose property was taken. . . . (A Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.) With respect to the documents, papers and things seized in the residences of petitioners herein, the aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by this Court, 12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence against petitioners herein. In connection with said documents, papers and things, two (2) important questions need be settled, namely: (1) whether the search warrants in question, and the searches and seizures made under the authority thereof, are valid or not, and (2) if the answer to the preceding question is in the negative, whether said documents, papers and things may be used in evidence against petitioners herein.1wph1.t Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and that accordingly, the seizures effected upon the authority there of are null and void. In this connection, the Constitution 13 provides: The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the 327

witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized. Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall issue but upon probable cause, to be determined by the judge in the manner set forth in said provision; and (2) that the warrant shall particularly describe the things to be seized. None of these requirements has been complied with in the contested warrants. Indeed, the same were issued upon applications stating that the natural and juridical person therein named had committed a "violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other words, no specific offense had been alleged in said applications. The averments thereof with respect to the offense committed were abstract. As a consequence, it was impossible for the judges who issued the warrants to have found the existence of probable cause, for the same presupposes the introduction of competent proof that the party against whom it is sought has performed particular acts, or committed specific omissions, violating a given provision of our criminal laws. As a matter of fact, the applications involved in this case do not allege any specific acts performed by herein petitioners. It would be the legal heresy, of the highest order, to convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code," as alleged in the aforementioned applications without reference to any determinate provision of said laws or To uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of communication and correspondence at the mercy of the whims caprice or passion of 328

peace officers. This is precisely the evil sought to be remedied by the constitutional provision above quoted to outlaw the so-called general warrants. It is not difficult to imagine what would happen, in times of keen political strife, when the party in power feels that the minority is likely to wrest it, even though by legal means. Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court 14 by providing in its counterpart, under the Revised Rules of Court 15 that "a search warrant shall not issue but upon probable cause in connection with one specific offense." Not satisfied with this qualification, the Court added thereto a paragraph, directing that "no search warrant shall issue for more than one specific offense." The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit: Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or papers showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements. Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights that the things to be seized be particularly described as well as tending to defeat its major objective: the elimination of general warrants. 329

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the searches and seizures under consideration were unconstitutional, the documents, papers and things thus seized are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are unanimously of the opinion that the position taken in the Moncado case must be abandoned. Said position was in line with the American common law rule, that the criminal should not be allowed to go free merely "because the constable has blundered," 16 upon the theory that the constitutional prohibition against unreasonable searches and seizures is protected by means other than the exclusion of evidence unlawfully obtained, 17 such as the common-law action for damages against the searching officer, against the party who procured the issuance of the search warrant and against those assisting in the execution of an illegal search, their criminal punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as may be provided by other laws. However, most common law jurisdictions have already given up this approach and eventually adopted the exclusionary rule, realizing that this is the only practical means of enforcing the constitutional injunction against unreasonable searches and seizures. In the language of Judge Learned Hand: As we understand it, the reason for the exclusion of evidence competent as such, which has been unlawfully acquired, is that exclusion is the only practical way of enforcing the constitutional privilege. In earlier times the action of trespass against the offending official may have been protection enough; but that is true no longer. Only in case the prosecution which itself controls the seizing officials, knows that it cannot profit by their wrong will that wrong be repressed.18 In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

330

If letters and private documents can thus be seized and held and used in evidence against a citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be secure against such searches and seizures, is of no value, and, so far as those thus placed are concerned, might as well be stricken from the Constitution. The efforts of the courts and their officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the sacrifice of those great principles established by years of endeavor and suffering which have resulted in their embodiment in the fundamental law of the land.19 This view was, not only reiterated, but, also, broadened in subsequent decisions on the same Federal Court. 20 After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.): . . . Today we once again examine the Wolf's constitutional documentation of the right of privacy free from unreasonable state intrusion, and after its dozen years on our books, are led by it to close the only courtroom door remaining open to evidence secured by official lawlessness in flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that very same unlawful conduct. We hold that all evidence obtained by searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a State. Since the Fourth Amendment's right of privacy has been declared enforceable against the States through the Due Process Clause of the Fourteenth, it is enforceable against them by the same sanction of exclusion as it used against the Federal Government. Were it otherwise, then just as without the Weeks rule the assurance against unreasonable federal searches and seizures would be "a form of words," valueless and underserving of mention in a perpetual charter of inestimable human liberties, so too, without that rule the freedom from state invasions of privacy would be so ephemeral and so neatly 331

