THEORY OF CONCESSION

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administratorappellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust
Company of New York, United States of America, of the estate of the deceased Idonah Slade Perkins,
who died in New York City on March 27, 1960, to surrender to the ancillary administrator in the
Philippines the stock certificates owned by her in a Philippine corporation, Benguet Consolidated, Inc.,
to satisfy the legitimate claims of local creditors, the lower court, then presided by the Honorable
Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering the
motion of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by the
Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in connection with
the administration and liquidation of the Philippine estate of Idonah Slade Perkins the stock
certificates covering the 33,002 shares of stock standing in her name in the books of the Benguet
Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said corporation to issue new
certificates in lieu thereof, the same to be delivered by said corporation to either the incumbent
ancillary administrator or to the Probate Division of this Court."1
From such an order, an appeal was taken to this Court not by the domiciliary administrator, the
County Trust Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc.
The appeal cannot possibly prosper. The challenged order represents a response and expresses a
policy, to paraphrase Frankfurter, arising out of a specific problem, addressed to the attainment of
specific ends by the use of specific remedies, with full and ample support from legal doctrines of
weight and significance.
The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah
Slade Perkins, who died on March 27, 1960 in New York City, left among others, two stock certificates
covering 33,002 shares of appellant, the certificates being in the possession of the County Trust
Company of New York, which as noted, is the domiciliary administrator of the estate of the deceased.2
Then came this portion of the appellant's brief: "On August 12, 1960, Prospero Sanidad instituted
ancillary administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez was
appointed ancillary administrator, and on January 22, 1963, he was substituted by the appellee Renato
D. Tayag. A dispute arose between the domiciary administrator in New York and the ancillary
administrator in the Philippines as to which of them was entitled to the possession of the stock
certificates in question. On January 27, 1964, the Court of First Instance of Manila ordered the

domiciliary administrator, County Trust Company, to "produce and deposit" them with the ancillary
administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order,
and on February 11, 1964, the ancillary administrator petitioned the court to "issue an order declaring
the certificate or certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade
Perkins by Benguet Consolidated, Inc., be declared [or] considered as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as far
as it is concerned as to "who is entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator because the said stock certificates are in
existence, they are today in the possession of the domiciliary administrator, the County Trust
Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or
considered as lost. Moreover, it would allege that there was a failure to observe certain requirements
of its by-laws before new stock certificates could be issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order
constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful
conduct of the domiciliary administrator in refusing to accord obedience to a court decree. How, then,
can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response was called for by the realities of
the situation. What cannot be ignored is that conduct bordering on wilful defiance, if it had not
actually reached it, cannot without undue loss of judicial prestige, be condoned or tolerated. For the
law is not so lacking in flexibility and resourcefulness as to preclude such a solution, the more so as
deeper reflection would make clear its being buttressed by indisputable principles and supported by
the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no
less than that of the country. Through this challenged order, there is thus dispelled the atmosphere of
contingent frustration brought about by the persistence of the domiciliary administrator to hold on to
the stock certificates after it had, as admitted, voluntarily submitted itself to the jurisdiction of the
lower court by entering its appearance through counsel on June 27, 1963, and filing a petition for
relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was
decreed. For without it, what it had been decided would be set at naught and nullified. Unless such a
blatant disregard by the domiciliary administrator, with residence abroad, of what was previously
ordained by a court order could be thus remedied, it would have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary
administrator to gain control and possession of all assets of the decedent within the jurisdiction of the
1

Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and satisfy the claims
of local creditors.5 As Justice Tuason speaking for this Court made clear, it is a "general rule universally
recognized" that administration, whether principal or ancillary, certainly "extends to the assets of a
decedent found within the state or country where it was granted," the corollary being "that an
administrator appointed in one state or country has no power over property in another state or
country."6
It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set
forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration of an
estate. When a person dies intestate owning property in the country of his domicile as well as in a
foreign country, administration is had in both countries. That which is granted in the jurisdiction of
decedent's last domicile is termed the principal administration, while any other administration is
termed the ancillary administration. The reason for the latter is because a grant of administration does
not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an
administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary
administration is proper, whenever a person dies, leaving in a country other than that of his last
domicile, property to be administered in the nature of assets of the deceased liable for his individual
debts or to be distributed among his heirs."7
It would follow then that the authority of the probate court to require that ancillary administrator's
right to "the stock certificates covering the 33,002 shares ... standing in her name in the books of
[appellant] Benguet Consolidated, Inc...." be respected is equally beyond question. For appellant is a
Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds application. "In the
instant case, the actual situs of the shares of stock is in the Philippines, the corporation being
domiciled [here]." To the force of the above undeniable proposition, not even appellant is insensible.
It does not dispute it. Nor could it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the
legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose to carry the
extremely heavy burden of persuasion of precisely demonstrating the contrary? It would assign as the
basic error allegedly committed by the lower court its "considering as lost the stock certificates
covering 33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9 More
specifically, appellant would stress that the "lower court could not "consider as lost" the stock
certificates in question when, as a matter of fact, his Honor the trial Judge knew, and does know, and
it is admitted by the appellee, that the said stock certificates are in existence and are today in the
possession of the domiciliary administrator in New York."10
There may be an element of fiction in the above view of the lower court. That certainly does not
suffice to call for the reversal of the appealed order. Since there is a refusal, persistently adhered to by
the domiciliary administrator in New York, to deliver the shares of stocks of appellant corporation

owned by the decedent to the ancillary administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new
certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator
could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to depend on the
uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far has shown
the utmost persistence in refusing to yield obedience. Certainly, appellant would not be heard to
contend in all seriousness that a judicial decree could be treated as a mere scrap of paper, the court
issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did not correspond
exactly with the facts. To be more blunt, the quality of truth may be lacking in such a conclusion
arrived at. It is to be remembered however, again to borrow from Frankfurter, "that fictions which the
law may rely upon in the pursuit of legitimate ends have played an important part in its
development."11
Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to
advance the ends of justice, [even if] clumsy and at times offensive."12 Some of them have persisted
even to the present, that eminent jurist, noting "the quasi contract, the adopted child, the
constructive trust, all of flourishing vitality, to attest the empire of "as if" today."13 He likewise noted
"a class of fictions of another order, the fiction which is a working tool of thought, but which at times
hides itself from view till reflection and analysis have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in
the law. There should be then on the part of the appellant a further refinement in the catholicity of its
condemnation of such judicial technique. If ever an occasion did call for the employment of a legal
fiction to put an end to the anomalous situation of a valid judicial order being disregarded with
apparent impunity, this is it. What is thus most obvious is that this particular alleged error does not
carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking
one of the provisions of its by-laws which would set forth the procedure to be followed in case of a
lost, stolen or destroyed stock certificate; it would stress that in the event of a contest or the
pendency of an action regarding ownership of such certificate or certificates of stock allegedly lost,
stolen or destroyed, the issuance of a new certificate or certificates would await the "final decision by
[a] court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is
admitted that the foreign domiciliary administrator did not appeal from the order now in question.
Moreover, there is likewise the express admission of appellant that as far as it is concerned, "it is
immaterial ... who is entitled to the possession of the stock certificates ..." Even if such were not the
case, it would be a legal absurdity to impart to such a provision conclusiveness and finality. Assuming
2

that a contrariety exists between the above by-law and the command of a court decree, the latter is to
be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which,
however, the judiciary must yield deference, when appropriately invoked and deemed applicable. It
would be most highly unorthodox, however, if a corporate by-law would be accorded such a high
estate in the jural order that a court must not only take note of it but yield to its alleged controlling
force.
The fear of appellant of a contingent liability with which it could be saddled unless the appealed order
be set aside for its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful
court order certainly constitutes a valid defense, assuming that such apprehension of a possible court
action against it could possibly materialize. Thus far, nothing in the circumstances as they have
developed gives substance to such a fear. Gossamer possibilities of a future prejudice to appellant do
not suffice to nullify the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications
at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being created by operation of
law...."16 It owes its life to the state, its birth being purely dependent on its will. As Berle so aptly
stated: "Classically, a corporation was conceived as an artificial person, owing its existence through
creation by a sovereign power."17 As a matter of fact, the statutory language employed owes much to
Chief Justice Marshall, who in the Dartmouth College decision defined a corporation precisely as "an
artificial being, invisible, intangible, and existing only in contemplation of law."18
The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact and
in reality a person, but the law treats it as though it were a person by process of fiction, or by
regarding it as an artificial person distinct and separate from its individual stockholders.... It owes its
existence to law. It is an artificial person created by law for certain specific purposes, the extent of
whose existence, powers and liberties is fixed by its charter."19 Dean Pound's terse summary, a
juristic person, resulting from an association of human beings granted legal personality by the state,
puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from
Friedmann, "is the reality of the group as a social and legal entity, independent of state recognition
and concession."21 A corporation as known to Philippine jurisprudence is a creature without any
existence until it has received the imprimatur of the state according to law. It is logically inconceivable
therefore that it will have rights and privileges of a higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding
the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still of persuasive
authority in our jurisdiction, comes more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is
not immune from judicial control in those instances, where a duty under the law as ascertained in an
appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to disregard is to confer upon it not
autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may,
when so minded, overrule the state, the source of its very existence; it is to contend that what any of
its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot
possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that in a guardianship
proceedings then pending in a lower court, the United States Veterans Administration filed a motion
for the refund of a certain sum of money paid to the minor under guardianship, alleging that the lower
court had previously granted its petition to consider the deceased father as not entitled to guerilla
benefits according to a determination arrived at by its main office in the United States. The motion
was denied. In seeking a reconsideration of such order, the Administrator relied on an American
federal statute making his decisions "final and conclusive on all questions of law or fact" precluding
any other American official to examine the matter anew, "except a judge or judges of the United
States court."23 Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion that
the appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the
decisions of the U.S. Veterans' Administrator final and conclusive when made on claims property
submitted to him for resolution; but they are not applicable to the present case, where the
Administrator is not acting as a judge but as a litigant. There is a great difference between actions
against the Administrator (which must be filed strictly in accordance with the conditions that are
imposed by the Veterans' Act, including the exclusive review by United States courts), and those
actions where the Veterans' Administrator seeks a remedy from our courts and submits to their
jurisdiction by filing actions therein. Our attention has not been called to any law or treaty that would
make the findings of the Veterans' Administrator, in actions where he is a party, conclusive on our
courts. That, in effect, would deprive our tribunals of judicial discretion and render them mere
subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive,
determinations made by foreign governmental agencies. It is infinitely worse if through the absence of
any coercive power by our courts over juridical persons within our jurisdiction, the force and
effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is
difficult to imagine of a situation more offensive to the dignity of the bench or the honor of the
country.

Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet
Consolidated seems to be firmly committed as shown by its failure to accept the validity of the order
complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not succeed.
The deplorable consequences attendant on appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS,
HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:

That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to
conjure extreme and even oppressive possibilities. That is not decisive. It does not settle the issue.
What carries weight and conviction is the result arrived at, the just solution obtained, grounded in the
soundest of legal doctrines and distinguished by its correspondence with what a sense of realism
requires. For through the appealed order, the imperative requirement of justice according to law is
satisfied and national dignity and honor maintained.

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.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First
Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the
South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of
China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received,
the Federation made two partial payments, both in September of 1989, in the total amount of
P176,467.50.[2]
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter
requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.[4]
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation.[5] Thereafter, no further payments were
made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued
Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation
as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the
tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said
obligation.[6]
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation
owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that
the petitioner has no cause of action against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he did not guarantee payment but merely
acted as an agent of the Federation which has a separate and distinct juridical personality.[7]
On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial
court.[8]

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling,
the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his
Answer. Being the President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the
plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power to enter into, or to
ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not
binding on, or enforceable against it. The officers or agents are themselves personally liable.
x x 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]
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It
rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the

Federation, he should not be held liable for the same as said entity has a separate and distinct
personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation
be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution
of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation,
it should be remembered that the trial court dismissed the complaint against the Philippine Football
Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently, no judgment may be pronounced by this
Court against the PFF without violating the due process clause, let alone the fact that the judgment
dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to
appeal therefrom. The alternative prayer is therefore similarly DENIED.[12]
Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors:[13]
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT
PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A
CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN
PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED
WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL
PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE
HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF
IS SOLELY LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the
Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the
laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical
existence of national sports associations. This may be gleaned from the powers and functions granted
to these associations. Section 14 of R.A. 3135 provides:
5

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the
following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and government;
2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due consultation with the
executive committee;
xxx
13. To perform such other acts as may be necessary for the proper accomplishment of their purposes
and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations
shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government which shall be
submitted to the Department and any amendment thereto shall take effect upon approval by the
Department: Provided, however, That no team, school, club, organization, or entity shall be admitted
as a voting member of an association unless 60 per cent of the athletes composing said team, school,
club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the
Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games,
for the promotion of their sport;

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property
are acts which may only be done by persons, whether natural or artificial, with juridical capacity.
However, while we agree with the appellate court that national sports associations may be accorded
corporate status, such does not automatically take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the State must give
its consent either in the form of a special law or a general enabling act. We cannot agree with the view
of the appellate court and the private respondent that the Philippine Football Federation came into
existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any
provision creating the Philippine Football Federation. These laws merely recognized the existence of
national sports associations and provided the manner by which these entities may acquire juridical
personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be
organized for each individual sports in the Philippines in the manner hereinafter provided to
constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National
Sports' Association shall be filed with the executive committee together with, among others, a copy of
the constitution and by-laws and a list of the members of the proposed association, and a filing fee of
ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied that said association will
promote the purposes of this Act and particularly section three thereof. No application shall be held
pending for more than three months after the filing thereof without any action having been taken
thereon by the executive committee. Should the application be rejected, the reasons for such
rejection shall be clearly stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be considered as unacted upon:
Provided, however, That until the executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said executive committee
shall be dissolved upon the organization of the executive committee herein provided: Provided,
further, That the functioning executive committee is charged with the responsibility of seeing to it that
the National Sports' Associations are formed and organized within six months from and after the
passage of this Act.
Section 7 of P.D. 604, similarly provides:

5. Affiliate with international or regional sports associations after due consultation with the
Department;
xxx

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.
6

THEORY OF ENTERPRISE ENTITY

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially complied
with the rules and regulations of the Department: Provided, That the Department may withdraw
accreditation or recognition for violation of this Decree and such rules and regulations formulated by
it.

PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL
LAND, INC., respondents.

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.

TORRES, JR., J.:

Clearly the above cited provisions require that before an entity may be considered as a national sports
association, such entity must be recognized by the accrediting organization, the Philippine Amateur
Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under
P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove
the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before
the trial court a copy of the constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and
Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national
sports association within the purview of the aforementioned laws and does not have corporate
existence of its own.
Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract entered into or for other acts
performed as such agent.[14] As president of the Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of the Federation. We cannot subscribe to the
position taken by the appellate court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the Federation because it had
contracted and dealt with the Federation in such a manner as to recognize and in effect admit its
existence.[15] The doctrine of corporation by estoppel is mistakenly applied by the respondent court
to the petitioner. The application of the doctrine applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the irrelevant ground of defective
incorporation.[16] In the case at bar, the petitioner is not trying to escape liability from the contract
but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional
Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.

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 inumerable functions, and one of
the most important, is the supervision of all corporations, partnerships or associations, who are
grantees of primary franchise and/or a license or permit issued by the 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 on 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 PALI's 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 PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the 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
7

his estate, and requested PALI's application to be deferred. PALI was requested to comment upon the
said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort
Complex were not claimed by PALI as its assets. On the contrary, the resort is actually owned by
Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also asserting legal and beneficial ownership of other
properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission
on Good Government (PCGG) requesting for comments on the letters 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 PALI's application, citing the existence of serious claims, issues and circumstances
surrounding PALI's ownership over its assets that adversely affect the suitability of listing PALI's 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 SEC's 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 PSE's action
on PALI's listing application and institute such measures as are just and proper under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI
and directing the PSE to file its comments thereto within five days from its receipt and for its
authorized representative to appear for an "inquiry" on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion of
the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and jurisdiction under
Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of 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
investigating 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 reconsider its order
dated April 24, 1996, and in the light of recent developments on the adverse claim against the PALI
properties, PSE should require PALI to submit full disclosure of material facts and information to
protect the investing public. In this regard, PALI is hereby ordered to amend its registration statements
filed with the Commission to incorporate the full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for
Review (with Application for Writ of Preliminary Injunction and Temporary Restraining Order),
assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED
IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALI'S 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 fled its Reply to Comment and Opposition to Motion to
Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for
Review. Hence, this Petition by the PSE.
8

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 respondent's 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
SEC's ruling to the effect that:
. . . 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 situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were even less serious than the
claims against the assets of the other companies in that, the assertions of the Marcoses that they are
owners of the disputed properties were not substantiated enough to overcome the strength of a title
to properties issued under the Torrens System as evidence of ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify PALI's ownership
over the disputed properties, neither has the government instituted recovery proceedings against
these properties. Yet the import of PSE's decision in denying PALI's application is that it would be PALI,
not the Marcoses, that must go to court to prove the legality of its ownership on these properties
before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not
inspire belief. The point is, the PALI properties are now titled. A property losses its public character the
moment it is covered by a title. As a matter of fact, the titles have long been settled by a final
judgment; and the final decree having been registered, they can no longer be re-opened considering

that the one year period has already passed. Lastly, the determination of what standard to apply in
allowing PALI's 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, 19961 the PSE, after it was granted an extension, filed the 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 PCGG's 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 PCGG's motion for leave to file petition for intervention, PALI
filed its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20,
1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI
(October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list
the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC
over stock exchanges are more limited as compared to its authority over ordinary corporations. In
connection with this, the powers of the SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to reverse the decisions of the stock
exchange. Authorities are in abundance even in the United States, from which the country's security
policies are patterned, to the effect of giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making the decision whether or not to allow
corporations to offer their stock to the public through the stock exchange. This is in accord with the
"business judgment rule" whereby the SEC and the courts are barred from intruding into business
judgments of corporations, when the same are made in good faith. the said rule precludes the reversal
of the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part
of the PSE. Under the listing rules 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 issuer's
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.
Sadiganbayan, 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 subject of forfeiture proceedings in
the Sandiganbayan. This ruling of the Court is the "law of the case" between the Republic and TDC and
9

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, intimated that the Court of Appeals' sanction that PALI's 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 SEC's and the Court of Appeals reliance on the alleged policy of "full
disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear mandate for
the effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with
the listing rules and disclosure requirements. In fact, PALI's documents supporting its application
contained misrepresentations and misleading statements, and concealed material information. The
matter of sequestration of PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed
with the markings of a corporate entity, it functions as the primary channel through which the vessels
of capital trade ply. The PSE's 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 necessarily. 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 country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give special
treatment to the administration and regulation of stock exchanges. 6
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 safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's
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 SEC's regulatory authority over private corporations encompasses a
wide margin of areas, touching nearly all of a corporation's concerns. This authority springs from the
fact that a corporation owes its existence to the concession of its corporate franchise from the state.

The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SEC's 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 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 SEC's 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
SEC's 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:
Paramount policy also supports the authority of the public respondent to review petitioner's 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
This is not to say, however, that the PSE's management prerogatives are under the absolute control of
the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE's 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 a body. 11 As to its corporate and
management decisions, therefore, the state will generally not interfere with the same. Questions of
10

policy and of management are left to the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their judgment for the judgment of the
board of directors. The board is the business manager of the corporation, and so long as it acts in good
faith, its orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to
reverse the PSE's decision in matters of application for listing in the market, the SEC may exercise such
power only if the PSE's 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 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 decisions to buy and sell securities, but
also to protect legitimate business seeking to obtain capital through honest presentation against
competition from crooked promoters and to prevent fraud in the sale of securities. (Tenth Annual
Report, U.S. Securities & 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 their 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, . . . Thus, the Commission may refuse to permit a registration statement to
become effective if it appears on its face to be incomplete or inaccurate in any material respect, and
empower the Commission to issue a stop order suspending the effectiveness of any registration

statement which is found to include any untrue statement of a material fact or to omit to state any
material fact required to be stated therein or necessary to make the statements therein not
misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill, and it has
the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities
who choose to transact through its facilities. It was reasonable for the 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 is 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 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 the Marcos estate, and were held only in
trust by Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and
forest reserves, and therefore beyond private dominion. If any of these claims is established to be
true, the certificates of title over the subject properties now held by PALI map 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 PALI's 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
corporation entity, whose business judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and sale of
securities in the SEC is not for the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to administer the Revised Securities Act,
and in performing its other functions under pertinent laws, the Revised Securities Act, under Section 3
thereof, gives the SEC the power to promulgate such rules and regulations as it may consider
appropriate in the public interest for the enforcement of the said laws. The second paragraph of
Section 4 of the said law, on the other hand, provides that no security, unless exempt by law, shall be
issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless registered in
accordance with the rules and regulations that shall be promulgated in the public interest and for the
protection of investors by the Commission. Presidential Decree No. 902-A, on the other hand, provides
11

that the SEC, as regulatory agency, has supervision and control over all corporations and over the
securities market as a whole, and as such, is given ample authority in determining appropriate policies.
Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of "full
material disclosure" where all companies, listed or applying for listing, are required to divulge
truthfully and accurately, all material information about themselves and the securities they sell, for
the protection of the investing public, and under pain of administrative, criminal and civil sanctions. In
connection with this, a fact is deemed material if it tends to induce or otherwise effect the sale or
purchase of its securities. 15 While the employment of this policy is recognized and sanctioned by the
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 fact required to be stated
therein or necessary to make the statements therein not misleading; or
(2) The issuer or registrant
(i) is not solvent or not in 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;

(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 of the public interest or as a fraud upon the purchasers 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 interests 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. As it is, the Court finds that the private respondent PALI, on at least two points
(nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity,
thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in
its stock exchange. This does not discount the effectivity of whatever method the SEC, in the exercise
of its vested authority, chooses in setting the standard for public offerings of corporations wishing to
do so. However, the SEC must recognize and implement the mandate of the law, particularly the
Revised Securities Act, the provisions of which cannot be amended or supplanted by mere
administrative issuance.
In resume, 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.