severed from its conceptual nexus with the freedom from all brutish means of coercing evidence as not to permit this Court's high regard as a freedom "implicit in the concept of ordered liberty." At the time that the Court held in Wolf that the amendment was applicable to the States through the Due Process Clause, the cases of this Court as we have seen, had steadfastly held that as to federal officers the Fourth Amendment included the exclusion of the evidence seized in violation of its provisions. Even Wolf "stoutly adhered" to that proposition. The right to when conceded operatively enforceable against the States, was not susceptible of destruction by avulsion of the sanction upon which its protection and enjoyment had always been deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the substantive protections of due process to all constitutionally unreasonable searches state or federal it was logically and constitutionally necessarily that the exclusion doctrine an essential part of the right to privacy be also insisted upon as an essential ingredient of the right newly recognized by the Wolf Case. In short, the admission of the new constitutional Right by Wolf could not tolerate denial of its most important constitutional privilege, namely, the exclusion of the evidence which an accused had been forced to give by reason of the unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its privilege and enjoyment. Only last year the Court itself recognized that the purpose of the exclusionary rule to "is to deter to compel respect for the constitutional guaranty in the only effectively available way by removing the incentive to disregard it" .... The ignoble shortcut to conviction left open to the State tends to destroy the entire system of constitutional restraints on which the liberties of the people rest. Having once recognized that the right to privacy embodied in the Fourth Amendment is enforceable against the States, and that the right to be 332

secure against rude invasions of privacy by state officers is, therefore constitutional in origin, we can no longer permit that right to remain an empty promise. Because it is enforceable in the same manner and to like effect as other basic rights secured by its Due Process Clause, we can no longer permit it to be revocable at the whim of any police officer who, in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision, founded on reason and truth, gives to the individual no more than that which the Constitution guarantees him to the police officer no less than that to which honest law enforcement is entitled, and, to the courts, that judicial integrity so necessary in the true administration of justice. (emphasis ours.) Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the constitutional injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has competent evidence to establish probable cause of the commission of a given crime by the party against whom the warrant is intended, then there is no reason why the applicant should not comply with the requirements of the fundamental law. Upon the other hand, if he has no such competent evidence, then it is not possible for the Judge to find that there is probable cause, and, hence, no justification for the issuance of the warrant. The only possible explanation (not justification) for its issuance is the necessity of fishing evidence of the commission of a crime. But, then, this fishing expedition is indicative of the absence of evidence to establish a probable cause. Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration, overlooks the fact that violations thereof are, in general, committed By agents of the party in power, for, certainly, those belonging to the minority could not possibly abuse a power they do 333

not have. Regardless of the handicap under which the minority usually but, understandably finds itself in prosecuting agents of the majority, one must not lose sight of the fact that the psychological and moral effect of the possibility 21 of securing their conviction, is watered down by the pardoning power of the party for whose benefit the illegality had been committed. In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects seized in the offices of the corporations above referred to include personal belongings of said petitioners and other effects under their exclusive possession and control, for the exclusion of which they have a standing under the latest rulings of the federal courts of federal courts of the United States. 22 We note, however, that petitioners' theory, regarding their alleged possession of and control over the aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been Advanced, not in their petition or amended petition herein, but in the Motion for Reconsideration and Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be readjustment of that followed in said petitions, to suit the approach intimated in the Resolution sought to be reconsidered and amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said motion for reconsideration, or submitted in support thereof, contain either inconsistent allegations, or allegations inconsistent with the theory now advanced by petitioners herein. 334

Upon the other hand, we are not satisfied that the allegations of said petitions said motion for reconsideration, and the contents of the aforementioned affidavits and other papers submitted in support of said motion, have sufficiently established the facts or conditions contemplated in the cases relied upon by the petitioners; to warrant application of the views therein expressed, should we agree thereto. At any rate, we do not deem it necessary to express our opinion thereon, it being best to leave the matter open for determination in appropriate cases in the future. We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that the warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the documents, papers and other effects so seized in the aforementioned residences are concerned; that the aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other effects seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution, without special pronouncement as to costs. It is so ordered. Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur. CASTRO, J., concurring and dissenting:

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From my analysis of the opinion written by Chief Justice Roberto Concepcion and from the import of the deliberations of the Court on this case, I gather the following distinct conclusions: 1. All the search warrants served by the National Bureau of Investigation in this case are general warrants and are therefore proscribed by, and in violation of, paragraph 3 of section 1 of Article III (Bill of Rights) of the Constitution; 2. All the searches and seizures conducted under the authority of the said search warrants were consequently illegal; 3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1, should be, and is declared, abandoned; 4. The search warrants served at the three residences of the petitioners are expressly declared null and void the searches and seizures therein made are expressly declared illegal; and the writ of preliminary injunction heretofore issued against the use of the documents, papers and effect seized in the said residences is made permanent; and 5. Reasoning that the petitioners have not in their pleadings satisfactorily demonstrated that they have legal standing to move for the suppression of the documents, papers and effects seized in the places other than the three residences adverted to above, the opinion written by the Chief Justice refrains from expressly declaring as null and void the such warrants served at such other places and as illegal the searches and seizures made therein, and leaves "the matter open for determination in appropriate cases in the future." It is precisely the position taken by the Chief Justice summarized in the immediately preceding paragraph (numbered 5) with which I am not in accord. 336

I do not share his reluctance or unwillingness to expressly declare, at this time, the nullity of the search warrants served at places other than the three residences, and the illegibility of the searches and seizures conducted under the authority thereof. In my view even the exacerbating passions and prejudices inordinately generated by the environmental political and moral developments of this case should not deter this Court from forthrightly laying down the law not only for this case but as well for future cases and future generations. All the search warrants, without exception, in this case are admittedly general, blanket and roving warrants and are therefore admittedly and indisputably outlawed by the Constitution; and the searches and seizures made were therefore unlawful. That the petitioners, let us assume in gratia argumente, have no legal standing to ask for the suppression of the papers, things and effects seized from places other than their residences, to my mind, cannot in any manner affect, alter or otherwise modify the intrinsic nullity of the search warrants and the intrinsic illegality of the searches and seizures made thereunder. Whether or not the petitioners possess legal standing the said warrants are void and remain void, and the searches and seizures were illegal and remain illegal. No inference can be drawn from the words of the Constitution that "legal standing" or the lack of it is a determinant of the nullity or validity of a search warrant or of the lawfulness or illegality of a search or seizure. On the question of legal standing, I am of the conviction that, upon the pleadings submitted to this Court the petitioners have the requisite legal standing to move for the suppression and return of the documents, papers and effects that were seized from places other than their family residences. Our constitutional provision on searches and seizures was derived almost verbatim from the Fourth Amendment to the United States Constitution. In the many years of judicial construction and 337

interpretation of the said constitutional provision, our courts have invariably regarded as doctrinal the pronouncement made on the Fourth Amendment by federal courts, especially the Federal Supreme Court and the Federal Circuit Courts of Appeals. The U.S. doctrines and pertinent cases on standing to move for the suppression or return of documents, papers and effects which are the fruits of an unlawful search and seizure, may be summarized as follows; (a) ownership of documents, papers and effects gives "standing;" (b) ownership and/or control or possession actual or constructive of premises searched gives "standing"; and (c) the "aggrieved person" doctrine where the search warrant and the sworn application for search warrant are "primarily" directed solely and exclusively against the "aggrieved person," gives "standing." An examination of the search warrants in this case will readily show that, excepting three, all were directed against the petitioners personally. In some of them, the petitioners were named personally, followed by the designation, "the President and/or General Manager" of the particular corporation. The three warrants excepted named three corporate defendants. But the "office/house/warehouse/premises" mentioned in the said three warrants were also the same "office/house/warehouse/premises" declared to be owned by or under the control of the petitioners in all the other search warrants directed against the petitioners and/or "the President and/or General Manager" of the particular corporation. (see pages 5-24 of Petitioners' Reply of April 2, 1962). The searches and seizures were to be made, and were actually made, in the "office/house/warehouse/premises" owned by or under the control of the petitioners. Ownership of matters seized gives "standing."