(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;

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 Exchange
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.

(iv) has been engaged or is engaged or is about to engage in fraudulent transaction;

SO ORDERED.

(v) is in any way dishonest or 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 to 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
be such officer, director or principal stockholder; or
12

CORPORATION AS A CREATURE OF LAW AND CONSTITUTIONAL PROVISION ON THE CREATION OF

CORPORATION

organizational and management relationship between Veterans Federation of the Philippines and the
Philippine Veterans Bank which for many years have been inadvertently overlooked.

THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R. Acorda, Petitioner,

vs.
Hon. ANGELO T. REYES in his capacity as Secretary of National Defense; and Hon. EDGARDO E.
BATENGA in his capacity as Undersecretary for Civil Relations and Administration of the Department of
National Defense, Respondents.

I refer to Republic Act 2640 creating the body corporate known as the VFP and Republic Act 3518
creating the Phil. Vets [sic] Bank.

DECISION

2. RA 2640 Section 12 ... "On or before the last day of the month following the end of each fiscal year,
the Federation shall make and transmit to the President of the Philippines or to the Secretary of
National Defense, a report of its proceedings for the past year, including a full, complete and itemized
report of receipts and expenditures of whatever kind."

CHICO-NAZARIO, J.:
This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil Procedure,
with a prayer to declare as void Department Circular No. 04 of the Department of National Defense
(DND), dated 10 June 2002.
Petitioner in this case is the Veterans Federation of the Philippines (VFP), a corporate body organized
under Republic Act No. 2640, dated 18 June 1960, as amended, and duly registered with the Securities
and Exchange Commission. Respondent Angelo T. Reyes was the Secretary of National Defense (DND
Secretary) who issued the assailed Department Circular No. 04, dated 10 June 2002. Respondent
Edgardo E. Batenga was the DND Undersecretary for Civil Relations and Administration who was
tasked by the respondent DND Secretary to conduct an extensive management audit of the records of
petitioner.

1. RA 2640 dated 18 June 60 Section 1 ... "hereby created a body corporate, under the control and
supervision of the Secretary of National Defense."

3. Republic Act 3518 dated 18 June 1963 (An Act Creating the Philippine Veterans Bank, and for Other
Purposes) provides in Section 6 that ... "the affairs and business of the Philippine Veterans Bank shall
be directed and its property managed, controlled and preserved, unless otherwise provided in this Act,
by a Board of Directors consisting of eleven (11) members to be composed of three ex officio
members to wit: the Philippine Veterans Administrator, the President of the Veterans Federation of
the Philippines and the Secretary of National Defense x x x.
It is therefore in the context of clarification and rectification of what should have been done by the
DND (Department of National Defense) for and about the VFP and PVB that I am requesting
appropriate information and report about these two corporate bodies.

The factual and procedural antecedents of this case are as follows:

Therefore it may become necessary that a conference with your staffs in these two bodies be set.

Petitioner VFP was created under Rep. Act No. 2640,1 a statute approved on 18 June 1960.

Thank you and anticipating your action on this request.

On 15 April 2002, petitioners incumbent president received a letter dated 13 April 2002 which reads:

Very truly yours,

Col. Emmanuel V. De Ocampo (Ret.)

(SGD) ANGELO T. REYES

President

[DND] Secretary

Veterans Federation of the Philippines

Makati, Metro Manila

On 10 June 2002, respondent DND Secretary issued the assailed DND Department Circular No. 04
entitled, "Further Implementing the Provisions of Sections 12 and 23 of Republic Act No. 2640," the
full text of which appears as follows:

Dear Col. De Ocampo:

Department of National Defense

Please be informed that during the preparation of my briefing before the Cabinet and the President
last March 9, 2002, we came across some legal bases which tended to show that there is an

Department Circular No. 04

13

Subject: Further Implementing the Provisions of Sections 1 & 2 of

Republic Act No. 2640
Authority: Republic Act No. 2640

Fund sum of money or other resources set aside for the purpose of carrying out specific activities or
attaining certain objectives in accordance with special regulations, restrictions or limitations and
constitutes an independent, fiscal and accounting entity.
Government Fund includes public monies of every sort and other resources pertaining to any agency
of the government.

Executive Order No. 292 dated July 25, 1987

Section 1
These rules shall govern and apply to the management and operations of the Veterans Federation of
the Philippines (VFP) within the context provided by EO 292 s-1987.
Section 2 DEFINITION OF TERMS for the purpose of these rules, the terms, phrases or words used
herein shall, unless the context indicates otherwise, mean or be understood as follows:
Supervision and Control it shall include authority to act directly whenever a specific function is
entrusted by law or regulation to a subordinate; direct the performance of a duty; restrain the
commission of acts; approve, reverse or modify acts and decisions of subordinate officials or units;
determine priorities in the execution of plans and programs; and prescribe standards, guidelines, plans
and programs.
Power of Control power to alter, modify, nullify or set aside what a subordinate officer had done in
the performance of his duties and to substitute the judgment of the former to that of the latter.
Supervision means overseeing or the power of an officer to see to it that their subordinate officers
perform their duties; it does not allow the superior to annul the acts of the subordinate.
Administrative Process embraces matter concerning the procedure in the disposition of both routine
and contested matters, and the matter in which determinations are made, enforced or reviewed.
Government Agency as defined under PD 1445, a government agency or agency of government or
"agency" refers to any department, bureau or office of the national government, or any of its branches
or instrumentalities, of any political subdivision, as well as any government owned or controlled
corporation, including its subsidiaries, or other self-governing board or commission of the
government.
Government Owned and Controlled Corporation (GOCC) refer to any agency organized as a stock or
non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the government directly or through its instrumentalities wholly
or, where applicable as in the case of stock corporations, to the extent of at least 50% of its capital
stock.

Veteran any person who rendered military service in the land, sea or air forces of the Philippines
during the revolution against Spain, the Philippine American War, World War II, including Filipino
citizens who served in Allied Forces in the Philippine territory and foreign nationals who served in
Philippine forces; the Korean campaign, the Vietnam campaign, the Anti-dissidence campaign, or
other wars or military campaigns; or who rendered military service in the Armed Forces of the
Philippines and has been honorably discharged or separated after at least six (6) years total cumulative
active service or sooner separated due to the death or disability arising from a wound or injury
received or sickness or disease incurred in line of duty while in the active service.
Section 3 Relationship Between the DND and the VFP
3.1 Sec 1 of RA 3140 provides "... the following persons (heads of various veterans associations and
organizations in the Philippines) and their associates and successors are hereby created a body
corporate, under the control and supervision of the Secretary of National Defense, under the name,
style and title of "Veterans Federation of the Philippines ..."
The Secretary of National Defense shall be charged with the duty of supervising the veterans and allied
program under the jurisdiction of the Department. It shall also have the responsibility of overseeing
and ensuring the judicious and effective implementation of veterans assistance, benefits, and
utilization of VFP assets.
3.2 To effectively supervise and control the corporate affairs of the Federation and to safeguard the
interests and welfare of the veterans who are also wards of the State entrusted under the protection
of the DND, the Secretary may personally or through a designated representative, require the
submission of reports, documents and other papers regarding any or all of the Federations business
transactions particularly those relating to the VFP functions under Section 2 of RA 2640.
The Secretary or his representative may attend conferences of the supreme council of the VFP and
such other activities he may deem relevant.
3.3 The Secretary shall from time to time issue guidelines, directives and other orders governing vital
government activities including, but not limited to, the conduct of elections; the acquisition,
management and dispositions of properties, the accounting of funds, financial interests, stocks and
bonds, corporate investments, etc. and such other transactions which may affect the interests of the
veterans.
14

3.4 Financial transactions of the Federation shall follow the provisions of the government auditing
code (PD 1445) i.e. government funds shall be spent or used for public purposes; trust funds shall be
available and may be spent only for the specific purpose for which the trust was created or the funds
received; fiscal responsibility shall, to the greatest extent, be shared by all those exercising authority
over the financial affairs, transactions, and operations of the federation; disbursements or dispositions
of government funds or property shall invariably bear the approval of the proper officials.

d. Resolutions passed by the Executive Board and the Supreme Council for confirmation to be
submitted not later than one month after the approval of the resolution;
e. After Operation/Activity Reports to be submitted not later than one month after such operation or
activity;
Section 6 Penal Sanctions

Section 4 Records of the FEDERATION

As a corporate body and in accordance with appropriate laws, it shall keep and carefully preserve
records of all business transactions, minutes of meetings of stockholders/members of the board of
directors reflecting all details about such activity.
All such records and minutes shall be open to directors, trustees, stockholders, and other members for
inspection and copies of which may be requested.
As a body corporate, it shall submit the following: annual report; proceedings of council meetings;
report of operations together with financial statement of its assets and liabilities and fund balance per
year; statement of revenues and expenses per year; statement of cash flows per year as certified by
the accountant; and other documents/reports as may be necessary or required by the SND.

As an attached agency to a regular department of the government, the VFP and all its
instrumentalities, officials and personnel shall be subject to the penal provisions of such laws, rules
and regulations applicable to the attached agencies of the government.
In a letter dated 6 August 2002 addressed to the President of petitioner, respondent DND Secretary
reiterated his instructions in his earlier letter of 13 April 2002.
Thereafter, petitioners President received a letter dated 23 August 2002 from respondent
Undersecretary, informing him that Department Order No. 129 dated 23 August 2002 directed "the
conduct of a Management Audit of the Veterans Federation of the Philippines."4 The letter went on to
state that respondent DND Secretary "believes that the mandate given by said law can be
meaningfully exercised if this department can better appreciate the functions, responsibilities and
situation on the ground and this can be done by undertaking a thorough study of the organization."5

Section 5 Submission of Annual and Periodic Report

As mandated under appropriate laws, the following reports shall be submitted to the SND, to wit:
a. Annual Report to be submitted not later than every January 31 of the following year. Said report
shall consist of the following:
1. Financial Report of the Federation, signed by the Treasurer General and Auditor General;

Respondent Undersecretary also requested both for a briefing and for documents on personnel,
ongoing projects and petitioners financial condition. The letter ended by stating that, after the
briefing, the support staff of the Audit Committee would begin their work to meet the one-month
target within which to submit a report.
A letter dated 28 August 2003 informed petitioners President that the Management Audit Group
headed by the Undersecretary would be paying petitioner a visit on 30 August 2002 for an update on
VFPs different affiliates and the financial statement of the Federation.

2. Roster of Members of the Supreme Council;

4. Current listing of officers and management of VFP.

Subsequently, the Secretary General of the VFP sent an undated letter to respondent DND Secretary,
with notice to respondent Undersecretary for Civil Relations and Administration, complaining about
the alleged broadness of the scope of the management audit and requesting the suspension thereof
until such time that specific areas of the audit shall have been agreed upon.

b. Report on the proceedings of each Supreme Council Meeting to be submitted not later than one
month after the meeting;

The request was, however, denied by the Undersecretary in a letter dated 4 September 2002 on the
ground that a specific timeframe had been set for the activity.

c. Report of the VFP President as may be required by SND or as may be found necessary by the
President of the Federation;

Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil
Procedure, praying for the following reliefs:

3. Roster of Members of the Executive Board and National Officers; and

15

1. For this Court to issue a temporary restraining order and a writ of preliminary prohibitory and
mandatory injunction to enjoin respondent Secretary and all those acting under his discretion and
authority from: (a) implementing DND Department Circular No. 04; and (b) continuing with the
ongoing management audit of petitioners books of account;
2. After hearing the issues on notice

judicial notice of the fact that the persons who stand to lose in a possible protracted litigation in this
case are war veterans, many of whom have precious little time left to enjoy the benefits that can be
conferred by petitioner corporation. This bickering for the power over petitioner corporation, an
entity created to represent and defend the interests of Filipino veterans, should be resolved as soon as
possible in order for it to once and for all direct its resources to its rightful beneficiaries all over the
country. All these said, we hereby resolve to give due course to this petition.

a. Declare DND Department Circular No. 04 as null and void for being ultra vires;

ISSUES

b. Convert the writ of prohibition, preliminary prohibitory and mandatory injunction into a permanent
one.6

Petitioner mainly alleges that the rules and guidelines laid down in the assailed Department Circular
No. 04 expanded the scope of "control and supervision" beyond what has been laid down in Rep. Act
No. 2640.11 Petitioner further submits the following issues to this Court:

GIVING DUE COURSE TO THE PETITION

Petitioner asserts that, although cases which question the constitutionality or validity of
administrative issuances are ordinarily filed with the lower courts, the urgency and substantive
importance of the question on hand and the public interest attendant to the subject matter of the
petition justify its being filed with this Court directly as an original action.7

1. Was the challenged department circular passed in the valid exercise of the respondent Secretarys
"control and supervision"?
2. Could the challenged department circular validly lay standards classifying the VFP, an essentially
civilian organization, within the ambit of statutes only applying to government entities?

It is settled that the Regional Trial Court and the Court of Appeals also exercise original jurisdiction
over petitions for certiorari and prohibition. As we have held in numerous occasions, however, such
concurrence of original jurisdiction does not mean that the party seeking extraordinary writs has the
absolute freedom to file his petition in the court of his choice.8 Thus, in Commissioner of Internal
Revenue v. Leal,9 we held that:

3. Does the department circular, which grants respondent direct management control on the VFP,
unduly encroach on the prerogatives of VFPs governing body?

Such concurrence of original jurisdiction among the Regional Trial Court, the Court of Appeals and this
Court, however, does not mean that the party seeking any of the extraordinary writs has the absolute
freedom to file his petition in the court of his choice. The hierarchy of courts in our judicial system
determines the appropriate forum for these petitions. Thus, petitions for the issuance of the said writs
against the first level (inferior) courts must be filed with the Regional Trial Court and those against the
latter, with the Court of Appeals. A direct invocation of this Courts original jurisdiction to issue these
writs should be allowed only where there are special and important reasons therefor, specifically and
sufficiently set forth in the petition. This is the established policy to prevent inordinate demands upon
the Courts time and attention, which are better devoted to matters within its exclusive jurisdiction,
and to prevent further over-crowding of the Courts docket. Thus, it was proper for petitioner to
institute the special civil action for certiorari with the Court of Appeals assailing the RTC order denying
his motion to dismiss based on lack of jurisdiction.

CENTRAL ISSUE:

The petition itself, in this case, does not specifically and sufficiently set forth the special and important
reasons why the Court should give due course to this petition in the first instance, hereby failing to
fulfill the conditions set forth in Commissioner of Internal Revenue v. Leal.10 While we reiterate the
policies set forth in Leal and allied cases and continue to abhor the propensity of a number of litigants
to disregard the principle of hierarchy of courts in our judicial system, we, however, resolve to take

At the heart of all these issues and all of petitioners prayers and assertions in this case is petitioners
claim that it is a private non-government corporation.

IS THE VFP A PRIVATE CORPORATION?

Petitioner claims that it is not a public nor a governmental entity but a private organization, and
advances this claim to prove that the issuance of DND Department Circular No. 04 is an invalid
exercise of respondent Secretarys control and supervision.12
This Court has defined the power of control as "the power of an officer to alter or modify or nullify or
set aside what a subordinate has done in the performance of his duties and to substitute the judgment
of the former to that of the latter."13 The power of supervision, on the other hand, means
"overseeing, or the power or authority of an officer to see that subordinate officers perform their
duties. If the latter fail or neglect to fulfill them, the former may take such action or step as prescribed
by law to make them perform their duties."14 These definitions are synonymous with the definitions
in the assailed Department Circular No. 04, while the other provisions of the assailed department
circular are mere consequences of control and supervision as defined.

16

Thus, in order for petitioners premise to be able to support its conclusion, petitioners should be
deemed to imply either of the following: (1) that it is unconstitutional/impermissible for the law (Rep.
Act No. 2640) to grant control and/or supervision to the Secretary of National Defense over a private
organization, or (2) that the control and/or supervision that can be granted to the Secretary of
National Defense over a private organization is limited, and is not as strong as they are defined above.

b) VFP funds come from membership dues;

The following provision of the 1935 Constitution, the organic act controlling at the time of the creation
of the VFP in 1960, is relevant:

c) The lease rentals raised from the use of government lands reserved for the VFP are private in
character and do not belong to the government. Said rentals are fruits of VFPs labor and efforts in
managing and administering the lands for VFP purposes and objectives. A close analogy would be any
Filipino citizen settling on government land and who tills the land for his livelihood and sustenance.
The fruits of his labor belong to him and not to the owner of the land. Such fruits are not public funds.

Section 7. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned and controlled by the
Government or any subdivision or instrumentality thereof.15

3. Although the juridical personality of the VFP emanates from a statutory charter, the VFP retains its
essential character as a private, civilian federation of veterans voluntarily formed by the veterans
themselves to attain a unity of effort, purpose and objectives, e.g.