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Ownership of the properties seized alone entitles the petitioners to bring a motion to return and suppress, and gives them standing as persons aggrieved by an unlawful search and seizure regardless of their location at the time of seizure. Jones vs. United States, 362 U.S. 257, 261 (1960) (narcotics stored in the apartment of a friend of the defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal and corporate papers of corporation of which the defendant was president), United States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not belonging to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th Cir. 1925) (books seized from the defendant's sister but belonging to the defendant); Cf. Villano vs. United States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized in desk neither owned by nor in exclusive possession of the defendant). In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it was held that under the constitutional provision against unlawful searches and seizures, a person places himself or his property within a constitutionally protected area, be it his home or his office, his hotel room or his automobile: Where the argument falls is in its misapprehension of the fundamental nature and scope of Fourth Amendment protection. What the Fourth Amendment protects is the security a man relies upon when he places himself or his property within a constitutionally protected area, be it his home or his office, his hotel room or his automobile. There he is protected from unwarranted governmental intrusion. And when he puts some thing in his filing cabinet, in his desk drawer, or in his pocket, he has the right to know it will be secure from an unreasonable search or an unreasonable seizure. So it was that the Fourth Amendment could not tolerate the warrantless search of the hotel room in Jeffers, the purloining of the petitioner's private papers in Gouled, or the surreptitious electronic surveilance in Silverman. 339

Countless other cases which have come to this Court over the years have involved a myriad of differing factual contexts in which the protections of the Fourth Amendment have been appropriately invoked. No doubt, the future will bring countless others. By nothing we say here do we either foresee or foreclose factual situations to which the Fourth Amendment may be applicable. (Hoffa vs. U.S., 87 S. Ct. 408 (December 12, 1966). See also U.S. vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951). (Emphasis supplied). Control of premises searched gives "standing." Independent of ownership or other personal interest in the records and documents seized, the petitioners have standing to move for return and suppression by virtue of their proprietary or leasehold interest in many of the premises searched. These proprietary and leasehold interests have been sufficiently set forth in their motion for reconsideration and need not be recounted here, except to emphasize that the petitioners paid rent, directly or indirectly, for practically all the premises searched (Room 91, 84 Carmen Apts; Room 304, Army & Navy Club; Premises 2008, Dewey Boulevard; 1436 Colorado Street); maintained personal offices within the corporate offices (IBMC, USTC); had made improvements or furnished such offices; or had paid for the filing cabinets in which the papers were stored (Room 204, Army & Navy Club); and individually, or through their respective spouses, owned the controlling stock of the corporations involved. The petitioners' proprietary interest in most, if not all, of the premises searched therefore independently gives them standing to move for the return and suppression of the books, papers and affects seized therefrom. In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and extent of the interest in the searched premises necessary to maintain a motion to suppress. After reviewing what it 340