On the other hand, its counterparts in the 1973 and 1987 constitutions are the following:

a. The members of the VFP are individual members and retirees from the public and military service;

Section 4. 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.16

b. Membership in the VFP is voluntary, not compulsory;

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned and 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.17
From the foregoing, it is crystal clear that our constitutions explicitly prohibit the regulation by special
laws of private corporations, with the exception of government-owned or controlled corporations
(GOCCs). Hence, it would be impermissible for the law to grant control of the VFP to a public official if
it were neither a public corporation, an unincorporated governmental entity, nor a GOCC.18 Said
constitutional provisions can even be read to prohibit the creation itself of the VFP if it were neither of
the three mentioned above, but we cannot go into that in this case since there is no challenge to the
creation of the VFP in the petition as to permit this Court from considering its nullity.
Petitioner vigorously argues that the VFP is a private non-government organization, pressing on the
following contentions:
1. The VFP does not possess the elements which would qualify it as a public office, particularly the
possession/delegation of a portion of sovereign power of government to be exercised for the benefit
of the public;

c. The VFP is governed, not by the Civil Service Law, the Articles of War nor the GSIS Law, but by the
Labor Code and the SSS Law;
d. The VFP has its own Constitution and By-Laws and is governed by a Supreme Council who are
elected from and by the members themselves;
4. The Administrative Code of 1987 does not provide that the VFP is an attached agency, nor does it
provide that it is an entity under the control and supervision of the DND in the context of the
provisions of said code.
5. The DBM declared that the VFP is a non-government organization and issued a certificate that the
VFP has not been a direct recipient of any funds released by the DBM.
These arguments of petitioner notwithstanding, we are constrained to rule that petitioner is in fact a
public corporation. Before responding to petitioners allegations one by one, here are the more
evident reasons why the VFP is a public corporation:
(1) Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation to be Known as the Veterans
Federation of the Philippines, Defining its Powers, and for Other Purposes."
(2) Any action or decision of the Federation or of the Supreme Council shall be subject to the approval
of the Secretary of Defense.19

2. VFP funds are not public funds because

a) No budgetary appropriations or government funds have been released to the VFP directly or
indirectly from the Department of Budget and Management (DBM);

(3) The VFP is required to submit annual reports of its proceedings for the past year, including a full,
complete and itemized report of receipts and expenditures of whatever kind, to the President of the
Philippines or to the Secretary of National Defense.20
17

(4) Under Executive Order No. 37 dated 2 December 1992, the VFP was listed as among the
government-owned and controlled corporations that will not be privatized.
(5) In Ang Bagong Bayani OFW Labor Party v. COMELEC,21 this Court held in a minute resolution that
the "VFP [Veterans Federation Party] is an adjunct of the government, as it is merely an incarnation of
the Veterans Federation of the Philippines.
And now to answer petitioners reasons for insisting that it is a private corporation:
1. Petitioner claims that the VFP does not possess the elements which would qualify it as a public
office, particularly the possession/delegation of a portion of sovereign power of government to be
exercised for the benefit of the public;
In Laurel v. Desierto,22 we adopted the definition of Mechem of a public office, that it is "the right,
authority and duty, created and conferred by law, by which, for a given period, either fixed by law or
enduring at the pleasure of the creating power, an individual is invested with some portion of the
sovereign functions of the government, to be exercised by him for the benefit of the public."
In the same case, we went on to adopt Mechems view that the delegation to the individual of some
of the sovereign functions of government is "[t]he most important characteristic" in determining
whether a position is a public office or not.23 Such portion of the sovereignty of the country, either
legislative, executive or judicial, must attach to the office for the time being, to be exercised for the
public benefit. Unless the powers conferred are of this nature, the individual is not a public officer. The
most important characteristic which distinguishes an office from an employment or contract is that
the creation and conferring of an office involves a delegation to the individual of some of the
sovereign functions of government, to be exercised by him for the benefit of the public; that some
portion of the sovereignty of the country, either legislative, executive or judicial, attaches, for the time
being, to be exercised for the public benefit. Unless the powers conferred are of this nature, the
individual is not a public officer.24 The issue, therefore, is whether the VFAs officers have been
delegated some portion of the sovereignty of the country, to be exercised for the public benefit.
In several cases, we have dealt with the issue of whether certain specific activities can be classified as
sovereign functions. These cases, which deal with activities not immediately apparent to be sovereign
functions, upheld the public sovereign nature of operations needed either to promote social justice25
or to stimulate patriotic sentiments and love of country.26
As regards the promotion of social justice as a sovereign function, we held in Agricultural Credit and
Cooperative Financing Administration (ACCFA) v. Confederation of Unions in Government
Corporations and Offices (CUGCO),27 that the compelling urgency with which the Constitution speaks
of social justice does not leave any doubt that land reform is not an optional but a compulsory
function of sovereignty. The same reason was used in our declaration that socialized housing is

likewise a sovereign function.28 Highly significant here is the observation of former Chief Justice
Querube Makalintal:
The growing complexities of modern society, however, have rendered this traditional classification of
the functions of government [into constituent and ministrant functions] quite unrealistic, not to say
obsolete. The areas which used to be left to private enterprise and initiative and which the
government was called upon to enter optionally, and only "because it was better equipped to
administer for the public welfare than is any private individual or group of individuals," continue to
lose their well-defined boundaries and to be absorbed within activities that the government must
undertake in its sovereign capacity if it is to meet the increasing social challenges of the times. Here[,]
as almost everywhere else[,] the tendency is undoubtedly towards a greater socialization of economic
forces. Here, of course, this development was envisioned, indeed adopted as a national policy, by the
Constitution itself in its declaration of principle concerning the promotion of social justice.29
(Emphasis supplied.)
It was, on the other hand, the fact that the National Centennial Celebrations was calculated to arouse
and stimulate patriotic sentiments and love of country that it was considered as a sovereign function
in Laurel v. Desierto.30 In Laurel, the Court then took its cue from a similar case in the United States
involving a Fourth of July fireworks display. The holding of the Centennial Celebrations was held to be
an executive function, as it was intended to enforce Article XIV of the Constitution which provides for
the conservation, promotion and popularization of the nations historical and cultural heritage and
resources, and artistic relations.
In the case at bar, the functions of petitioner corporation enshrined in Section 4 of Rep. Act No.
264031 should most certainly fall within the category of sovereign functions. The protection of the
interests of war veterans is not only meant to promote social justice, but is also intended to reward
patriotism. All of the functions in Section 4 concern the well-being of war veterans, our countrymen
who risked their lives and lost their limbs in fighting for and defending our nation. It would be injustice
of catastrophic proportions to say that it is beyond sovereigntys power to reward the people who
defended her.
Like the holding of the National Centennial Celebrations, the functions of the VFP are executive
functions, designed to implement not just the provisions of Rep. Act No. 2640, but also, and more
importantly, the Constitutional mandate for the State to provide immediate and adequate care,
benefits and other forms of assistance to war veterans and veterans of military campaigns, their
surviving spouses and orphans.32
2. Petitioner claims that VFP funds are not public funds.
Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and because
VFP funds come from membership dues and lease rentals earned from administering government
lands reserved for the VFP.
18

The fact that no budgetary appropriations have been released to the VFP does not prove that it is a
private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the VFP,
having itself believed that the VFP is a private corporation.33 If the DBM, however, is mistaken as to
its conclusion regarding the nature of VFPs incorporation, its previous assertions will not prevent
future budgetary appropriations to the VFP. The erroneous application of the law by public officers
does not bar a subsequent correct application of the law.34
Nevertheless, funds in the hands of the VFP from whatever source are public funds, and can be used
only for public purposes. This is mandated by the following provisions of Rep. Act No. 2640:

In Republic v. COCOFED,36 we held that the Coconut Levy Funds are public funds because, inter alia,
(1) they were meant to be for the benefit of the coconut industry, one of the major industries
supporting the national economy, and its farmers; and (2) the very laws governing coconut levies
recognize their public character. The same is true with regard to the VFP funds. No less public is the
use for the VFP funds, as such use is limited to the purposes of the VFP which we have ruled to be
sovereign functions. Likewise, the law governing VFP funds (Rep. Act No. 2640) recognizes the public
character of the funds as shown in the enumerated provisions above.

(3) Section 4 provides that "the Federation shall exist solely for the purposes of a benevolent
character, and not for the pecuniary benefit of its members;"1avvphil.net

We also observed in the same COCOFED case that "(e)ven if the money is allocated for a special
purpose and raised by special means, it is still public in character."37 In the case at bar, some of the
funds were raised by even more special means, as the contributions from affiliate organizations of the
VFP can hardly be regarded as enforced contributions as to be considered taxes. They are more in the
nature of donations which have always been recognized as a source of public funding. Affiliate
organizations of the VFP cannot complain of their contributions becoming public funds upon the
receipt by the VFP, since they are presumed aware of the provisions of Rep. Act No. 2640 which not
only specifies the exclusive purposes for which VFP funds can be used, but also provides for the
regulation of such funds by the national government through the Secretary of National Defense. There
is nothing wrong, whether legally or morally, from raising revenues through non-traditional methods.
As remarked by Justice Florentino Feliciano in his concurring opinion in Kilosbayan, Incorporated v.
Guingona, Jr.38 where he explained that the funds raised by the On-line Lottery System were also
public in nature, thus:

(4) Section 6 provides that all funds of the VFP in excess of operating expenses are "reserved for
disbursement, as the Supreme Council may authorize, for the purposes stated in Section two of this
Act;"

x x x [T]he more successful the government is in raising revenues by non-traditional methods such as
PAGCOR operations and privatization measures, the lesser will be the pressure upon the traditional
sources of public revenues, i.e., the pocket books of individual taxpayers and importers.

(5) Section 10 provides that "(a)ny donation or contribution which from time to time may be made to
the Federation by the Government of the Philippines or any of its subdivisions, branches, offices,
agencies or instrumentalities shall be expended by the Supreme Council only for the purposes
mentioned in this Act."; and finally,

Petitioner additionally harps on the inapplicability of the case of Laurel v. Desierto39 which was cited
by Respondents. Petitioner claims that among the reasons National Centennial Commission Chair
Salvador Laurel was considered a public officer was the fact that his compensation was derived from
public funds. Having ruled that VFP funds from whatever source are public funds, we can safely
conclude that the Supreme Councils compensation, taken as they are from VFP funds under the term
"operating expenses" in Section 6 of Rep. Act No. 2640, are derived from public funds. The particular
nomenclature of the compensation taken from VFP funds is not even of relevance here. As we said in
Laurel concerning compensation as an element of public office:

(1) Section 2 provides that the VFP can only "invest its funds for the exclusive benefit of the Veterans
of the Philippines;"
(2) Section 2 likewise provides that "(a)ny action or decision of the Federation or of the Supreme
Council shall be subject to the approval of the Secretary of National Defense." Hence, all activities of
the VFP to which the Supreme Council can apply its funds are subject to the approval of the Secretary
of National Defense;

(6) Section 12 requires the submission of annual reports of VFP proceedings for the past year,
including a full, complete and itemized report of receipts and expenditures of whatever kind, to the
President of the Philippines or to the Secretary of National Defense.
It is important to note here that the membership dues collected from the individual members of VFPs
affiliate organizations do not become public funds while they are still funds of the affiliate
organizations. A close reading of Section 135 of Rep. Act No. 2640 reveals that what has been created
as a body corporate is not the individual membership of the affiliate organizations, but merely the
aggregation of the heads of the affiliate organizations. Thus, only the money remitted by the affiliate
organizations to the VFP partake in the public nature of the VFP funds.

Under particular circumstances, "compensation" has been held to include allowance for personal
expenses, commissions, expenses, fees, an honorarium, mileage or traveling expenses, payments for
services, restitution or a balancing of accounts, salary, and wages.40
3. Petitioner argues that it is a civilian federation where membership is voluntary.
Petitioner claims that the Secretary of National Defense "historically did not indulge in the direct or
micromanagement of the VFP precisely because it is essentially a civilian organization where
19

membership is voluntary."41 This reliance of petitioner on what has "historically" been done is
erroneous, since laws are not repealed by disuse, custom, or practice to the contrary.42 Furthermore,
as earlier stated, the erroneous application of the law by public officers does not bar a subsequent
correct application of the law.43
Neither is the civilian nature of VFP relevant in this case. The Constitution does not contain any
prohibition, express or implied, against the grant of control and/or supervision to the Secretary of
National Defense over a civilian organization. The Office of the Secretary of National Defense is itself a
civilian office, its occupant being an alter ego of the civilian Commander-in-Chief. This set-up is the
manifestation of the constitutional principle that civilian authority is, at all times, supreme over the
military.44 There being no such constitutional prohibition, the creation of a civilian public organization
by Rep. Act No. 2640 is not rendered invalid by its being placed under the control and supervision of
the Secretary of National Defense.
Petitioners stand that the VFP is a private corporation because membership thereto is voluntary is
likewise erroneous. As stated above, the membership of the VFP is not the individual membership of
the affiliate organizations, but merely the aggregation of the heads of such affiliate organizations.
These heads forming the VFP then elect the Supreme Council and the other officers,45 of this public
corporation.
4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is an attached
agency, and nor does it provide that it is an entity under the control and supervision of the DND in the
context of the provisions of said code.
The Administrative Code, by giving definitions of the various entities covered by it, acknowledges that
its enumeration is not exclusive. The Administrative Code could not be said to have repealed nor
enormously modified Rep. Act No. 2640 by implication, as such repeal or enormous modification by
implication is not favored in statutory construction.46
5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government organization in its
certification that the VFP "has not been a direct recipient of any funds released by the DBM."

consultative services and technical assistance to local governments and the general public on local
taxation and other related matters. Thus, the rule that the "Court will not set aside conclusions
rendered by the CTA, which is, by the very nature of its function, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority" cannot apply in the case of the BLGF.
On this score, though, we disagree with respondents and hold that the DBMs appraisal is considered
persuasive. Respondents misread the PLDT case in asserting that only quasi-judicial agencies
determination can be considered persuasive. What the PLDT case points out is that, for an
administrative agencys opinion to be persuasive, the administrative agency involved (whether it has
quasi-judicial powers or not) must be an expert in the field they are giving their opinion on.
The DBM is indeed an expert on determining what the various government agencies and corporations
are. This determination is necessary for the DBM to fulfill its mandate:
Sec. 2. Mandate. - The Department shall be responsible for the formulation and implementation of the
National Budget with the goal of attaining our national socio-economic plans and objectives.
The Department shall be responsible for the efficient and sound utilization of government funds and
revenues to effectively achieve our country's development objectives.48
The persuasiveness of the DBM opinion has, however, been overcome by all the previous explanations
we have laid so far. It has also been eclipsed by another similarly persuasive opinion, that of the
Department of National Defense embodied in Department Circular No. 04. The DND is clearly more of
an expert with respect to the determination of the entities under it, and its Administrative Rules and
Regulations are entitled to great respect and have in their favor the presumption of legality.49
The DBM opinion furthermore suffers from its lack of explanation and justification in the "certification
of non-receipt" where said opinion was given. The DBM has not furnished, in said certification or
elsewhere, an explanation for its opinion that VFP is a non-government organization.
THE FATE OF DEPARTMENT CIRCULAR NO. 04

Respondents claim that the supposed declaration of the DBM that petitioner is a non-government
organization is not persuasive, since DBM is not a quasi-judicial agency. They aver that what we have
said of the Bureau of Local Government Finance (BLGF) in Philippine Long Distance Telephone
Company (PLDT) v. City of Davao47 can be applied to DBM:
In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that
petitioners exemption from local taxes has been restored is a contemporaneous construction of
Section 23 [of R.A. No. 7925 and, as such, is entitled to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which is a
special court created for the purpose of reviewing tax cases, the BLGF was created merely to provide

Our ruling that petitioner is a public corporation is determinative of whether or not we should grant
petitioners prayer to declare Department Circular No. 04 void.
Petitioner assails Department Circular No. 04 on the ground that it expanded the scope of control and
supervision beyond what has been laid down in Rep. Act No. 2640. Petitioner alleges that "(t)he
equation of the meaning of `control and `supervision of the Administrative Code of 1987 as the same
`control and supervision under Rep. Act No. 2640, takes out the context of the original legislative
intent from the peculiar surrounding circumstances and conditions that brought about the creation of
the VFP."50 Petitioner claims that the VFP "was intended as a self-governing autonomous body with a
Supreme Council as governing authority," and that the assailed circular "pre-empts VFPs original self20

governance and autonomy (in) representing veterans organizations, and substitutes government
discretion and decisions to that of the veterans own determination."51 Petitioner says that the
circulars provisions practically render the Supreme Council inutile, despite its being the statutory
governing body of the VFP.52
As previously mentioned, this Court has defined the power of control as "the power of an officer to
alter or modify or nullify or set aside what a subordinate has done in the performance of his duties
and to substitute the judgment of the former to that of the latter."53 The power of supervision, on the
other hand, means "overseeing, or the power or authority of an officer to see that subordinate officers
perform their duties."54 Under the Administrative Code of 1987:55
Supervision and control shall include the authority to act directly whenever a specific function is
entrusted by law or regulation to a subordinate; direct the performance of duty; restrain the
commission of acts; review, approve, reverse or modify acts and decisions of subordinate officials or
units; determine priorities in the execution of plans and programs; and prescribe standards,
guidelines, plans and programs. x x x
The definition of the power of control and supervision under Section 2 of the assailed Department
Circular are synonymous with the foregoing definitions. Consequently, and considering that petitioner
is a public corporation, the provisions of the assailed Department Circular No. 04 did not supplant nor
modify the provisions of Republic Act No. 2640, thus not violating the settled rule that "all such
(administrative) issuances must not override, but must remain consistent and in harmony with the law
they seek to apply or implement. Administrative rules and regulations are intended to carry out,
neither to supplant nor to modify, the law."56
Section 3.2 of the assailed department circular, which authorizes the Secretary of National Defense to
"x x x personally or through a designated representative, require the submission of reports,
documents and other papers regarding any or all of the Federations business functions, x x x."
as well as Section 3.3 which allows the Secretary of DND to
x x x [F]rom time to time issue guidelines, directives and other orders governing vital government
activities including, but not limited to, the conduct of elections, the acquisition, management and
dispositions of properties, the accounting of funds, financial interests, stocks and bonds, corporate
investments, etc. and such other transactions which may affect the interests of the veterans.
are merely consequences of both the power of control and supervision granted by Rep. Act No. 2640.
The power to alter or modify or nullify or set aside what a subordinate has done in the performance of
his duties, or to see to it that subordinate officers perform their duties in accordance with law,
necessarily requires the ability of the superior officer to monitor, as closely as it desires, the acts of the
subordinate.

The same is true with respect to Sections 4 and 5 of the assailed Department Circular No. 04, which
requires the preservation of the records of the Federation and the submission to the Secretary of
National Defense of annual and periodic reports.
Petitioner likewise claims that the assailed DND Department Circular No. 04 was never published, and
hence void.57 Respondents deny such non-publication.58
We have put forth both the rule and the exception on the publication of administrative rules and
regulations in the case of Taada v. Tuvera:59
x x x Administrative rules and regulations must also be published if their purpose is to enforce or
implement existing law pursuant also to a valid delegation.
Interpretative regulations and those merely internal in nature, that is, regulating only the personnel of
the administrative agency and not the public, need not be published. Neither is publication required of
the so-called letters of instructions issued by administrative superiors concerning the rules on
guidelines to be followed by their subordinates in the performance of their duties.
Even assuming that the assailed circular was not published, its validity is not affected by such nonpublication for the reason that its provisions fall under two of the exceptions enumerated in Taada.
Department Circular No. 04 is an internal regulation. As we have ruled, they are meant to regulate a
public corporation under the control of DND, and not the public in general. As likewise discussed
above, what has been created as a body corporate by Rep. Act No. 2640 is not the individual
membership of the affiliate organizations of the VFP, but merely the aggregation of the heads of the
affiliate organizations. Consequently, the individual members of the affiliate organizations, who are
not public officers, are beyond the regulation of the circular.
Sections 2, 3 and 6 of the assailed circular are additionally merely interpretative in nature. They add
nothing to the law. They do not affect the substantial rights of any person, whether party to the case
at bar or not. In Sections 2 and 3, control and supervision are defined, mentioning actions that can be
performed as consequences of such control and supervision, but without specifying the particular
actions that shall be rendered to control and supervise the VFP. Section 6, in the same vein, merely
state what the drafters of the circular perceived to be consequences of being an attached agency to a
regular department of the government, enumerating sanctions and remedies provided by law that
may be availed of whenever desired.
Petitioner then objects to the implementation of Sec. 3.4 of the assailed Department Circular, which
provides that
3.4 Financial transactions of the Federation shall follow the provisions of the government auditing
code (PD 1445) i.e. government funds shall be spent or used for public purposes; trust funds shall be
available and may be spent only for the specific purpose for which the trust was created or the funds
21

received; fiscal responsibility shall, to the greatest extent, be shared by all those exercising authority
over the financial affairs, transactions, and operations of the federation; disbursements or dispositions
of government funds or property shall invariably bear the approval of the proper officials.
Since we have also previously determined that VFP funds are public funds, there is likewise no reason
to declare this provision invalid. Section 3.4 is correct in requiring the VFP funds to be used for public
purposes, but only insofar the term "public purposes" is construed to mean "public purposes
enumerated in Rep. Act No. 2640."
Having in their possession public funds, the officers of the VFP, especially its fiscal officers, must
indeed share in the fiscal responsibility to the greatest extent.
As to petitioners allegation that VFP was intended as a self-governing autonomous body with a
Supreme Council as governing authority, we find that the provisions of Rep. Act No. 2640 concerning
the control and supervision of the Secretary of National Defense clearly withholds from the VFP
complete autonomy. To say, however, that such provisions render the VFP inutile is an exaggeration.
An office is not rendered inutile by the fact that it is placed under the control of a higher office. These
subordinate offices, such as the executive offices under the control of the President, exercise
discretion at the first instance. While their acts can be altered or even set aside by the superior, these
acts are effective and are deemed the acts of the superior until they are modified. Surely, we cannot
say that the offices of all the Department Secretaries are worthless positions.
In sum, the assailed DND Department Circular No. 04 does not supplant nor modify and is, on the
contrary, perfectly in consonance with Rep. Act No. 2640. Petitioner VFP is a public corporation. As
such, it can be placed under the control and supervision of the Secretary of National Defense, who
consequently has the power to conduct an extensive management audit of petitioner corporation.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The validity of the Department of
National Defense Department Circular No. 04 is AFFIRMED.
SO ORDERED.

LEAGUE OF CITIES OF THE PHILIPPINES (LCP) represented by LCP National President JERRY P. TREAS,
CITY OF ILOILO represented by MAYOR JERRY P. TREAS, CITY OF CALBAYOG represented by MAYOR
MEL SENEN S. SARMIENTO, and JERRY P. TREAS in his personal capacity as taxpayer, petitioners,
vs.
COMMISSION ON ELECTIONS; MUNICIPALITY OF BAYBAY, PROVINCE OF LEYTE; MUNICIPALITY OF
BOGO, PROVINCE OF CEBU; MUNICIPALITY OF CATBALOGAN, PROVINCE OF WESTERN SAMAR;
MUNICIPALITY OF TANDAG, PROVINCE OF SURIGAO DEL SUR; MUNICIPALITY OF BORONGAN,
PROVINCE OF EASTERN SAMAR; and MUNICIPALITY OF TAYABAS, PROVINCE OF QUEZON,
respondents.
CITY OF TARLAC, CITY OF SANTIAGO, CITY OF IRIGA, CITY OF LIGAO, CITY OF LEGAZPI, CITY OF
TAGAYTAY, CITY OF SURIGAO, CITY OF BAYAWAN, CITY OF SILAY, CITY OF GENERAL SANTOS, CITY OF
ZAMBOANGA, CITY OF GINGOOG, CITY OF CAUAYAN, CITY OF PAGADIAN, CITY OF SAN CARLOS, CITY
OF SAN FERNANDO, CITY OF TACURONG, CITY OF TANGUB, CITY OF OROQUIETA, CITY OF URDANETA,
CITY OF VICTORIAS, CITY OF CALAPAN, CITY OF HIMAMAYLAN, CITY OF BATANGAS, CITY OF BAIS, CITY
OF CADIZ, and CITY OF TAGUM, petitioners-in-intervention.
x-----------------------------x
G.R. No. 177499

November 18, 2008

LEAGUE OF CITIES OF THE PHILIPPINES (LCP) represented by LCP National President JERRY P. TREAS,
CITY OF ILOILO represented by MAYOR JERRY P. TREAS, CITY OF CALBAYOG represented by MAYOR
MEL SENEN S. SARMIENTO, and JERRY P. TREAS in his personal capacity as taxpayer, petitioners,
vs.
COMMISSION ON ELECTIONS; MUNICIPALITY OF LAMITAN, PROVINCE OF BASILAN; MUNICIPALITY OF
TABUK, PROVINCE OF KALINGA; MUNICIPALITY OF BAYUGAN, PROVINCE OF AGUSAN DEL SUR;
MUNICIPALITY OF BATAC, PROVINCE OF ILOCOS NORTE; MUNICIPALITY OF MATI, PROVINCE OF
DAVAO ORIENTAL; and MUNICIPALITY OF GUIHULNGAN, PROVINCE OF NEGROS ORIENTAL,
respondents.
CITY OF TARLAC, CITY OF SANTIAGO, CITY OF IRIGA, CITY OF LIGAO, CITY OF LEGAZPI, CITY OF
TAGAYTAY, CITY OF SURIGAO, CITY OF BAYAWAN, CITY OF SILAY, CITY OF GENERAL SANTOS, CITY OF
ZAMBOANGA, CITY OF GINGOOG, CITY OF CAUAYAN, CITY OF PAGADIAN, CITY OF SAN CARLOS, CITY
OF SAN FERNANDO, CITY OF TACURONG, CITY OF TANGUB, CITY OF OROQUIETA, CITY OF URDANETA,
CITY OF VICTORIAS, CITY OF CALAPAN, CITY OF HIMAMAYLAN, CITY OF BATANGAS, CITY OF BAIS, CITY
OF CADIZ, and CITY OF TAGUM, petitioners-in-intervention.
x - - - - - - - - - - - - - - - - - - - - - - - - - - --x
G.R. No. 178056

November 18, 2008

LEAGUE OF CITIES OF THE PHILIPPINES (LCP) represented by LCP National President JERRY P. TREAS,
CITY OF ILOILO represented by MAYOR JERRY P. TREAS, CITY OF CALBAYOG represented by MAYOR
MEL SENEN S. SARMIENTO, and JERRY P. TREAS in his personal capacity as taxpayer, petitioners
22

vs.
COMMISSION ON ELECTIONS; MUNICIPALITY OF CABADBARAN, PROVINCE OF AGUSAN DEL NORTE;
MUNICIPALITY OF CARCAR, PROVINCE OF CEBU; and MUNICIPALITY OF EL SALVADOR, MISAMIS
ORIENTAL, respondents.
CITY OF TARLAC, CITY OF SANTIAGO, CITY OF IRIGA, CITY OF LIGAO, CITY OF LEGAZPI, CITY OF
TAGAYTAY, CITY OF SURIGAO, CITY OF BAYAWAN, CITY OF SILAY, CITY OF GENERAL SANTOS, CITY OF
ZAMBOANGA, CITY OF GINGOOG, CITY OF CAUAYAN, CITY OF PAGADIAN, CITY OF SAN CARLOS, CITY
OF SAN FERNANDO, CITY OF TACURONG, CITY OF TANGUB, CITY OF OROQUIETA, CITY OF URDANETA,
CITY OF VICTORIAS, CITY OF CALAPAN, CITY OF HIMAMAYLAN, CITY OF BATANGAS, CITY OF BAIS, CITY
OF CADIZ, and CITY OF TAGUM, petitioners-in-intervention.

filed, through their respective sponsors, individual cityhood bills. The 16 cityhood bills contained a
common provision exempting all the 16 municipalities from the P100 million income requirement in
RA 9009.
On 22 December 2006, the House of Representatives approved the cityhood bills. The Senate also
approved the cityhood bills in February 2007, except that of Naga, Cebu which was passed on 7 June
2007. The cityhood bills lapsed into law (Cityhood Laws10) on various dates from March to July 2007
without the President's signature.11
The Cityhood Laws direct the COMELEC to hold plebiscites to determine whether the voters in each
respondent municipality approve of the conversion of their municipality into a city.

DECISION
CARPIO, J.:
The Case
These are consolidated petitions for prohibition1 with prayer for the issuance of a writ of preliminary
injunction or temporary restraining order filed by the League of Cities of the Philippines, City of Iloilo,
City of Calbayog, and Jerry P. Treas2 assailing the constitutionality of the subject Cityhood Laws and
enjoining the Commission on Elections (COMELEC) and respondent municipalities from conducting
plebiscites pursuant to the Cityhood Laws.

Petitioners filed the present petitions to declare the Cityhood Laws unconstitutional for violation of
Section 10, Article X of the Constitution, as well as for violation of the equal protection clause.12
Petitioners also lament that the wholesale conversion of municipalities into cities will reduce the share
of existing cities in the Internal Revenue Allotment because more cities will share the same amount of
internal revenue set aside for all cities under Section 285 of the Local Government Code.13
The Issues
The petitions raise the following fundamental issues:
1. Whether the Cityhood Laws violate Section 10, Article X of the Constitution; and

The Facts
2. Whether the Cityhood Laws violate the equal protection clause.
During the 11th Congress,3 Congress enacted into law 33 bills converting 33 municipalities into cities.
However, Congress did not act on bills converting 24 other municipalities into cities.
During the 12th Congress,4 Congress enacted into law Republic Act No. 9009 (RA 9009),5 which took
effect on 30 June 2001. RA 9009 amended Section 450 of the Local Government Code by increasing
the annual income requirement for conversion of a municipality into a city from P20 million to P100
million. The rationale for the amendment was to restrain, in the words of Senator Aquilino Pimentel,
"the mad rush" of municipalities to convert into cities solely to secure a larger share in the Internal
Revenue Allotment despite the fact that they are incapable of fiscal independence.6
After the effectivity of RA 9009, the House of Representatives of the 12th Congress7 adopted Joint
Resolution No. 29,8 which sought to exempt from the P100 million income requirement in RA 9009
the 24 municipalities whose cityhood bills were not approved in the 11th Congress. However, the 12th
Congress ended without the Senate approving Joint Resolution No. 29.
During the 13th Congress,9 the House of Representatives re-adopted Joint Resolution No. 29 as Joint
Resolution No. 1 and forwarded it to the Senate for approval. However, the Senate again failed to
approve the Joint Resolution. Following the advice of Senator Aquilino Pimentel, 16 municipalities

The Ruling of the Court

We grant the petitions.
The Cityhood Laws violate Sections 6 and 10, Article X of the Constitution, and are thus
unconstitutional.
First, applying the P100 million income requirement in RA 9009 to the present case is a prospective,
not a retroactive application, because RA 9009 took effect in 2001 while the cityhood bills became law
more than five years later.
Second, the Constitution requires that Congress shall prescribe all the criteria for the creation of a city
in the Local Government Code and not in any other law, including the Cityhood Laws.
Third, the Cityhood Laws violate Section 6, Article X of the Constitution because they prevent a fair
and just distribution of the national taxes to local government units.
23

Fourth, the criteria prescribed in Section 450 of the Local Government Code, as amended by RA 9009,
for converting a municipality into a city are clear, plain and unambiguous, needing no resort to any
statutory construction.

The creation thereof shall not reduce the land area, population and income of the original unit or units
at the time of said creation to less than the minimum requirements prescribed herein.

Fifth, the intent of members of the 11th Congress to exempt certain municipalities from the coverage
of RA 9009 remained an intent and was never written into Section 450 of the Local Government Code.

(b) The territorial jurisdiction of a newly-created city shall be properly identified by metes and bounds.
The requirement on land area shall not apply where the city proposed to be created is composed of
one (1) or more islands. The territory need not be contiguous if it comprises two (2) or more islands.

Sixth, the deliberations of the 11th or 12th Congress on unapproved bills or resolutions are not
extrinsic aids in interpreting a law passed in the 13th Congress.

(c) The average annual income shall include the income accruing to the general fund, exclusive of
special funds, transfers, and non-recurring income. (Emphasis supplied)

Seventh, even if the exemption in the Cityhood Laws were written in Section 450 of the Local
Government Code, the exemption would still be unconstitutional for violation of the equal protection
clause.

Thus, RA 9009 increased the income requirement for conversion of a municipality into a city from P20
million to P100 million. Section 450 of the Local Government Code, as amended by RA 9009, does not
provide any exemption from the increased income requirement.

Preliminary Matters

Prior to the enactment of RA 9009, a total of 57 municipalities had cityhood bills pending in Congress.
Thirty-three cityhood bills became law before the enactment of RA 9009. Congress did not act on 24
cityhood bills during the 11th Congress.

Prohibition is the proper action for testing the constitutionality of laws administered by the
COMELEC,14 like the Cityhood Laws, which direct the COMELEC to hold plebiscites in implementation
of the Cityhood Laws. Petitioner League of Cities of the Philippines has legal standing because Section
499 of the Local Government Code tasks the League with the "primary purpose of ventilating,
articulating and crystallizing issues affecting city government administration and securing, through
proper and legal means, solutions thereto."15 Petitioners-in-intervention,16 which are existing cities,
have legal standing because their Internal Revenue Allotment will be reduced if the Cityhood Laws are
declared constitutional. Mayor Jerry P. Treas has legal standing because as Mayor of Iloilo City and as
a taxpayer he has sufficient interest to prevent the unlawful expenditure of public funds, like the
release of more Internal Revenue Allotment to political units than what the law allows.
Applying RA 9009 is a Prospective Application of the Law
RA 9009 became effective on 30 June 2001 during the 11th Congress. This law specifically amended
Section 450 of the Local Government Code, which now provides:
Section 450. Requisites for Creation. (a) A municipality or a cluster of barangays may be converted
into a component city if it has a locally generated average annual income, as certified by the
Department of Finance, of at least One hundred million pesos (P100,000,000.00) for the last two (2)
consecutive years based on 2000 constant prices, and if it has either of the following requisites:
(i) a contiguous territory of at least one hundred (100) square kilometers, as certified by the Land
Management Bureau; or
(ii) a population of not less than one hundred fifty thousand (150,000) inhabitants, as certified by the
National Statistics Office.

During the 12th Congress, the House of Representatives adopted Joint Resolution No. 29, exempting
from the income requirement of P100 million in RA 9009 the 24 municipalities whose cityhood bills
were not acted upon during the 11th Congress. This Resolution reached the Senate. However, the
12th Congress adjourned without the Senate approving Joint Resolution No. 29.
During the 13th Congress, 16 of the 24 municipalities mentioned in the unapproved Joint Resolution
No. 29 filed between November and December of 2006, through their respective sponsors in
Congress, individual cityhood bills containing a common provision, as follows:
Exemption from Republic Act No. 9009. - The City of x x x shall be exempted from the income
requirement prescribed under Republic Act No. 9009.
This common provision exempted each of the 16 municipalities from the income requirement of P100
million prescribed in Section 450 of the Local Government Code, as amended by RA 9009. These
cityhood bills lapsed into law on various dates from March to July 2007 after President Gloria
Macapagal-Arroyo failed to sign them.
Indisputably, Congress passed the Cityhood Laws long after the effectivity of RA 9009. RA 9009
became effective on 30 June 2001 or during the 11th Congress. The 13th Congress passed in
December 2006 the cityhood bills which became law only in 2007. Thus, respondent municipalities
cannot invoke the principle of non-retroactivity of laws.17 This basic rule has no application because
RA 9009, an earlier law to the Cityhood Laws, is not being applied retroactively but prospectively.
Congress Must Prescribe in the Local Government Code All Criteria
24

Section 10, Article X of the 1987 Constitution provides:

No province, city, municipality, or barangay shall be created, divided, merged, abolished or its
boundary substantially altered, except in accordance with the criteria established in the local
government code and subject to approval by a majority of the votes cast in a plebiscite in the political
units directly affected. (Emphasis supplied)
The Constitution is clear. The creation of local government units must follow the criteria established in
the Local Government Code and not in any other law. There is only one Local Government Code.18
The Constitution requires Congress to stipulate in the Local Government Code all the criteria necessary
for the creation of a city, including the conversion of a municipality into a city. Congress cannot write
such criteria in any other law, like the Cityhood Laws.
The criteria prescribed in the Local Government Code govern exclusively the creation of a city. No
other law, not even the charter of the city, can govern such creation. The clear intent of the
Constitution is to insure that the creation of cities and other political units must follow the same
uniform, non-discriminatory criteria found solely in the Local Government Code. Any derogation or
deviation from the criteria prescribed in the Local Government Code violates Section 10, Article X of
the Constitution.
RA 9009 amended Section 450 of the Local Government Code to increase the income requirement
from P20 million to P100 million for the creation of a city. This took effect on 30 June 2001. Hence,
from that moment the Local Government Code required that any municipality desiring to become a
city must satisfy the P100 million income requirement. Section 450 of the Local Government Code, as
amended by RA 9009, does not contain any exemption from this income requirement.
In enacting RA 9009, Congress did not grant any exemption to respondent municipalities, even though
their cityhood bills were pending in Congress when Congress passed RA 9009. The Cityhood Laws, all
enacted after the effectivity of RA 9009, explicitly exempt respondent municipalities from the
increased income requirement in Section 450 of the Local Government Code, as amended by RA 9009.
Such exemption clearly violates Section 10, Article X of the Constitution and is thus patently
unconstitutional. To be valid, such exemption must be written in the Local Government Code and not
in any other law, including the Cityhood Laws.
Cityhood Laws Violate Section 6, Article X of the Constitution
Uniform and non-discriminatory criteria as prescribed in the Local Government Code are essential to
implement a fair and equitable distribution of national taxes to all local government units. Section 6,
Article X of the Constitution provides:
Local government units shall have a just share, as determined by law, in the national taxes which shall
be automatically released to them. (Emphasis supplied)

If the criteria in creating local government units are not uniform and discriminatory, there can be no
fair and just distribution of the national taxes to local government units.
A city with an annual income of only P20 million, all other criteria being equal, should not receive the
same share in national taxes as a city with an annual income of P100 million or more. The criteria of
land area, population and income, as prescribed in Section 450 of the Local Government Code, must
be strictly followed because such criteria, prescribed by law, are material in determining the "just
share" of local government units in national taxes. Since the Cityhood Laws do not follow the income
criterion in Section 450 of the Local Government Code, they prevent the fair and just distribution of
the Internal Revenue Allotment in violation of Section 6, Article X of the Constitution.
Section 450 of the Local Government Code is Clear,
Plain and Unambiguous
There can be no resort to extrinsic aids like deliberations of Congress if the language of the law is
plain, clear and unambiguous. Courts determine the intent of the law from the literal language of the
law, within the law's four corners.19 If the language of the law is plain, clear and unambiguous, courts
simply apply the law according to its express terms. If a literal application of the law results in
absurdity, impossibility or injustice, then courts may resort to extrinsic aids of statutory construction
like the legislative history of the law.20
Congress, in enacting RA 9009 to amend Section 450 of the Local Government Code, did not provide
any exemption from the increased income requirement, not even to respondent municipalities whose
cityhood bills were then pending when Congress passed RA 9009. Section 450 of the Local
Government Code, as amended by RA 9009, contains no exemption whatsoever. Since the law is clear,
plain and unambiguous that any municipality desiring to convert into a city must meet the increased
income requirement, there is no reason to go beyond the letter of the law in applying Section 450 of
the Local Government Code, as amended by RA 9009.
The 11th Congress' Intent was not Written into the Local Government Code
True, members of Congress discussed exempting respondent municipalities from RA 9009, as shown
by the various deliberations on the matter during the 11th Congress. However, Congress did not write
this intended exemption into law. Congress could have easily included such exemption in RA 9009 but
Congress did not. This is fatal to the cause of respondent municipalities because such exemption must
appear in RA 9009 as an amendment to Section 450 of the Local Government Code. The Constitution
requires that the criteria for the conversion of a municipality into a city, including any exemption from
such criteria, must all be written in the Local Government Code. Congress cannot prescribe such
criteria or exemption from such criteria in any other law. In short, Congress cannot create a city
through a law that does not comply with the criteria or exemption found in the Local Government
Code.

25

Section 10 of Article X is similar to Section 16, Article XII of the Constitution prohibiting Congress from
creating private corporations except by a general law. Section 16 of Article XII provides:
The Congress shall not, except by general law, provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled corporations may be created or established by
special charters in the interest of the common good and subject to the test of economic viability.
(Emphasis supplied)
Thus, Congress must prescribe all the criteria for the "formation, organization, or regulation" of
private corporations in a general law applicable to all without discrimination.21 Congress cannot
create a private corporation through a special law or charter.
Deliberations of the 11th Congress on Unapproved Bills Inapplicable
Congress is not a continuing body.22 The unapproved cityhood bills filed during the 11th Congress
became mere scraps of paper upon the adjournment of the 11th Congress. All the hearings and
deliberations conducted during the 11th Congress on unapproved bills also became worthless upon
the adjournment of the 11th Congress. These hearings and deliberations cannot be used to interpret
bills enacted into law in the 13th or subsequent Congresses.
The members and officers of each Congress are different. All unapproved bills filed in one Congress
become functus officio upon adjournment of that Congress and must be re-filed anew in order to be
taken up in the next Congress. When their respective authors re-filed the cityhood bills in 2006 during
the 13th Congress, the bills had to start from square one again, going through the legislative mill just
like bills taken up for the first time, from the filing to the approval. Section 123, Rule XLIV of the Rules
of the Senate, on Unfinished Business, provides:
Sec. 123. x x x
All pending matters and proceedings shall terminate upon the expiration of one (1) Congress, but may
be taken by the succeeding Congress as if presented for the first time. (Emphasis supplied)
Similarly, Section 78 of the Rules of the House of Representatives, on Unfinished Business, states:
Section 78. Calendar of Business. The Calendar of Business shall consist of the following:
a. Unfinished Business. This is business being considered by the House at the time of its last
adjournment. Its consideration shall be resumed until it is disposed of. The Unfinished Business at the
end of a session shall be resumed at the commencement of the next session as if no adjournment has
taken place. At the end of the term of a Congress, all Unfinished Business are deemed terminated.
(Emphasis supplied)

Thus, the deliberations during the 11th Congress on the unapproved cityhood bills, as well as the
deliberations during the 12th and 13th Congresses on the unapproved resolution exempting from RA
9009 certain municipalities, have no legal significance. They do not qualify as extrinsic aids in
construing laws passed by subsequent Congresses.
Applicability of Equal Protection Clause
If Section 450 of the Local Government Code, as amended by RA 9009, contained an exemption to the
P100 million annual income requirement, the criteria for such exemption could be scrutinized for
possible violation of the equal protection clause. Thus, the criteria for the exemption, if found in the
Local Government Code, could be assailed on the ground of absence of a valid classification. However,
Section 450 of the Local Government Code, as amended by RA 9009, does not contain any exemption.
The exemption is contained in the Cityhood Laws, which are unconstitutional because such exemption
must be prescribed in the Local Government Code as mandated in Section 10, Article X of the
Constitution.
Even if the exemption provision in the Cityhood Laws were written in Section 450 of the Local
Government Code, as amended by RA 9009, such exemption would still be unconstitutional for
violation of the equal protection clause. The exemption provision merely states, "Exemption from
Republic Act No. 9009 The City of x x x shall be exempted from the income requirement prescribed
under Republic Act No. 9009." This one sentence exemption provision contains no classification
standards or guidelines differentiating the exempted municipalities from those that are not exempted.
Even if we take into account the deliberations in the 11th Congress that municipalities with pending
cityhood bills should be exempt from the P100 million income requirement, there is still no valid
classification to satisfy the equal protection clause. The exemption will be based solely on the fact that
the 16 municipalities had cityhood bills pending in the 11th Congress when RA 9009 was enacted. This
is not a valid classification between those entitled and those not entitled to exemption from the P100
million income requirement.
To be valid, the classification in the present case must be based on substantial distinctions, rationally
related to a legitimate government objective which is the purpose of the law,23 not limited to existing
conditions only, and applicable to all similarly situated. Thus, this Court has ruled:
The equal protection clause of the 1987 Constitution permits a valid classification under the following
conditions:
1. The classification must rest on substantial distinctions;
2. The classification must be germane to the purpose of the law;
3. The classification must not be limited to existing conditions only; and
26

4. The classification must apply equally to all members of the same class.24
There is no substantial distinction between municipalities with pending cityhood bills in the 11th
Congress and municipalities that did not have pending bills. The mere pendency of a cityhood bill in
the 11th Congress is not a material difference to distinguish one municipality from another for the
purpose of the income requirement. The pendency of a cityhood bill in the 11th Congress does not
affect or determine the level of income of a municipality. Municipalities with pending cityhood bills in
the 11th Congress might even have lower annual income than municipalities that did not have
pending cityhood bills. In short, the classification criterion mere pendency of a cityhood bill in the
11th Congress is not rationally related to the purpose of the law which is to prevent fiscally nonviable municipalities from converting into cities.
Municipalities that did not have pending cityhood bills were not informed that a pending cityhood bill
in the 11th Congress would be a condition for exemption from the increased P100 million income
requirement. Had they been informed, many municipalities would have caused the filing of their own
cityhood bills. These municipalities, even if they have bigger annual income than the 16 respondent
municipalities, cannot now convert into cities if their income is less than P100 million.