considered to be the unduly technical standard of the then prevailing circuit court decisions, the Supreme Court said (362 U.S. 266): We do not lightly depart from this course of decisions by the lower courts. We are persuaded, however, that it is unnecessarily and ill-advised to import into the law surrounding the constitutional right to be free from unreasonable searches and seizures subtle distinctions, developed and refined by the common law in evolving the body of private property law which, more than almost any other branch of law, has been shaped by distinctions whose validity is largely historical. Even in the area from which they derive, due consideration has led to the discarding of those distinctions in the homeland of the common law. See Occupiers' Liability Act, 1957, 5 and 6 Eliz. 2, c. 31, carrying out Law Reform Committee, Third Report, Cmd. 9305. Distinctions such as those between "lessee", "licensee," "invitee," "guest," often only of gossamer strength, ought not be determinative in fashioning procedures ultimately referable to constitutional safeguards. See also Chapman vs. United States, 354 U.S. 610, 616-17 (1961). It has never been held that a person with requisite interest in the premises searched must own the property seized in order to have standing in a motion to return and suppress. In Alioto vs. United States, 216 F. Supp. 48 (1963), a Bookkeeper for several corporations from whose apartment the corporate records were seized successfully moved for their return. In United States vs. Antonelli, Fireworks Co., 53 F. Supp. 870, 873 (W D. N. Y. 1943), the corporation's president successfully moved for the return and suppression is to him of both personal and corporate documents seized from his home during the course of an illegal search: The lawful possession by Antonelli of documents and property, "either his own or the corporation's was entitled to protection against unreasonable search and seizure. Under the circumstances in the case at 341

bar, the search and seizure were unreasonable and unlawful. The motion for the return of seized article and the suppression of the evidence so obtained should be granted. (Emphasis supplied). Time was when only a person who had property in interest in either the place searched or the articles seize had the necessary standing to invoke the protection of the exclusionary rule. But in MacDonald vs. Unite States, 335 U.S. 461 (1948), Justice Robert Jackson joined by Justice Felix Frankfurter, advanced the view that "even a guest may expect the shelter of the rooftree he is under against criminal intrusion." This view finally became the official view of the U.S. Supreme Court and was articulated in United States vs. Jeffers, 432 U.S 48 (1951). Nine years later, in 1960, in Jones vs. Unite States, 362 U.S. 257, 267, the U.S. Supreme Court went a step further. Jones was a mere guest in the apartment unlawfully searched but the Court nonetheless declared that the exclusionary rule protected him as well. The concept of "person aggrieved by an unlawful search and seizure" was enlarged to include "anyone legitimately on premise where the search occurs." Shortly after the U.S. Supreme Court's Jones decision the U.S. Court of Appeals for the Fifth Circuit held that the defendant organizer, sole stockholder and president of a corporation had standing in a mail fraud prosecution against him to demand the return and suppression of corporate property. Henzel vs. United States, 296 F 2d 650, 652 (5th Cir. 1961), supra. The court conclude that the defendant had standing on two independent grounds: First he had a sufficient interest in the property seized, and second he had an adequate interest in the premises searched (just like in the case at bar). A postal inspector had unlawfully searched the corporation' premises and had seized most of the corporation's book and records. Looking to Jones, the court observed:

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Jones clearly tells us, therefore, what is not required qualify one as a "person aggrieved by an unlawful search and seizure." It tells us that appellant should not have been precluded from objecting to the Postal Inspector's search and seizure of the corporation's books and records merely because the appellant did not show ownership or possession of the books and records or a substantial possessory interest in the invade premises . . . (Henzel vs. United States, 296 F. 2d at 651). . Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683, (10th Cir. 1962). In Villano, police officers seized two notebooks from a desk in the defendant's place of employment; the defendant did not claim ownership of either; he asserted that several employees (including himself) used the notebooks. The Court held that the employee had a protected interest and that there also was an invasion of privacy. Both Henzel and Villano considered also the fact that the search and seizure were "directed at" the moving defendant. Henzel vs. United States, 296 F. 2d at 682; Villano vs. United States, 310 F. 2d at 683. In a case in which an attorney closed his law office, placed his files in storage and went to Puerto Rico, the Court of Appeals for the Eighth Circuit recognized his standing to move to quash as unreasonable search and seizure under the Fourth Amendment of the U.S. Constitution a grand jury subpoena duces tecum directed to the custodian of his files. The Government contended that the petitioner had no standing because the books and papers were physically in the possession of the custodian, and because the subpoena was directed against the custodian. The court rejected the contention, holding that Schwimmer legally had such possession, control and unrelinquished personal rights in the books and papers as not to enable the question of unreasonable search and seizure to be escaped through the