Congress - as against all other municipalities that want to convert into cities after the effectivity of RA
9009.
Furthermore, limiting the exemption only to the 16 municipalities violates the requirement that the
classification must apply to all similarly situated. Municipalities with the same income as the 16
respondent municipalities cannot convert into cities, while the 16 respondent municipalities can.
Clearly, as worded the exemption provision found in the Cityhood Laws, even if it were written in
Section 450 of the Local Government Code, would still be unconstitutional for violation of the equal
protection clause.
WHEREFORE, we GRANT the petitions and declare UNCONSTITUTIONAL the Cityhood Laws, namely:
Republic Act Nos. 9389, 9390, 9391, 9392, 9393, 9394, 9398, 9404, 9405, 9407, 9408, 9409, 9434,
9435, 9436, and 9491.
SO ORDERED.

The fact of pendency of a cityhood bill in the 11th Congress limits the exemption to a specific
condition existing at the time of passage of RA 9009. That specific condition will never happen again.
This violates the requirement that a valid classification must not be limited to existing conditions only.
This requirement is illustrated in Mayflower Farms, Inc. v. Ten Eyck,25 where the challenged law
allowed milk dealers engaged in business prior to a fixed date to sell at a price lower than that allowed
to newcomers in the same business. In Mayflower, the U.S. Supreme Court held:
We are referred to a host of decisions to the effect that a regulatory law may be prospective in
operation and may except from its sweep those presently engaged in the calling or activity to which it
is directed. Examples are statutes licensing physicians and dentists, which apply only to those entering
the profession subsequent to the passage of the act and exempt those then in practice, or zoning laws
which exempt existing buildings, or laws forbidding slaughterhouses within certain areas, but
excepting existing establishments. The challenged provision is unlike such laws, since, on its face, it is
not a regulation of a business or an activity in the interest of, or for the protection of, the public, but
an attempt to give an economic advantage to those engaged in a given business at an arbitrary date as
against all those who enter the industry after that date. The appellees do not intimate that the
classification bears any relation to the public health or welfare generally; that the provision will
discourage monopoly; or that it was aimed at any abuse, cognizable by law, in the milk business. In the
absence of any such showing, we have no right to conjure up possible situations which might justify
the discrimination. The classification is arbitrary and unreasonable and denies the appellant the equal
protection of the law. (Emphasis supplied)
In the same vein, the exemption provision in the Cityhood Laws gives the 16 municipalities a unique
advantage based on an arbitrary date the filing of their cityhood bills before the end of the 11th
27

CIVIL CODE PROVISIONS SUPPLETORY

EDUARDO V. LINTONJUA, JR. and ANTONIO K. LITONJUA, Petitioners,
vs.
ETERNIT CORPORATION (now ETERTON MULTI-RESOURCES CORPORATION), ETEROUTREMER, S.A. and
FAR EAST BANK & TRUST COMPANY, Respondents.
DECISION

on February 12, 1987 that Delsaux sent a telex to Glanville stating that, based on the "Belgian/Swiss
decision," the final offer was "US$1,000,000.00 and P2,500,000.00 to cover all existing obligations
prior to final liquidation."5
Marquez furnished Eduardo Litonjua, Jr. with a copy of the telex sent by Delsaux. Litonjua, Jr. accepted
the counterproposal of Delsaux. Marquez conferred with Glanville, and in a Letter dated February 26,
1987, confirmed that the Litonjua siblings had accepted the counter-proposal of Delsaux. He also
stated that the Litonjua siblings would confirm full payment within 90 days after execution and
preparation of all documents of sale, together with the necessary governmental clearances.6

CALLEJO, SR., J.:

On appeal via a Petition for Review on Certiorari is the Decision1 of the Court of Appeals (CA) in CAG.R. CV No. 51022, which affirmed the Decision of the Regional Trial Court (RTC), Pasig City, Branch
165, in Civil Case No. 54887, as well as the Resolution2 of the CA denying the motion for
reconsideration thereof.
The Eternit Corporation (EC) is a corporation duly organized and registered under Philippine laws.
Since 1950, it had been engaged in the manufacture of roofing materials and pipe products. Its
manufacturing operations were conducted on eight parcels of land with a total area of 47,233 square
meters. The properties, located in Mandaluyong City, Metro Manila, were covered by Transfer
Certificates of Title Nos. 451117, 451118, 451119, 451120, 451121, 451122, 451124 and 451125 under
the name of Far East Bank & Trust Company, as trustee. Ninety (90%) percent of the shares of stocks
of EC were owned by Eteroutremer S.A. Corporation (ESAC), a corporation organized and registered
under the laws of Belgium.3 Jack Glanville, an Australian citizen, was the General Manager and
President of EC, while Claude Frederick Delsaux was the Regional Director for Asia of ESAC. Both had
their offices in Belgium.
In 1986, the management of ESAC grew concerned about the political situation in the Philippines and
wanted to stop its operations in the country. The Committee for Asia of ESAC instructed Michael
Adams, a member of ECs Board of Directors, to dispose of the eight parcels of land. Adams engaged
the services of realtor/broker Lauro G. Marquez so that the properties could be offered for sale to
prospective buyers. Glanville later showed the properties to Marquez.
Marquez thereafter offered the parcels of land and the improvements thereon to Eduardo B. Litonjua,
Jr. of the Litonjua & Company, Inc. In a Letter dated September 12, 1986, Marquez declared that he
was authorized to sell the properties for P27,000,000.00 and that the terms of the sale were subject to
negotiation.4
Eduardo Litonjua, Jr. responded to the offer. Marquez showed the property to Eduardo Litonjua, Jr.,
and his brother Antonio K. Litonjua. The Litonjua siblings offered to buy the property for
P20,000,000.00 cash. Marquez apprised Glanville of the Litonjua siblings offer and relayed the same
to Delsaux in Belgium, but the latter did not respond. On October 28, 1986, Glanville telexed Delsaux
in Belgium, inquiring on his position/ counterproposal to the offer of the Litonjua siblings. It was only

The Litonjua brothers deposited the amount of US$1,000,000.00 with the Security Bank & Trust
Company, Ermita Branch, and drafted an Escrow Agreement to expedite the sale.7
Sometime later, Marquez and the Litonjua brothers inquired from Glanville when the sale would be
implemented. In a telex dated April 22, 1987, Glanville informed Delsaux that he had met with the
buyer, which had given him the impression that "he is prepared to press for a satisfactory conclusion
to the sale."8 He also emphasized to Delsaux that the buyers were concerned because they would
incur expenses in bank commitment fees as a consequence of prolonged period of inaction.9
Meanwhile, with the assumption of Corazon C. Aquino as President of the Republic of the Philippines,
the political situation in the Philippines had improved. Marquez received a telephone call from
Glanville, advising that the sale would no longer proceed. Glanville followed it up with a Letter dated
May 7, 1987, confirming that he had been instructed by his principal to inform Marquez that "the
decision has been taken at a Board Meeting not to sell the properties on which Eternit Corporation is
situated."10
Delsaux himself later sent a letter dated May 22, 1987, confirming that the ESAC Regional Office had
decided not to proceed with the sale of the subject land, to wit:
May 22, 1987
Mr. L.G. Marquez
L.G. Marquez, Inc.
334 Makati Stock Exchange Bldg.
6767 Ayala Avenue
Makati, Metro Manila
Philippines
Dear Sir:
Re: Land of Eternit Corporation

28

I would like to confirm officially that our Group has decided not to proceed with the sale of the land
which was proposed to you.
The Committee for Asia of our Group met recently (meeting every six months) and examined the
position as far as the Philippines are (sic) concerned. Considering [the] new political situation since the
departure of MR. MARCOS and a certain stabilization in the Philippines, the Committee has decided
not to stop our operations in Manila. In fact, production has started again last week, and (sic) to
recognize the participation in the Corporation.
We regret that we could not make a deal with you this time, but in case the policy would change at
a later state, we would consult you again.
xxx

The complaint as against Far East Bank and Trust Company is likewise dismissed for lack of cause of
action.
The counterclaim of Eternit Corporation now Eterton Multi-Resources Corporation and Eteroutremer,
S.A. is also dismissed for lack of merit.13
The trial court declared that since the authority of the agents/realtors was not in writing, the sale is
void and not merely unenforceable, and as such, could not have been ratified by the principal. In any
event, such ratification cannot be given any retroactive effect. Plaintiffs could not assume that
defendants had agreed to sell the property without a clear authorization from the corporation
concerned, that is, through resolutions of the Board of Directors and stockholders. The trial court also
pointed out that the supposed sale involves substantially all the assets of defendant EC which would
result in the eventual total cessation of its operation.14

Yours sincerely,
(Sgd.)
C.F. DELSAUX
cc. To: J. GLANVILLE (Eternit Corp.)11
When apprised of this development, the Litonjuas, through counsel, wrote EC, demanding payment
for damages they had suffered on account of the aborted sale. EC, however, rejected their demand.
The Litonjuas then filed a complaint for specific performance and damages against EC (now the
Eterton Multi-Resources Corporation) and the Far East Bank & Trust Company, and ESAC in the RTC of
Pasig City. An amended complaint was filed, in which defendant EC was substituted by Eterton MultiResources Corporation; Benito C. Tan, Ruperto V. Tan, Stock Ha T. Tan and Deogracias G. Eufemio
were impleaded as additional defendants on account of their purchase of ESAC shares of stocks and
were the controlling stockholders of EC.
In their answer to the complaint, EC and ESAC alleged that since Eteroutremer was not doing business
in the Philippines, it cannot be subject to the jurisdiction of Philippine courts; the Board and
stockholders of EC never approved any resolution to sell subject properties nor authorized Marquez to
sell the same; and the telex dated October 28, 1986 of Jack Glanville was his own personal making
which did not bind EC.
On July 3, 1995, the trial court rendered judgment in favor of defendants and dismissed the amended
complaint.12 The fallo of the decision reads:
WHEREFORE, the complaint against Eternit Corporation now Eterton Multi-Resources Corporation and
Eteroutremer, S.A. is dismissed on the ground that there is no valid and binding sale between the
plaintiffs and said defendants.

The Litonjuas appealed the decision to the CA, alleging that "(1) the lower court erred in concluding
that the real estate broker in the instant case needed a written authority from appellee corporation
and/or that said broker had no such written authority; and (2) the lower court committed grave error
of law in holding that appellee corporation is not legally bound for specific performance and/or
damages in the absence of an enabling resolution of the board of directors."15 They averred that
Marquez acted merely as a broker or go-between and not as agent of the corporation; hence, it was
not necessary for him to be empowered as such by any written authority. They further claimed that an
agency by estoppel was created when the corporation clothed Marquez with apparent authority to
negotiate for the sale of the properties. However, since it was a bilateral contract to buy and sell, it
was equivalent to a perfected contract of sale, which the corporation was obliged to consummate.
In reply, EC alleged that Marquez had no written authority from the Board of Directors to bind it;
neither were Glanville and Delsaux authorized by its board of directors to offer the property for sale.
Since the sale involved substantially all of the corporations assets, it would necessarily need the
authority from the stockholders.
On June 16, 2000, the CA rendered judgment affirming the decision of the RTC. 16 The Litonjuas filed a
motion for reconsideration, which was also denied by the appellate court.
The CA ruled that Marquez, who was a real estate broker, was a special agent within the purview of
Article 1874 of the New Civil Code. Under Section 23 of the Corporation Code, he needed a special
authority from ECs board of directors to bind such corporation to the sale of its properties. Delsaux,
who was merely the representative of ESAC (the majority stockholder of EC) had no authority to bind
the latter. The CA pointed out that Delsaux was not even a member of the board of directors of EC.
Moreover, the Litonjuas failed to prove that an agency by estoppel had been created between the
parties.
In the instant petition for review, petitioners aver that
29

1. The testimony of Marquez that he was chosen by Glanville as the then President and General
Manager of Eternit, to sell the properties of said corporation to any interested party, which authority,
as hereinabove discussed, need not be in writing.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PERFECTED CONTRACT OF SALE.
II
THE APPELLATE COURT COMMITTED GRAVE ERROR OF LAW IN HOLDING THAT MARQUEZ NEEDED A
WRITTEN AUTHORITY FROM RESPONDENT ETERNIT BEFORE THE SALE CAN BE PERFECTED.
III

2. The fact that the NEGOTIATIONS for the sale of the subject properties spanned SEVERAL MONTHS,
from 1986 to 1987;
3. The COUNTER-OFFER made by Eternit through GLANVILLE to sell its properties to the Petitioners;
4. The GOOD FAITH of Petitioners in believing Eternits offer to sell the properties as evidenced by the
Petitioners ACCEPTANCE of the counter-offer;

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT GLANVILLE AND DELSAUX HAVE THE
NECESSARY AUTHORITY TO SELL THE SUBJECT PROPERTIES, OR AT THE VERY LEAST, WERE
KNOWINGLY PERMITTED BY RESPONDENT ETERNIT TO DO ACTS WITHIN THE SCOPE OF AN APPARENT
AUTHORITY, AND THUS HELD THEM OUT TO THE PUBLIC AS POSSESSING POWER TO SELL THE SAID
PROPERTIES.17

5. The fact that Petitioners DEPOSITED the price of [US]$1,000,000.00 with the Security Bank and that
an ESCROW agreement was drafted over the subject properties;

Petitioners maintain that, based on the facts of the case, there was a perfected contract of sale of the
parcels of land and the improvements thereon for "US$1,000,000.00 plus P2,500,000.00 to cover
obligations prior to final liquidation." Petitioners insist that they had accepted the counter-offer of
respondent EC and that before the counter-offer was withdrawn by respondents, the acceptance was
made known to them through real estate broker Marquez.

7. More importantly, Exhibits "G" and "H" of the Respondents, which evidenced the fact that
Petitioners offer was allegedly REJECTED by both Glanville and Delsaux.18

Petitioners assert that there was no need for a written authority from the Board of Directors of EC for
Marquez to validly act as broker/middleman/intermediary. As broker, Marquez was not an ordinary
agent because his authority was of a special and limited character in most respects. His only job as a
broker was to look for a buyer and to bring together the parties to the transaction. He was not
authorized to sell the properties or to make a binding contract to respondent EC; hence, petitioners
argue, Article 1874 of the New Civil Code does not apply.
In any event, petitioners aver, what is important and decisive was that Marquez was able to
communicate both the offer and counter-offer and their acceptance of respondent ECs counter-offer,
resulting in a perfected contract of sale.
Petitioners posit that the testimonial and documentary evidence on record amply shows that
Glanville, who was the President and General Manager of respondent EC, and Delsaux, who was the
Managing Director for ESAC Asia, had the necessary authority to sell the subject property or, at least,
had been allowed by respondent EC to hold themselves out in the public as having the power to sell
the subject properties. Petitioners identified such evidence, thus:

6. Glanvilles telex to Delsaux inquiring "WHEN WE (Respondents) WILL IMPLEMENT ACTION TO BUY
AND SELL";

Petitioners insist that it is incongruous for Glanville and Delsaux to make a counter-offer to
petitioners offer and thereafter reject such offer unless they were authorized to do so by respondent
EC. Petitioners insist that Delsaux confirmed his authority to sell the properties in his letter to
Marquez, to wit:
Dear Sir,
Re: Land of Eternit Corporation
I would like to confirm officially that our Group has decided not to proceed with the sale of the land
which was proposed to you.
The Committee for Asia of our Group met recently (meeting every six months) and examined the
position as far as the Philippines are (sic) concerned. Considering the new political situation since the
departure of MR. MARCOS and a certain stabilization in the Philippines, the Committee has decided
not to stop our operations in Manila[.] [I]n fact production started again last week, and (sic) to
reorganize the participation in the Corporation.
We regret that we could not make a deal with you this time, but in case the policy would change at
a later stage we would consult you again.
In the meantime, I remain
30

Yours sincerely,
C.F. DELSAUX19
Petitioners further emphasize that they acted in good faith when Glanville and Delsaux were
knowingly permitted by respondent EC to sell the properties within the scope of an apparent
authority. Petitioners insist that respondents held themselves to the public as possessing power to sell
the subject properties.
By way of comment, respondents aver that the issues raised by the petitioners are factual, hence, are
proscribed by Rule 45 of the Rules of Court. On the merits of the petition, respondents EC (now EMC)
and ESAC reiterate their submissions in the CA. They maintain that Glanville, Delsaux and Marquez had
no authority from the stockholders of respondent EC and its Board of Directors to offer the properties
for sale to the petitioners, or to any other person or entity for that matter. They assert that the
decision and resolution of the CA are in accord with law and the evidence on record, and should be
affirmed in toto.
Petitioners aver in their subsequent pleadings that respondent EC, through Glanville and Delsaux,
conformed to the written authority of Marquez to sell the properties. The authority of Glanville and
Delsaux to bind respondent EC is evidenced by the fact that Glanville and Delsaux negotiated for the
sale of 90% of stocks of respondent EC to Ruperto Tan on June 1, 1997. Given the significance of their
positions and their duties in respondent EC at the time of the transaction, and the fact that
respondent ESAC owns 90% of the shares of stock of respondent EC, a formal resolution of the Board
of Directors would be a mere ceremonial formality. What is important, petitioners maintain, is that
Marquez was able to communicate the offer of respondent EC and the petitioners acceptance
thereof. There was no time that they acted without the knowledge of respondents. In fact, respondent
EC never repudiated the acts of Glanville, Marquez and Delsaux.

It must be stressed that issues of facts may not be raised in the Court under Rule 45 of the Rules of
Court because the Court is not a trier of facts. It is not to re-examine and assess the evidence on
record, whether testimonial and documentary. There are, however, recognized exceptions where the
Court may delve into and resolve factual issues, namely:
(1) When the conclusion is a finding grounded entirely on speculations, surmises, or conjectures; (2)
when the inference made is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse
of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of
fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of
the case and the same is contrary to the admissions of both appellant and appellee; (7) when the
findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact
are conclusions without citation of specific evidence on which they are based; (9) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion; and (10) when the findings of fact of the Court of
Appeals are premised on the absence of evidence and are contradicted by the evidence on record.23
We have reviewed the records thoroughly and find that the petitioners failed to establish that the
instant case falls under any of the foregoing exceptions. Indeed, the assailed decision of the Court of
Appeals is supported by the evidence on record and the law.
It was the duty of the petitioners to prove that respondent EC had decided to sell its properties and
that it had empowered Adams, Glanville and Delsaux or Marquez to offer the properties for sale to
prospective buyers and to accept any counter-offer. Petitioners likewise failed to prove that their
counter-offer had been accepted by respondent EC, through Glanville and Delsaux. It must be stressed
that when specific performance is sought of a contract made with an agent, the agency must be
established by clear, certain and specific proof.24
Section 23 of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines,
provides:

The petition has no merit.

Anent the first issue, we agree with the contention of respondents that the issues raised by petitioner
in this case are factual. Whether or not Marquez, Glanville, and Delsaux were authorized by
respondent EC to act as its agents relative to the sale of the properties of respondent EC, and if so, the
boundaries of their authority as agents, is a question of fact. In the absence of express written terms
creating the relationship of an agency, the existence of an agency is a fact question.20 Whether an
agency by estoppel was created or whether a person acted within the bounds of his apparent
authority, and whether the principal is estopped to deny the apparent authority of its agent are,
likewise, questions of fact to be resolved on the basis of the evidence on record.21 The findings of the
trial court on such issues, as affirmed by the CA, are conclusive on the Court, absent evidence that the
trial and appellate courts ignored, misconstrued, or misapplied facts and circumstances of substance
which, if considered, would warrant a modification or reversal of the outcome of the case.22

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.
Indeed, a corporation is a juridical person separate and distinct from its members or stockholders and
is not affected by the personal rights,
obligations and transactions of the latter.25 It may act only through its board of directors or, when
authorized either by its by-laws 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, by-laws, or relevant provisions of law.26
31

Under Section 36 of the Corporation Code, a corporation may sell or convey its real properties, subject
to the limitations prescribed by law and the Constitution, as follows:
SEC. 36. Corporate powers and capacity. Every corporation incorporated under this Code has the
power and capacity:
xxxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transaction of a lawful business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by the law and the Constitution.
The property of a corporation, however, is not the property of the stockholders or members, and as
such, may not be sold without express authority from the board of directors.27 Physical acts, like the
offering of the properties of the corporation for sale, or the acceptance of a counter-offer of
prospective buyers of such properties and the execution of the deed of sale covering such property,
can be performed by the corporation only by officers or agents duly authorized for the purpose by
corporate by-laws or by specific acts of the board of directors.28 Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to the
affairs of the corporation, but not in the course of, or connected with, the performance of authorized
duties of such director, are not binding on the corporation.29
While a corporation may appoint agents to negotiate for the sale of its real properties, the final say
will have to be with the board of directors through its officers and agents as authorized by a board
resolution or by its by-laws.30 An unauthorized act of an officer of the corporation is not binding on it
unless the latter ratifies the same expressly or impliedly by its board of directors. Any sale of real
property of a corporation by a person purporting to be an agent thereof but without written authority
from the corporation is null and void. The declarations of the agent alone are generally insufficient to
establish the fact or extent of his/her authority.31
By the contract of agency, a person binds himself to render some service or to do something in
representation on behalf of another, with the consent or authority of the latter.32 Consent of both
principal and agent is necessary to create an agency. The principal must intend that the agent shall act
for him; the agent must intend to accept the authority and act on it, and the intention of the parties
must find expression either in words or conduct between them.33
An agency may be expressed or implied from the act 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. Acceptance by the agent may be expressed, or implied from his acts which carry out the
agency, or from his silence or inaction according to the circumstances.34 Agency may be oral unless
the law requires a specific form.35 However, to create or convey real rights over immovable property,

a special power of attorney is necessary.36 Thus, when a sale of a piece of land or any portion thereof
is through an agent, the authority of the latter shall be in writing, otherwise, the sale shall be void.37
In this case, the petitioners as plaintiffs below, failed to adduce in evidence any resolution of the
Board of Directors of respondent EC empowering Marquez, Glanville or Delsaux as its agents, to sell,
let alone offer for sale, for and in its behalf, the eight parcels of land owned by respondent EC
including the improvements thereon. The bare fact that Delsaux may have been authorized to sell to
Ruperto Tan the shares of stock of respondent ESAC, on June 1, 1997, cannot be used as basis for
petitioners claim that he had likewise been authorized by respondent EC to sell the parcels of land.
Moreover, the evidence of petitioners shows that Adams and Glanville acted on the authority of
Delsaux, who, in turn, acted on the authority of respondent ESAC, through its Committee for Asia,38
the Board of Directors of respondent ESAC,39 and the Belgian/Swiss component of the management
of respondent ESAC.40 As such, Adams and Glanville engaged the services of Marquez to offer to sell
the properties to prospective buyers. Thus, on September 12, 1986, Marquez wrote the petitioner that
he was authorized to offer for sale the property for P27,000,000.00 and the other terms of the sale
subject to negotiations. When petitioners offered to purchase the property for P20,000,000.00,
through Marquez, the latter relayed petitioners offer to Glanville; Glanville had to send a telex to
Delsaux to inquire the position of respondent ESAC to petitioners offer. However, as admitted by
petitioners in their Memorandum, Delsaux was unable to reply immediately to the telex of Glanville
because Delsaux had to wait for confirmation from respondent ESAC.41 When Delsaux finally
responded to Glanville on February 12, 1987, he made it clear that, based on the "Belgian/Swiss
decision" the final offer of respondent ESAC was US$1,000,000.00 plus P2,500,000.00 to cover all
existing obligations prior to final liquidation.42 The offer of Delsaux emanated only from the
"Belgian/Swiss decision," and not the entire management or Board of Directors of respondent ESAC.
While it is true that petitioners accepted the counter-offer of respondent ESAC, respondent EC was
not a party to the transaction between them; hence, EC was not bound by such acceptance.
While Glanville was the President and General Manager of respondent EC, and Adams and Delsaux
were members of its Board of Directors, the three acted for and in behalf of respondent ESAC, and not
as duly authorized agents of respondent EC; a board resolution evincing the grant of such authority is
needed to bind EC to any agreement regarding the sale of the subject properties. Such board
resolution is not a mere formality but is a condition sine qua non to bind respondent EC. Admittedly,
respondent ESAC owned 90% of the shares of stocks of respondent EC; however, the mere fact that a
corporation owns a majority of the shares of stocks of another, or even all of such shares of stocks,
taken alone, will not justify their being treated as one corporation.43
It bears stressing that in an agent-principal relationship, the personality of the principal is extended
through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal,
authorized to perform all acts which the latter would have him do. Such a relationship can only be
effected with the consent of the principal, which must not, in any way, be compelled by law or by any
court.44
32

The petitioners cannot feign ignorance of the absence of any regular and valid authority of respondent
EC empowering Adams, Glanville or Delsaux to offer the properties for sale and to sell the said
properties to the petitioners. A person dealing with a known agent is not authorized, under any
circumstances, blindly to trust the agents; statements as to the extent of his powers; such person
must not act negligently but must use reasonable diligence and prudence to ascertain whether the
agent acts within the scope of his authority.45 The settled rule is that, persons dealing with an
assumed agent are bound at their peril, and 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 prove it.46 In this case, the petitioners failed to discharge their
burden; hence, petitioners are not entitled to damages from respondent EC.

FRANCHISES CORP
J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J. BELTRAN, petitioners,
vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and
HON. AGUSTIN MONTESA, Judge of the Court of First Instance of Manila, respondents.
Felipe N. Aurea for petitioners.
Taada, Teehankee and Carreon for respondent Imperial Insurance, Inc.
PAREDES, J.:

It appears that Marquez acted not only as real estate broker for the petitioners but also as their agent.
As gleaned from the letter of Marquez to Glanville, on February 26, 1987, he confirmed, for and in
behalf of the petitioners, that the latter had accepted such offer to sell the land and the
improvements thereon. However, we agree with the ruling of the appellate court that Marquez had
no authority to bind respondent EC to sell the subject properties. A real estate broker is one who
negotiates the sale of real properties. His business, generally speaking, is only to find a purchaser who
is willing to buy the land upon terms fixed by the owner. He has no authority to bind the principal by
signing a contract of sale. Indeed, an authority to find a purchaser of real property does not include an
authority to sell.47
Equally barren of merit is petitioners contention that respondent EC is estopped to deny the existence
of a principal-agency relationship between it and Glanville or Delsaux. For an agency by estoppel to
exist, the following must be established: (1) the principal manifested a representation of the agents
authority or knowlingly allowed the agent to assume such authority; (2) the third person, in good faith,
relied upon such representation; (3) relying upon such representation, such third person has changed
his position to his detriment.48 An agency by estoppel, which is similar to the doctrine of apparent
authority, requires proof of reliance upon the representations, and that, in turn, needs proof that the
representations predated the action taken in reliance.49 Such proof is lacking in this case. In their
communications to the petitioners, Glanville and Delsaux positively and unequivocally declared that
they were acting for and in behalf of respondent ESAC.
Neither may respondent EC be deemed to have ratified the transactions between the petitioners and
respondent ESAC, through Glanville, Delsaux and Marquez. The transactions and the various
communications inter se were never submitted to the Board of Directors of respondent EC for
ratification.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the
petitioners.
SO ORDERED.

Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation, an establishment duly
franchised by the Congress of the Philippines, to conduct a messenger and delivery express service. On
July 12, 1961, the respondent Imperial Insurance, Inc., presented with the CFI of Manila a complaint
(Civ. Case No. 47520), for sum of money against the petitioner corporation. After the defendants
therein have submitted their Answer, the parties entered into a Compromise Agreement, assisted by
their respective counsels, the pertinent portions of which recite:
1) WHEREAS, the DEFENDANTS admit and confess their joint and solidary indebtedness to the
PLAINTIFF in the full sum of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY-TWO & 32/100
(P61,172.32), Philippine Currency, itemized as follows:
a) Principal
P50,000.00
b) Interest at 12% per annum
5,706.14
c) Liquidated damages at 7% per annum
3,330.58
d) Costs of suit 135.60
e) Attorney's fees 2,000.00
2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and hereby promise to pay their
aforementioned obligation to the PLAINTIFF at its business address at 301-305 Banquero St., (Ground
Floor), Regina Building, Escolta, Manila, within sixty (60) days from March 16, 1962 or on or before
May 14, 1962;
3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total amount of PESOS SIXTY ONE
THOUSAND ONE HUNDRED SEVENTY TWO & 32/100 (P61,172.32), Philippine Currency, for any reason
whatsoever, on May 14, 1962, the PLAINTIFF shall be entitled, as a matter of right, to move for the
execution of the decision to be rendered in the above-entitled case by this Honorable Court based on
this COMPROMISE AGREEMENT.
On March 17, 1962, the lower court rendered judgment embodying the contents of the said
compromise agreement, the dispositive portion of which reads

33

WHEREFORE, the Court hereby approves the above-quoted compromise agreement and renders
judgment in accordance therewith, enjoining the parties to comply faithfully and strictly with the
terms and conditions thereof, without special pronouncement as to costs.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1wph1.t
On May 15, 1962, one day after the date fixed in the compromise agreement, within which the
judgment debt would be paid, but was not, respondent Imperial Insurance Inc., filed a "Motion for the
Insurance of a Writ of Execution". On May 23, 1962, a Writ of Execution was issued by respondent
Sheriff of Manila and on May 26, 1962, Notices of Sale were sent out for the auction of the personal
properties of the petitioner J.R.S. Business Corporation. On June 2, 1962, a Notice of Sale of the
"whole capital stocks of the defendants JRS Business Corporation, the business name, right of
operation, the whole assets, furnitures and equipments, the total liabilities, and Net Worth, books of
accounts, etc., etc." of the petitioner corporation was, handed down. On June 9, the petitioner, thru
counsel, presented an "Urgent Petition for Postponement of Auction Sale and for Release of Levy on
the Business Name and Right to Operate of Defendant JRS Business Corporation", stating that
petitioners were busy negotiating for a loan with which to pay the judgment debt; that the judgment
was for money only and, therefore, plaintiff (respondent Insurance Company) was not authorized to
take over and appropriate for its own use, the business name of the defendants; that the right to
operate under the franchise, was not transferable and could not be considered a personal or
immovable, property, subject to levy and sale. On June 10, 1962, a Supplemental Motion for Release
of Execution, was filed by counsel of petitioner JRS Business Corporation, claiming that the capital
stocks thereof, could not be levied upon and sold under execution. Under date of June 20, 1962,
petitioner's counsel presented a pleading captioned "Very Urgent Motion for Postponement of Public
Auction Sale and for Ruling on Motion for Release of Levy on the Business Name, Right to Operate and
Capital Stocks of JRS Business Corporation". The auction sale was set for June 21, 1962. In said motion,
petitioners alleged that the loan they had applied for, was to be secured within the next ten (10) days,
and they would be able to discharge the judgment debt. Respondents opposed the said motion and on
June 21, 1962, the lower court denied the motion for postponement of the auction sale.
In the sale which was conducted in the premises of the JRS Business Corporation at 1341 Perez St.,
Paco, Manila, all the properties of said corporation contained in the Notices of Sale dated May 26,
1962, and June 2, 1962 (the latter notice being for the whole capital stocks of the defendant, JRS
Business Corporation, the business name, right of operation, the whole assets, furnitures and
equipments, the total liabilities and Net Worth, books of accounts, etc., etc.), were bought by
respondent Imperial Insurance, Inc., for P10,000.00, which was the highest bid offered. Immediately
after the sale, respondent Insurance Company took possession of the proper ties and started running
the affairs and operating the business of the JRS Business Corporation. Hence, the present appeal.
It would seem that the matters which need determination are (1) whether the respondent Judge acted
without or in excess of his jurisdiction or with grave abuse of discretion in promulgating the Order of

June 21, 1962, denying the motion for postponement of the scheduled sale at public auction, of the
properties of petitioner; and (2) whether the business name or trade name, franchise (right to
operate) and capital stocks of the petitioner are properties or property rights which could be the
subject of levy, execution and sale.
The respondent Court's act of postponing the scheduled sale was within the discretion of respondent
Judge, the exercise of which, one way or the other, did not constitute grave abuse of discretion and/or
excess of jurisdiction. There was a decision rendered and the corresponding writ of execution was
issued. Respondent Judge had jurisdiction over the matter and erroneous conclusions of law or fact, if
any, committed in the exercise of such jurisdiction are merely errors of judgment, not correctible by
certiorari (Villa Rey Transit v. Bello, et al., L-18957, April 23, 1963, and cases cited therein.)
The corporation law, on forced sale of franchises, provides
Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use public property or
any portion of the public domain or any right of way over public property or the public domain, and
any rights and privileges acquired under such franchise may be levied upon and sold under execution,
together with the property necessary for the enjoyment, the exercise of the powers, and the receipt
of the proceeds of such franchise or right of way, in the same manner and with like effect as any other
property to satisfy any judgment against the corporation: Provided, That the sale of the franchise or
right of way and the property necessary for the enjoyment, the exercise of the powers, and the receipt
of the proceeds of said franchise or right of way is especially decreed and ordered in the judgment:
And provided, further, That the sale shall not become effective until confirmed by the court after due
notice. (Sec. 56, Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was held
The first question then for decision is the meaning of the word "franchise" in the statute.
"A franchise is a special privilege conferred by governmental authority, and which does not belong to
citizens of the country generally as a matter of common right. ... Its meaning depends more or less
upon the connection in which the word is employed and the property and corporation to which it is
applied. It may have different significations.
"For practical purposes, franchises, so far as relating to corporations, are divisible into (1) corporate or
general franchises; and (2) special or secondary franchises. The former is the franchise to exist as a
corporation, while the latter are certain rights and privileges conferred upon existing corporations,
such as the right to use the streets of a municipality to lay pipes or tracks, erect poles or string wires."
2 Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p. 160; Adams v. Yazon & M. V. R. Co., 24 So. 200, 317,
28 So. 956, 77 Miss. 253, 60 L.R.A. 33 et seq.
The primary franchise of a corporation that is, the right to exist as such, is vested "in the individuals
who compose the corporation and not in the corporation itself" (14 C.J. pp. 160, 161; Adams v.
34

Railroad, supra; 2 Fletcher's Cyclopedia Corp. Secs. 1153, 1158; 3 Thompson on Corporations 2d Ed.]
Secs. 2863, 2864), and cannot be conveyed in the absence of a legislative authority so to do (14A CJ.
543, 577; 1 Fletcher's Cyc. Corp. Sec. 1224; Memphis & L.R.R. Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28
L.E.d. 837; Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453, 50 L.E.d. 1102, 6 Ann.
Cas. 253; Arthur v. Commercial & Railroad Bank, 9 Smedes & M. 394, 48 Am. Dec. 719), but the specify
or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed
or mortgaged under a general power granted to a corporation to dispose of its property (Adams v.
Railroad, supra; 14A C.J. 542, 557; 3 Thompson on Corp. [2nd Ed.] Sec. 2909), except such special or
secondary franchises as are charged with a public use (2 Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544; 3
Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R. Bank, supra; McAllister v. Plant, 54
Miss. 106).
The right to operate a messenger and express delivery service, by virtue of a legislative enactment, is
admittedly a secondary franchise (R.A. No. 3260, entitled "An Act granting the JRS Business
Corporation a franchise to conduct a messenger and express service)" and, as such, under our
corporation law, is subject to levy and sale on execution together and including all the property
necessary for the enjoyment thereof. The law, however, indicates the procedure under which the
same (secondary franchise and the properties necessary for its enjoyment) may be sold under
execution. Said franchise can be sold under execution, when such sale is especially decreed and
ordered in the judgment and it becomes effective only when the sale is confirmed by the Court after
due notice (Sec. 56, Corp. Law). The compromise agreement and the judgment based thereon, do not
contain any special decree or order making the franchise answerable for the judgment debt. The same
thing may be stated with respect to petitioner's trade name or business name and its capital stock.
Incidentally, the trade name or business name corresponds to the initials of the President of the
petitioner corporation and there can be no serious dispute regarding the fact that a trade name or
business name and capital stock are necessarily included in the enjoyment of the franchise. Like that
of a franchise, the law mandates, that property necessary for the enjoyment of said franchise, can only
be sold to satisfy a judgment debt if the decision especially so provides. As We have stated heretofore,
no such directive appears in the decision. Moreover, a trade name or business name cannot be sold
separately from the franchise, and the capital stock of the petitioner corporation or any other
corporation, for the matter, represents the interest and is the property of stockholders in the
corporation, who can only be deprived thereof in the manner provided by law (Therbee v. Baker, 35
N.E. Eq. [8 Stew.] 501, 505; In re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and
Phrases, 109).
It, therefore, results that the inclusion of the franchise, the trade name and/or business name and the
capital stock of the petitioner corporation, in the sale of the properties of the JRS Business
Corporation, has no justification. The sale of the properties of petitioner corporation is set aside, in so
far as it authorizes the levy and sale of its franchise, trade name and capital stocks. Without
pronouncement as to costs.

ATTRIBUTES OF A CORPORATION
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
DECISION
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and separate from the persons and
entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend
crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the
mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets
of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the
resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for
the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision[1] of the Court of Appeals (CA)
in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:
WHEREFORE, the judgment appealed from is hereby AFFIRMED.*2+
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
In its complaint, the plaintiff *herein respondent+ alleged that it is a partnership duly organized,
existing, and operating under the laws of the Philippines, with office and principal place of business at
Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine
National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing
and operating under the laws of the Philippines, with office and principal place of business at Escolta
Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development Corporation
(NASUDECO in brief), is also a semi-government corporation and the sugar arm of the PNB, with office
and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and
operating under the 1975 laws of the Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction
for the repairs and/or construction of different kinds of machineries and buildings; that on August 26,
1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed
by the Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant PNB
organized the defendant NASUDECO in September, 1975, to take ownership and possession of the
35

assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills;
that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical
rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several
unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant
PASUMIL entered into a contract for the plaintiff to perform the following, to wit
(a)

Construction of one (1) power house building;

(b)
Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel
engine generating set[s];
(c)
Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW
turbo generator sets;
(d)
Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine
generating set[s];
(e)
Installation of turbine and diesel generating sets including transformer, switchboard, electrical
wirings and pipe provided those stated units are completely supplied with their accessories;
(f)
Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and
drainage canals, excavation, and earth fillings all for the total amount of P543,500.00 as evidenced
by a contract, *a+ xerox copy of which is hereto attached as Annex A and made an integral part of this
complaint;
that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to
perform extra work, and provide electrical equipment and spare parts, such as:

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00,
leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as shown in the
Certification of the chief accountant of the PNB, a machine copy of which is appended as Annex C of
the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial
payment to the plaintiff of P14,000.00, in broken amounts, covering the period from January 5, 1974
up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the
defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just,
valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the
PNB, and this official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought
this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant
PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as well as the engineering and repairs,
performed by the plaintiff; that because of the failure and refusal of the defendants to pay their just,
valid, and demandable obligations, plaintiff suffered actual damages in the total amount of
P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the
professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the
amount of the obligation due by way of attorneys fees. Accordingly, the plaintiff prayed that
judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to
wit:
(1)
Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest
of 14% from the time the obligation falls due and demandable;
(2)

Condemning the defendants to pay attorneys fees amounting to 25% of the amount claim;

(3)

Ordering the defendants to pay the costs of the suit.

(a)

Supply of electrical devices;

The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the
ground that the complaint failed to state sufficient allegations to establish a cause of action against
both defendants, inasmuch as there is lack or want of privity of contract between the plaintiff and the
two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code,
and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al.
v. Court of Appeals, et al., 20 SCRA 1214.

(b)

Extra mechanical works;

(c)

Extra fabrication works;

(d)

Supply of materials and consumable items;

(e)

Electrical shop repair;

The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same
order, that court directed the defendants to file their answer to the complaint within 15 days.

(f)

Supply of parts and related works for turbine generator;

In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:

(g)

Supply of electrical equipment for machinery;

(h)

Supply of diesel engine parts and other related works including fabrication of parts.