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mere procedural device of compelling a third-party naked possessor to produce and deliver them. Schwimmer vs. United States, 232 F. 2d 855, 861 (8th Cir. 1956). Aggrieved person doctrine where the search warrant s primarily directed against said person gives "standing." The latest United States decision squarely in point is United States vs. Birrell, 242 F. Supp. 191 (1965, U.S.D.C. S.D.N.Y.). The defendant had stored with an attorney certain files and papers, which attorney, by the name of Dunn, was not, at the time of the seizing of the records, Birrell's attorney. * Dunn, in turn, had stored most of the records at his home in the country and on a farm which, according to Dunn's affidavit, was under his (Dunn's) "control and management." The papers turned out to be private, personal and business papers together with corporate books and records of certain unnamed corporations in which Birrell did not even claim ownership. (All of these type records were seized in the case at bar). Nevertheless, the search in Birrell was held invalid by the court which held that even though Birrell did not own the premises where the records were stored, he had "standing" to move for the return of all the papers and properties seized. The court, relying on Jones vs. U.S., supra; U.S. vs. Antonelli Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S., supra; and Schwimmer vs. U.S., supra, pointed out that It is overwhelmingly established that the searches here in question were directed solely and exclusively against Birrell. The only person suggested in the papers as having violated the law was Birrell. The first search warrant described the records as having been used "in committing a violation of Title 18, United States Code, Section 1341, by the use of the mails by one Lowell M. Birrell, . . ." The second search warrant was captioned: "United States of America vs. Lowell M. Birrell. (p. 198) 344

Possession (actual or constructive), no less than ownership, gives standing to move to suppress. Such was the rule even before Jones. (p. 199) If, as thus indicated Birrell had at least constructive possession of the records stored with Dunn, it matters not whether he had any interest in the premises searched. See also Jeffers v. United States, 88 U.S. Appl. D.C. 58, 187 F. 2d 498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951). The ruling in the Birrell case was reaffirmed on motion for reargument; the United States did not appeal from this decision. The factual situation in Birrell is strikingly similar to the case of the present petitioners; as in Birrell, many personal and corporate papers were seized from premises not petitioners' family residences; as in Birrell, the searches were "PRIMARILY DIRECTED SOLETY AND EXCLUSIVELY" against the petitioners. Still both types of documents were suppressed in Birrell because of the illegal search. In the case at bar, the petitioners connection with the premises raided is much closer than in Birrell. Thus, the petitioners have full standing to move for the quashing of all the warrants regardless whether these were directed against residences in the narrow sense of the word, as long as the documents were personal papers of the petitioners or (to the extent that they were corporate papers) were held by them in a personal capacity or under their personal control. Prescinding a from the foregoing, this Court, at all events, should order the return to the petitioners all personal and private papers and effects seized, no matter where these were seized, whether from their residences or corporate offices or any other place or places. The uncontradicted sworn statements of the petitioners in their, various pleadings submitted to this Court indisputably show that amongst the

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things seized from the corporate offices and other places were personal and private papers and effects belonging to the petitioners. If there should be any categorization of the documents, papers and things which where the objects of the unlawful searches and seizures, I submit that the grouping should be: (a) personal or private papers of the petitioners were they were unlawfully seized, be it their family residences offices, warehouses and/or premises owned and/or possessed (actually or constructively) by them as shown in all the search and in the sworn applications filed in securing the void search warrants and (b) purely corporate papers belonging to corporations. Under such categorization or grouping, the determination of which unlawfully seized papers, documents and things are personal/private of the petitioners or purely corporate papers will have to be left to the lower courts which issued the void search warrants in ultimately effecting the suppression and/or return of the said documents. And as unequivocally indicated by the authorities above cited, the petitioners likewise have clear legal standing to move for the suppression of purely corporate papers as "President and/or General Manager" of the corporations involved as specifically mentioned in the void search warrants. Finally, I must articulate my persuasion that although the cases cited in my disquisition were criminal prosecutions, the great clauses of the constitutional proscription on illegal searches and seizures do not withhold the mantle of their protection from cases not criminal in origin or nature.

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