That the complaint does not state a sufficient cause of action against the defendant NASUDECO
because: (a) NASUDECO is not x x x privy to the various electrical construction jobs being sued upon by
the plaintiff under the present complaint; (b) the taking over by NASUDECO of the assets of defendant
36

PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL
pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189A (as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation, the
NASUDECO, to assume the corporate obligations of PASUMIL as that being involved in the present
case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities
[were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of,
and submit *a+ recommendation on the problems concerning the same.
By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the
present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained
to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff should be
sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its
counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of attorneys fees as well
as exemplary damages.
In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1)
the complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the
contract alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the
defendant PASUMIL upon which plaintiffs suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of
the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of reconditioning the
sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season, and
that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume
the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that
PNBs management and operation under LOI No. 311 did not refer to any asset of PASUMIL which the
PNB had to acquire and thereafter [manage], but only to those which were foreclosed by the DBP and
were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15,
1975, the PNB and the Development Bank of the Philippines (DBP) entered into a Redemption
Agreement whereby DBP sold, transferred and conveyed in favor of the PNB, by way of redemption,
all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL,
as shown in Annex C which is made an integral part of the answer; (6) that again, conformably with
LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred,
and assigned for valuable consideration, in favor of NASUDECO, a distinct and independent
corporation, all its (PNB) rights and interest in and under the above Redemption Agreement. This is
shown in Annex D which is also made an integral part of the answer; *7+ that as a consequence of the
said Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate the abovementioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In other
words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the
execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct
PNB to assume the corporate obligations of PASUMIL, including the alleged obligation upon which this
present suit was brought; and [9] that, at most, what was granted to PNB in this respect was the
authority to make a study of and submit recommendation on the problems concerning the claims of
PASUMIL creditors, under sub-par. 5 LOI No. 311.

In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur
expenses in this case, hence it is entitled to claim attorneys fees in the amount of at least P50,000.00.
Accordingly, PNB prayed that the complaint be dismissed; and that on its counterclaim, that the
plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorneys fees, aside from
exemplary damages in such amount that the court may seem just and equitable in the premises.
Summons by publication was made via the Philippines Daily Express, a newspaper with editorial
office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter
declared in default as shown in the August 7, 1981 Order issued by the Trial Court.
After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant
Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION
(NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally
the former the following:
1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from
September 25, 1980 until fully paid;
2. The sum of P102,724.76 as attorneys fees; and,
3. Costs.
SO ORDERED.
Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
Judge*3+
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a
corporation to take over and operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising therefrom.[4]
Hence, this Petition.[5]
Issues
37

In their Memorandum, petitioners raise the following errors for the Courts consideration:

Piercing the Corporate

Veil Not Warranted

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid
corporate debts of PASUMIL, a corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners*+ take-over of the management and
operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.

A corporation is an artificial being created by operation of law. It possesses the right of succession and
such powers, attributes, and properties expressly authorized by law or incident to its existence.[12] It
has a personality separate and distinct from the persons composing it, as well as from any other legal
entity to which it may be related.[13] This is basic.

II

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation.[14] For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled[15]
only when it becomes a shield for fraud, illegality or inequity committed against third persons.[16]

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated
in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415.*6+
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the
unpaid debts of PASUMIL to respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the
Rules of Court.[7] To this rule, however, there are some exceptions enumerated in Fuentes v. Court of
Appeals.[8] After a careful scrutiny of the records and the pleadings submitted by the parties, we find
that the lower courts misappreciated the evidence presented.[9] Overlooked by the CA were certain
relevant facts that would justify a conclusion different from that reached in the assailed Decision.[10]

Hence, any application of the doctrine of piercing the corporate veil should be done with caution.[17]
A court should be mindful of the milieu where it is to be applied.[18] It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against
another, in disregard of its rights.[19] The wrongdoing must be clearly and convincingly established; it
cannot be presumed.[20] Otherwise, an injustice that was never unintended may result from an
erroneous application.[21]
This Court has pierced the corporate veil to ward off a judgment credit,[22] to avoid inclusion of
corporate assets as part of the estate of the decedent,[23] to escape liability arising from a debt,[24]
or to perpetuate fraud and/or confuse legitimate issues[25] either to promote or to shield unfair
objectives[26] or to cover up an otherwise blatant violation of the prohibition against forumshopping.[27] Only in these and similar instances may the veil be pierced and disregarded.[28]

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their
takeover of the latters foreclosed assets did not make them assignees. On the other hand,
respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly
and severally held liable for PASUMILs unpaid obligation.

The question of whether a corporation is a mere alter ego is one of fact.[29] Piercing the veil of
corporate fiction may be allowed only if the following elements concur: (1) control -- not mere stock
control, but complete domination -- not only of finances, but of policy and business practice in respect
to the transaction attacked, must have been such that the corporate entity as to this transaction had
at the time no separate mind, will or existence of its own; (2) such control must have been used by the
defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of plaintiffs legal right; and (3) the said
control and breach of duty must have proximately caused the injury or unjust loss complained of.[30]

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present: (1) where the purchaser expressly
or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or
merger of the corporations, (3) where the purchasing corporation is merely a continuation of the
selling corporation, and (4) where the transaction is fraudulently entered into in order to escape
liability for those debts.[11]

We believe that the absence of the foregoing elements in the present case precludes the piercing of
the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is
no showing that their control over it warrants the disregard of corporate personalities.[31] Second,
there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or
that the separate corporate entity was farcically used as a mere alter ego, business conduit or
instrumentality of another entity or person.[32] Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.[33]
38

Being the party that asked for the piercing of the corporate veil, respondent had the burden of
presenting clear and convincing evidence to justify the setting aside of the separate corporate
personality rule.[34] However, it utterly failed to discharge this burden;[35] it failed to establish by
competent evidence that petitioners separate corporate veil had been used to conceal fraud, illegality
or inequity.[36]

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL
by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners contend that their takeover of the operations of PASUMIL
did not involve any corporate merger or consolidation, because the latter had never lost its separate
identity as a corporation.

While we agree with respondents claim that the assets of the National Sugar Development
Corporation (NASUDECO) can be easily traced to PASUMIL,[37] we are not convinced that the transfer
of the latters assets to petitioners was fraudulently entered into in order to escape liability for its debt
to respondent.[38]

A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined
business.[54]

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and
acquired the assets as the highest bidder at the public auction conducted.[39] The bank was justified
in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20
percent of the total outstanding obligation.[40] Thus, DBP had not only a right, but also a duty under
the law to foreclose the subject properties.[41]

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.[55] Since a merger or consolidation involves fundamental changes in the corporation, as
well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.[56] For a valid merger or consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is required.[57] These articles must
likewise be duly approved by a majority of the respective stockholders of the constituent
corporations.[58]

Pursuant to LOI No. 189-A*42+ as amended by LOI No. 311,*43+ PNB acquired PASUMILs assets that
DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to
manage temporarily the operation of such assets either by itself or through a subsidiary
corporation.[44]

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB.
The procedure prescribed under Title IX of the Corporation Code[59] was not followed.

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to
Section 6 of Act No. 3135.[45] These assets were later conveyed to PNB for a consideration, the terms
of which were embodied in the Redemption Agreement.[46] PNB, as successor-in-interest, stepped
into the shoes of DBP as PASUMILs creditor.*47+ By way of a Deed of Assignment,*48+ PNB then
transferred to NASUDECO all its rights under the Redemption Agreement.

In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally extinguished
or terminated.*60+ Further, prior to PNBs acquisition of the foreclosed assets, PASUMIL had
previously made partial payments to respondent for the formers obligation in the amount of
P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5,
1974 to May 23, 1974, another P14,000.

In Development Bank of the Philippines v. Court of Appeals,[49] we had the occasion to resolve a
similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Minings
unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks had
foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its
burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the corporate
veil.

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent.[61]
LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of
PASUMILs creditors.*62+ Clearly, the corporate separateness between PASUMIL and PNB remains,
despite respondents insistence to the contrary.*63+

In the instant case, the CA erred in affirming the trial courts lifting of the corporate mask.*50+ The CA
did not point to any fact evidencing bad faith on the part of PNB and its transferee.[51] The corporate
fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime.[52]
None of the foregoing exceptions was shown to exist in the present case.[53] On the contrary, the
lifting of the corporate veil would result in manifest injustice. This we cannot allow.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No
pronouncement as to costs.
SO ORDERED.

No Merger or Consolidation
39

ANTONIO VAZQUEZ, petitioner,

vs.
FRANCISCO DE BORJA, respondent.
x---------------------------------------------------------x
G.R. No. L-48931

February 23, 1944

FRANCISCO DE BORJA, petitioner,

vs.
ANTONIO VAZQUEZ, respondent.
OZAETA, J.:

defendant Fernando Busuego (treasurer of the corporation) from the complaint and the plaintiff from
the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of Appeals, the latter
modified that judgment by reducing it to the total sum of P3,314.78, with legal interest thereon and
the costs. But by a subsequent resolution upon the defendant's motion for reconsideration, the Court
of Appeals set aside its judgment and ordered that the case be remanded to the court of origin for
further proceedings. The defendant Vazquez, not being agreeable to that result, filed the present
petition for certiorari (G.R. No. 48930) to review and reverse the judgment of the Court of Appeals;
and the plaintiff Francisco de Borja, excepting to the resolution of the Court of Appeals whereby its
original judgment was set aside and the case was ordered remanded to the court of origin for further
proceedings, filed a cross-petition for certiorari (G.R. No. 48931) to maintain the original judgment of
the Court of Appeals.
The original decision of the Court of Appeals and its subsequent resolutions on reconsideration read as
follows:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja against
Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the total sum of
P4,702.70 upon three alleged causes of action, to wit: First, that in or about the month of January,
1932, the defendants jointly and severally obligated themselves to sell to the plaintiff 4,000 cavans of
palay at P2.10 per cavan, to be delivered during the month of February, 1932, the said defendants
having subsequently received from the plaintiff in virtue of said agreement the sum of P8,400; that the
defendants delivered to the plaintiff during the months of February, March, and April, 1932, only
2,488 cavans of palay of the value of P5,224.80 and refused to deliver the balance of 1,512 cavans of
the value of P3,175.20 notwithstanding repeated demands. Second, that because of defendants'
refusal to deliver to the plaintiff the said 1,512 cavans of palay within the period above mentioned,
the plaintiff suffered damages in the sum of P1,000. And, third, that on account of the agreement
above mentioned the plaintiff delivered to the defendants 4,000 empty sacks, of which they returned
to the plaintiff only 2,490 and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay
their value amounting to P377.50; and that on account of such refusal the plaintiff suffered damages
in the sum of P150.

Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al

demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho demandante
solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000 sacos vacios. Esta
provbado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583 quedando en poder del
demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada la demanda contra los
demandados Antonio Vazquez y Fernando Busuego para el pago de la cantidad de P4,702.70, con sus
intereses legales desde el 1.o de marzo de 1932 hasta su completo pago y las costas, el Juzgado de
Primera Instancia de Manila el asunto condenando a Antonio Vazquez a pagar al demandante la
cantidad de P3,175.20, mas la cantidad de P377.50, con sus intereses legales, absolviendo al
demandado Fernando Busuego de la demanda y al demandante de la reconvencion de los
demandados, sin especial pronunciamiento en cuanto a las costas. De dicha decision apelo el
demandado Antonio Vazquez, apuntado como principal error el de que el habia sido condenado
personalmente, y no la corporacion por el representada.

The defendant Antonio Vazquez answered the complaint, denying having entered into the contract
mentioned in the first cause of action in his own individual and personal capacity, either solely or
together with his codefendant Fernando Busuego, and alleging that the agreement for the purchase of
4,000 cavans of palay and the payment of the price of P8,400 were made by the plaintiff with and to
the Natividad-Vasquez Sabani Development Co., Inc., a corporation organized and existing under the
laws of the Philippines, of which the defendant Antonio Vazquez was the acting manager at the time
the transaction took place. By way of counterclaim, the said defendant alleged that he suffered
damages in the sum of P1,000 on account of the filing of this action against him by the plaintiff with
full knowledge that the said defendant had nothing to do whatever with any and all of the
transactions mentioned in the complaint in his own individual and personal capacity.

Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de Francisco de
Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente interino y Manager de la
corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del Exh. 1, que es la copia al
carbon del recibo otorgado por el demandado Vazquez, y cuyo original lo habia perdido el
demandante, segun el. Asi tambien consta en los libros de la corporacion arriba mencionada, puesto
que en los mismos se ha asentado tanto la entrada de los P8,400, precio del palay, como su envio al
gobierno en pago de los alquileres de la Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al
abogado Sr. Jacinto Tomacruz, posterior presidente de la corporacion sucesora en el arrendamiento
de la Sabani Estate, cuando el solicito sus buenos oficios para el cobro del precio del palay no
entregado. Asi igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion,
cuyo testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en ella
a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development Co., Inc.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff the
sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving the
40

Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani Development Co., Inc.,
que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al demandado
Vazquez responsable del pago de la cantidad reclamada por su negligencia al vender los referidos
4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia en las bodegas de la
corporacion.

have been proven during the trial; and the statement of the court that it had not been sufficiently
discussed and proven was no justification for ordering a new trial, which, by the way, neither party
had solicited but against which, on the contrary, both parties now vehemently protest. Second, the
point is, in any event, beside the issue, and this we shall now discuss in connection with the original
judgment of the Court of Appeals which the plaintiff cross-petitioner seeks to maintain.

Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de Borja, el
mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el cavan, y decimos
'despues' porque esta ultima venta aparece asentada despues de la primera. Segun esto, el apelante
no solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo con
los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la
cantidad objecto de la demanda.

The action being on a contract, and it appearing from the preponderance of the evidence that the
party liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is not a party
herein, the complaint should have been dismissed. Counsel for the plaintiff, in his brief as respondent,
argues that altho by the preponderance of the evidence the trial court and the Court of Appeals found
that Vazquez celebrated the contract in his capacity as acting president of the corporation and altho it
was the latter, thru Vazquez, with which the plaintiff had contracted and which, thru Vazquez, had
received the sum of P8,400 from Borja, and altho that was true from the point of view of a legal
fiction, "ello no impede que tambien sea verdad lo alegado en la demanda de que la misma persona
de Vasquez fue la que contrato con Borja y que la misma persona de Vasquez fue quien recibio la
suma de P8,400." But such argument is invalid and insufficient to show that the president of the
corporation is personally liable on the contract duly and lawfully entered into by him in its behalf.

En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el apelante
debe pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes de palay que dejo de
entregar al demandante, mas la suma de P339.08 como importe de los 1,417 sacos vacios, que dejo de
devolver, a razon de P0.24 el saco, total P3,314.78, con sus intereses legales desde la interposicion de
la demanda y las costas de ambas instancias.
Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y alegandose
en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy, la corporacion
todavia tenia bastante existencia de dicho grano, y no estando dicho extremo suficientemente
discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin efecto nuestra citada
decision, y ordenamos la devolucion de la causa al Juzgado de origen para que reciba pruebas al efecto
y dicte despues la decision correspondiente.
Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R. No. 8676,
Francisco de Borja vs. Antonio Vasquez et al., praying, for the reasons therein given, that the
resolution of December 22, 1942, be reconsidered: Considering that said resolution remanding the
case to the lower court is for the benefit of the plaintiff-appellee to afford him opportunity to refute
the contention of the defendant-appellant Antonio Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered into
the contract with the defendant Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that according to the
preponderance of the evidence "the sale made by Antonio Vazquez in favor of Francisco de Borja of
4,000 cavans of palay was in his capacity as acting president and manager of the corporation
Natividad-Vazquez Sabani Development Co., Inc." That finding of fact is final and, it resolving the only
issue involved, should be determinative of the result.
The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin for
further trial to determine whether the corporation had sufficient stock of palay at the time appellant
sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the issue, it should

It is well known that a corporation is an artificial being invested by law with a personality of its own,
separate and distinct from that of its stockholders and from that of its officers who manage and run its
affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to act
thru its agents, does not make the latter personally liable on a contract duly entered into, or for an act
lawfully performed, by them for an in its behalf. The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without it no corporate entities may exists
and no corporate business may be transacted. Such legal fiction may be disregarded only when an
attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has been
alleged or proven in this case. It has not been alleged nor even intimated that Vazquez personally
benefited by the contract of sale in question and that he is merely invoking the legal fiction to avoid
personal liability. Neither is it contended that he entered into said contract for the corporation in bad
faith and with intent to defraud the plaintiff. We find no legal and factual basis upon which to hold
him liable on the contract either principally or subsidiarily.
The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no
solamente obro con negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo con los
arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la
cantidad objeto de la demanda." We think both the trial court and the Court of Appeals erred in law in
so holding. They have manifestly failed to distinguish a contractual from an extracontractual
obligation, or an obligation arising from contract from an obligation arising from culpa aquiliana. The
fault and negligence referred to in articles 1101-1104 of the Civil Code are those incidental to the
fulfillment or nonfullfillment of a contractual obligation; while the fault or negligence referred to in
article 1902 is the culpa aquiliana of the civil law, homologous but not identical to tort of the common
law, which gives rise to an obligation independently of any contract. (Cf. Manila R.R. Co. vs. Cia.
41

Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact that the
corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the
contract, did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was
the corporation's contract, its nonfulfillment, whether due to negligence or fault or to any other
cause, made the corporation and not its agent liable.

WENSHA SPA CENTER, INC. and/or XU ZHI JIE, Petitioners,

vs.
LORETA T. YUNG, Respondent.

On the other hand if independently of the contract Vazquez by his fault or negligence cause damaged
to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then the
plaintiff's cause of action should be based on culpa aquiliana and not on the contract alleged in his
complaint herein; and Vazquez' liability would be principal and not merely subsidiary, as the Court of
Appeals has erroneously held. No such cause of action was alleged in the complaint or tried by express
or implied consent of the parties by virtue of section 4 of Rule 17. Hence the trial court had no
jurisdiction over the issue and could not adjudicate upon it (Reyes vs. Diaz, G.R. No. 48754.)
Consequently it was error for the Court of Appeals to remand the case to the trial court to try and
decide such issue.

MENDOZA, J.:

It only remains for us to consider petitioner's second assignment of error referring to the lower courts'
refusal to entertain his counterclaim for damages against the respondent Borja arising from the
bringing of this action. The lower courts having sustained plaintiff's action. The finding of the Court of
Appeals that according to the preponderance of the evidence the defendant Vazquez celebrated the
contract not in his personal capacity but as acting president and manager of the corporation, does not
warrant his contention that the suit against him is malicious and tortious; and since we have to decide
defendant's counterclaim upon the facts found by the Court of Appeals, we find no sufficient basis
upon which to sustain said counterclaim. Indeed, we feel that a a matter of moral justice we ought to
state here that the indignant attitude adopted by the defendant towards the plaintiff for having
brought this action against him is in our estimation not wholly right. Altho from the legal point of view
he was not personally liable for the fulfillment of the contract entered into by him on behalf of the
corporation of which he was the acting president and manager, we think it was his moral duty towards
the party with whom he contracted in said capacity to see to it that the corporation represented by
him fulfilled the contract by delivering the palay it had sold, the price of which it had already received.
Recreant to such duty as a moral person, he has no legitimate cause for indignation. We feel that
under the circumstances he not only has no cause of action against the plaintiff for damages but is not
even entitled to costs.

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.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed, without any
finding as to costs.

DECISION

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 Decision1 and
October 23, 2008 Resolution2 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:

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 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
42

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 decision7 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 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 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 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
43

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;
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
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
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 affidavit24 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 affidavits25 of employees
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:
44

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
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.

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.

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 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. xxx28
Loreta also alleged that in the afternoon of that day, September 10, 2004, a notice was posted on the
Wensha bulletin board that reads:

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.1avvphi1 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
45

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
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.

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.

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.ten.lihpwal 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
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,
46

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.

In G.R. No. 155472:

[G.R. No. 155472. July 8, 2004]

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.

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.

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.

DECISION

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.

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.

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 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
47

Corporation.[15] The motion for reconsideration filed by the latter was denied by the appellate
court.[16]

The General Information Sheet shall state, among others, the names of the elected directors and
officers, together with their corresponding position title (Emphasis supplied)

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]

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:

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:
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.

1.

Ma. Antonia M. Salvatierra (Chairman);

2.

Ramon H. Monfort (Member);

3.

Antonio H. Monfort, Jr., (Member);

4.

Joaquin H. Monfort (Member);

5.

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.
48

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:

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.

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.
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

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
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
October 16, 1996 Minutes was submitted to the SEC. In fact, the 1997 General Information Sheet[28]
49

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.

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.:
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.
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.

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:
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:

No costs.
SO ORDERED.

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
50

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
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 defendantsappellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiffappellant, 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 Motorich Sales Corporation's bad faith in refusing to execute a deed of sale in favor of
plaintiff-appellant, 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 plaintiffappellant 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, plaintiffappellant 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:
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).
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:
51

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;

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

and
TRANSFEROR TRANSFEREE
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.

[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO

WITNESSETH, That:

Treasurer President

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;

Signed In the presence of:

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as
follows:

In its recourse before the Court of Appeals, petitioner insisted:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square
meter; subject to the following terms:

[SGD.] [SGD.]
6

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

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;

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:

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;

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case

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.

II. Whether or not the appellate court may consider matters which the parties failed to raise in the
lower court
52

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?

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 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

4. Are respondents liable for damages and attorney's fees?

First Issue: Validity of Agreement

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

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.

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.

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.

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

The Court's Ruling

The petition is devoid of merit.

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;

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
53

authority to buy or sell real property, an activity which falls way beyond the scope of her general
authority.

void under Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract
cannot be ratified. 24

Art. 1874 and 1878 of the Civil Code of the Philippines provides:

Second Issue:
Piercing the Corporate Veil Not Justified

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 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

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 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 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
54

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. . . . .

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

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.
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

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?
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.

55

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 Yes. sir, the check was paid in my name and I deposit[ed] it.

A That was not asked of me.

Q In your account?

Q Yes, just answer it.

A Yes, sir. 51

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.

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push
through." 52

Q You did not say that you were not authorized nor did you say that you were authorized?

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.

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

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 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.

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
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.
56

ENTITLEMENT TO CONSTITUTIONAL GUARANTEES

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.:
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, 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 Respondents-Prosecutors, 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
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
57

affect the constitutional rights of defendants whose property had not been seized or the privacy of
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
witnesses he may produce, and particularly describing the place to be searched, and the persons or
things to be seized.

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
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.

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.

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.

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

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,
58

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:
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 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 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 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
59

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.

It is so ordered.

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

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. 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, JOHN DOE, JOHN
DOE, JOHN DOE, and JOHN DOE, Respondents.

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.
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.

San Juan, Africa, Gonzales & San Agustin, for Petitioners.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor Pedro A.
Ramirez and Special Attorney Jaime M. Maza for Respondents.

DECISION

VILLAMOR, J.:

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:chanrob1es virtual 1aw library
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
60

subscribed before respondent De Leon; a deposition in printed form of respondent Logronio already
accomplished and 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
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:chanrob1es virtual 1aw library
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:jgc:chanrobles.com.ph
"(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.)
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:jgc:chanrobles.com.ph
"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.
"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.
61

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"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 . . ."cralaw virtua1aw library

"Q Who is this he?

"A The Honorable Judge.

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 . . ."cralaw virtua1aw library

"Q The deposition or the affidavit?

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.

Thereafter, respondent Judge signed the search warrant.

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:jgc:chanrobles.com.ph
"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.
Logronio whether he affirms the facts contained in his deposition and the affidavit executed before
Mr. Rodolfo de Leon.

"A The affidavit, Your Honor."cralaw virtua1aw library

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 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:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
62

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 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. v. 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:jgc:chanrobles.com.ph
"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."

The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in
this manner:jgc:chanrobles.com.ph
"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."cralaw
virtua1aw library
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:jgc:chanrobles.com.ph
"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:chanrob1es virtual 1aw library
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.
"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."cralaw virtua1aw library
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. v. 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:jgc:chanrobles.com.ph

3. The search warrant does not particularly describe the things to be seized.
63

". . . 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."cralaw virtua1aw library
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 v. 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
before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. 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 v. 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 v. 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 v. 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 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. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to
object against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph
"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 corporations, to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings against them in their individual capacity . . ."cralaw
virtua1aw library
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
64

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.

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

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL
R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.

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

The Sequestration, Takeover, and Other Orders Complained of

a.

The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery was
issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of the
agents of the Commission, hereafter simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good Government, by authority of
the President of the Philippines, you are hereby directed to sequester the following companies.
1.
Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and Mariveles
Shipyard)
2.

Baseco Quarry

3.

Philippine Jai-Alai Corporation

4.

Fidelity Management Co., Inc.

65

5.

Romson Realty, Inc.

6.

Trident Management Co.

7.

New Trident Management

8.

Bay Transport

9.

And all affiliate companies of Alfredo "Bejo" Romualdez

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973 to 1986 duly
certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others from 1973 to
December 31, 1985.
5. Monthly Financial Statements for the current year up to March 31, 1986.
You are hereby ordered:
6. Consolidated Cash Position Reports from January to April 15, 1986.
1. To implement this sequestration order with a minimum disruption of these companies' business
activities.
2. To ensure the continuity of these companies as going concerns, the care and maintenance of these
assets until such time that the Office of the President through the Commission on Good Government
should decide otherwise.

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

8. Updated schedule of Accounts Receivable and Accounts Payable.
9. Complete list of depository banks for all funds with the authorized signatories for withdrawals
thereof.

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

10. Schedule of company investments and placements. 2
Further, you are authorized to request for Military/Security Support from the Military/Police
authorities, and such other acts essential to the achievement of this sequestration order. 1

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

b. Order for Production of Documents

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

(1) Termination of Contract for Security Services

2.1. Articles of Incorporation

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

2.2. By-Laws

(2) Change of Mode of Payment of Entry Charges

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

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

1. Stock Transfer Book

2. Legal documents, such as:

2.4. Minutes of the Regular and Special Meetings of the Board of Directors from 1973 to 1986
2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

66

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO with
Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce
improvements costing approximately P210,000.00 on the BASECO wharf at Engineer Island, allegedly
then in poor condition, avowedly to "optimize its utilization and in return maximize the revenue which
would flow into the government coffers," in consideration of Deltamarine's being granted "priority in
using the improved portion of the wharf ahead of anybody" and exemption "from the payment of any
charges for the use of wharf including the area where it may install its bagging equipments" "until the
improvement remains in a condition suitable for port operations." 5 It seems however that this
contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management
Team," advised Deltamarine by letter dated July 30, 1986 that "the new management is not in a
position to honor the said contract" and thus "whatever improvements * * (may be introduced) shall
be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor Melba
O. Buenaventura, "to plan and implement progress towards maximizing the continuous operation of
the BASECO Sesiman Rock Quarry * * by conventional methods;" but afterwards, Commissioner
Bautista, in representation of the PCGG, authorized another party, A.T. Abesamis, to operate the
quarry, located at Mariveles, Bataan, an agreement to this effect having been executed by them on
September 17, 1986. 7

A management team was designated to implement the order, headed by Capt. Siacunco, and was
given the following powers:
1.

Conducts all aspects of operation of the subject companies;

2.

Installs key officers, hires and terminates personnel as necessary;

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

4. Ensures that the assets of the companies are not dissipated and used effectively and efficiently;
revenues are duly accounted for; and disburses funds only as may be necessary;
5. Does actions including among others, seeking of military support as may be necessary, that will
ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good Government on all aspects
related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez,
Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the PCGG.
10
2.

f.

Petitioner's Plea and Postulates

Order to Dispose of Scrap, etc.

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

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to repeat,
petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this Court1)

declare unconstitutional and void Executive Orders Numbered 1 and 2;

g. The TAKEOVER Order

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

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

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

* * To provisionally takeover in the public interest or to prevent its disposal or dissipation, business
enterprises and properties taken over by the government of the Marcos Administration or by entities
or persons close to former President Marcos, until the transactions leading to such acquisition by the
latter can be disposed of by the appropriate authorities.

While BASECO concedes that "sequestration without resorting to judicial action, might be made within
the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution
was promulgated, under the principle that the law promulgated by the ruler under a revolutionary
regime is the law of the land, it ceased to be acceptable when the same ruler opted to promulgate the
Freedom Constitution on March 25, 1986 wherein under Section I of the same, Article IV (Bill of Rights)
67

of the 1973 Constitution was adopted providing, among others, that "No person shall be deprived of
life, liberty and property without due process of law." (Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well as the
Sequestration Order * * and Takeover Order * * issued purportedly under the authority of said
Executive Orders, rests on four fundamental considerations: First, no notice and hearing was accorded
* * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a
purely investigative agency and therefore not competent to act as prosecutor and judge in the same
cause; Third, there is nothing in the issuances which envisions any proceeding, process or remedy by
which petitioner may expeditiously challenge the validity of the takeover after the same has been
effected; and Fourthly, being directed against specified persons, and in disregard of the constitutional
presumption of innocence and general rules and procedures, they constitute a Bill of Attainder." 13

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

8)
allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's
premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21
9)
allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have
been buried therein. 22
3.

b.

planning to elect its own Board of Directors; 20

Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently
already complied with, was issued without court authority and infringed its constitutional right against
self-incrimination, and unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of dominion and
management of its business affairs by
1)
terminating its contract for security services with Fairways & Anchor, without the consent
and against the will of the contracting parties; and amending the mode of payment of entry fees
stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts being
in violation of the non-impairment clause of the constitution; 15
2)
allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with
Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO premises; 16
3)
authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry
at Sesiman, Mariveles; 17

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders
have been engendered by misapprehension, or incomplete comprehension if not indeed downright
ignorance of the law governing these remedies. It is needful that these misconceptions and doubts be
dispelled so that uninformed and useless debates about them may be avoided, and arguments tainted
b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end, this opinion
will essay an exposition of the law on the matter. In the process many of the objections raised by
BASECO will be dealt with.
4.

The Governing Law

a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit command of the
Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of
legislative power which she was authorized to continue to wield "(until a legislature is elected and
convened under a new Constitution" "shall give priority to measures to achieve the mandate of the
people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters of the
previous regime and protect the interest of the people through orders of sequestration or freezing of
assets or accounts." 24
b. Executive Order No. 1

4)
authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and
other materials; 18
5)
authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated
companies;

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

68

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

and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines:"
and

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

Upon these premises, the President-

1. To sequester or place or cause to be placed under its control or possession any building or office
wherein any ill-gotten wealth or properties may be found, and any records pertaining thereto, in order
to prevent their destruction, concealment or disappearance which would frustrate or hamper the
investigation or otherwise prevent the Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the disposal or dissipation, business
enterprises and properties taken over by the government of the Marcos Administration or by entities
or persons close to former President Marcos, until the transactions leading to such acquisition by the
latter can be disposed of by the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that may
render moot and academic, or frustrate or otherwise make ineffectual the efforts of the Commission
to carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted power to conduct
investigations; require submission of evidence by subpoenae ad testificandum and duces tecum;
administer oaths; punish for contempt. 29 It was given power also to promulgate such rules and
regulations as may be necessary to carry out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery
of ill-gotten properties amassed by the leaders and supporters of the previous regime." It declares
that:
1) * * the Government of the Philippines is in possession of evidence showing that there are assets
and properties purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda
Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or as a result of the
improper or illegal use of funds or properties owned by the government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage
of their office, authority, influence, connections or relationship, resulting in their unjust enrichment

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

1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies,
agents, or nominees have any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives,
subordinates, business associates, duties, agents, or nominees from transferring, conveying,
encumbering, concealing or dissipating said assets or properties in the Philippines and abroad,
pending the outcome of appropriate proceedings in the Philippines to determine whether any such
assets or properties were acquired by them through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their
official position, authority, relationship, connection or influence to unjustly enrich themselves at the
expense and to the grave damage and prejudice of the Filipino people and the Republic of the
Philippines;
3)
prohibited "any person from transferring, conveying, encumbering or otherwise depleting or
concealing such assets and properties or from assisting or taking part in their transfer, encumbrance,
concealment or dissipation under pain of such penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or properties, whether located in the
Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the
same to the Commission on Good Government within thirty (30) days from publication of * (the)
Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered,
"with the assistance of the Office of the Solicitor General and other government agencies, * * to file
and prosecute all cases investigated by it * * as may be warranted by its findings." 34 All such cases,
whether civil or criminal, are to be filed "with the Sandiganbayan which shall have exclusive and
original jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for
restitution, reparation of damages, or indemnification for consequential damages, forfeiture
proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil Code
or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may be filed
69

separately from and proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of procedure and evidence shall
not be strictly applied to* * (said)civil cases." 36
5.

Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous regime";
37
a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E.
Marcos, his immediate family, relatives, subordinates and close associates, * * located in the
Philippines or abroad, * * (and) business enterprises and entities (came to be) owned or controlled by
them, during * * (the Marcos) administration, directly or through nominees, by taking undue
advantage of their public office and/or using their powers, authority, influence, Connections or
relationship; 38

But however plain and valid that right and duty may be, still a balance must be sought with the equally
compelling necessity that a proper respect be accorded and adequate protection assured, the
fundamental rights of private property and free enterprise which are deemed pillars of a free society
such as ours, and to which all members of that society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components
freedom of conscience, freedom of expression, and freedom in the pursuit of happiness. Along with
these freedoms are included economic freedom and freedom of enterprise within reasonable bounds
and under proper control. * * Evincing much concern for the protection of property, the Constitution
distinctly recognizes the preferred position which real estate has occupied in law for ages. Property is
bound up with every aspect of social life in a democracy as democracy is conceived in the Constitution.
The Constitution realizes the indispensable role which property, owned in reasonable quantities and
used legitimately, plays in the stimulation to economic effort and the formation and growth of a solid
social middle class that is said to be the bulwark of democracy and the backbone of every progressive
and happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit

b) otherwise stated, that "there are assets and properties purportedly pertaining to former President
Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents or nominees which had been or were acquired by
them directly or indirectly, through or as a result of the improper or illegal use of funds or properties
owned by the Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment and causing grave damage and
prejudice to the Filipino people and the Republic of the Philippines"; 39
c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts, shares
of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds
of real and personal properties in the Philippines and in various countries of the world;" 40 and

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

2) that certain "business enterprises and properties (were) taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos. 41
6.

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

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

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten
wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary,
provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.
7.

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

Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3) provisional takeover.
70

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

assets of the business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going activities. But, to repeat,
such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the
government of the Marcos Administration or by entities or persons close to former President Marcos."

a. Sequestration

d. No Divestment of Title Over Property Seized

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

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

b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property alleged to constitute
"ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing
such property, or from assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the property and conserve it
subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin to
a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver,
transfer, or otherwise dispose of any effects or credits in his possession or control, and thus becomes
in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction
between "ill gotten" "business enterprises and entities" (going concerns, businesses in actual
operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred
that the remedy entails no interference, or the least possible interference with the actual
management and operations thereof; and "business enterprises which were taken over by the
government government of the Marcos Administration or by entities or persons close to him," in
particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent
disposal or dissipation of the enterprises." 48 Such a "provisional takeover" imports something more
than sequestration or freezing, more than the placing of the business under physical possession and
control, albeit without or with the least possible interference with the management and carrying on of
the business itself. In a "provisional takeover," what is taken into custody is not only the physical

That this is the sense in which the power to sequester, freeze or provisionally take over is to be
understood and exercised, the language of the executive orders in question leaves no doubt. Executive
Order No. 1 declares that the sequestration of property the acquisition of which is suspect shall last
"until the transactions leading to such acquisition * * can be disposed of by the appropriate
authorities." 49 Executive Order No. 2 declares that the assets or properties therein mentioned shall
remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine
whether any such assets or properties were acquired" by illegal means. Executive Order No. 14 makes
clear that judicial proceedings are essential for the resolution of the basic issue of whether or not
particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or
provisional takeover is designed to be an end in itself, that it is the device through which persons may
be deprived of their property branded as "ill-gotten," that it is intended to bring about a permanent,
rather than a passing, transitional state of affairs. That this is not so is quite explicitly declared by the
governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these
provisional remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule in plain
terms, apart from extending ratification or confirmation (although not really necessary) to the
institution by presidential fiat of the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March
25, 1986 in relation to the recovery of ill-gotten wealth shag remain operative for not more than
71

eighteen months after the ratification of this Constitution. However, in the national interest, as
certified by the President, the Congress may extend said period.
A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and
the list of the sequestered or frozen properties shall forthwith be registered with the proper court. For
orders issued before the ratification of this Constitution, the corresponding judicial action or
proceeding shall be filed within six months from its ratification. For those issued after such ratification,
the judicial action or proceeding shall be commenced within six months from the issuance thereof.

fundamental character of temporariness or conditionality; and taking account specially of the

constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the people;" 59 as well as
the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause that
disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident,
that "any transfer, disposition, concealment or disappearance of said assets and properties would
frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof. 60
8.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is
commenced as herein provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy
of preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of a defendant
in a civil suit so that it may stand as security for the satisfaction of any judgment that may be obtained,
and not disposed of, or dissipated, or lost intentionally or otherwise, pending the action. 54 By
receivership, property, real or personal, which is subject of litigation, is placed in the possession and
control of a receiver appointed by the Court, who shall conserve it pending final determination of the
title or right of possession over it. 55 All these remedies sequestration, freezing, provisional,
takeover, attachment and receivership are provisional, temporary, designed for-particular
exigencies, attended by no character of permanency or finality, and always subject to the control of
the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of
no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936
the Commissioner of Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence on
sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point
that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding
position, is that any change in procedure, or the institution of a new one, should conform to due
process and the other prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a
proposition on which there can be no disagreement.
h.

Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property
in replevin suits, sequestration and provisional takeover writs may issue ex parte. 58 And as in
preliminary attachment, receivership, and delivery of personality, no objection of any significance may
be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its

Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a prima
facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate and
fair opportunity to contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and regulations promulgated by
the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due
process." 62 Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets
and properties, "it is the position of the new democratic government that President Marcos * * (and
other parties affected) be afforded fair opportunity to contest these claims before appropriate
Philippine authorities." 63 Section 7 of the Commission's Rules and Regulations provides that
sequestration or freeze (and takeover) orders issue upon the authority of at least two commissioners,
based on the affirmation or complaint of an interested party, or motu proprio when the Commission
has reasonable grounds to believe that the issuance thereof is warranted. 64 A similar requirement is
now found in Section 26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or
freeze order shall be issued only upon showing of a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may
seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or hold
order is directed may request the lifting thereof in writing, either personally or through counsel within
five (5) days from receipt of the writ or order, or in the case of a hold order, from date of knowledge
thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good cause
shown, the Commission may lift the writ or order unconditionally or subject to such conditions as it
may deem necessary, taking into consideration the evidence and the circumstance of the case. The
72

resolution of the commission may be appealed by the party concerned to the Office of the President
of the Philippines within fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not
expressly imposed by some rule or regulation as a condition to warrant the sequestration or freezing
of property contemplated in the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in fact
or law, or are whimsical and capricious, are condemned and struck down. 66
9.

Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and
propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these
particular remedies and the authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution
recognizes the power and duty of the President to enact "measures to achieve the mandate of the
people to * * * (recover ill- gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration or freezing of assets or
accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution 67 treats
of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."
The institution of these provisional remedies is also premised upon the State's inherent police power,
regarded, as t lie power of promoting the public welfare by restraining and regulating the use of
liberty and property," 68 and as "the most essential, insistent and illimitable of powers * * in the
promotion of general welfare and the public interest," 69 and said to be co-extensive with selfprotection and * * not inaptly termed (also) the'law of overruling necessity." " 70
10.

PCGG not a "Judge"; General Functions

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

11.

Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter
to be discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed for will not
be issued.
The facts show that the corporation known as BASECO was owned or controlled by President Marcos
"during his administration, through nominees, by taking undue advantage of his public office and/or
using his powers, authority, or influence, " and that it was by and through the same means, that
BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co., Inc.,
and other government-owned or controlled entities.
12.

Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as a
domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and
shipping executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer Island
Shipyard is housed, and its main shipyard is located at Mariveles Bataan." 73 Its Articles of
Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares, of
which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on said subscription,
the aggregate sum of P3,035,000.00 has been paid by the incorporators. 74 The same articles Identify
the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo
T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8)
Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas,
(13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely:
(1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in
BASECO's Stock and Transfer Book. 75 Their names and the number of shares respectively held by
them are as follows:
1. Jose A. Rojas
1,248 shares
2. Severino G. de la Cruz
1,248 shares
3. Emilio T. Yap
73

2,508 shares
8 shares
4. Jose Fernandez
15. Metro Bay Drydock
1,248 shares
136,370 shares
5. Jose Francisco
16. Manuel Jacela
128 shares
1 share
6. Manuel S. Mendoza
17. Jonathan G. Lu
96 shares
1 share
7. Anthony P. Lee
18. Jose J. Tanchanco
1,248 shares
1 share
8. Hilario M. Ruiz
19. Dioscoro Papa
32 shares
128 shares
9. Constante L. Farias
20. Edward T. Marcelo
8 shares
4 shares
10. Fidelity Management, Inc.
TOTAL
65,882 shares
218,819 shares.
11. Trident Management
13

Acquisition of NASSCO by BASECO

7,412 shares
12. United Phil. Lines
1,240 shares
13. Renato M. Tanseco
8 shares
14. Fidel Ventura

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel
Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at
Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and except for NASSCO's Engineer
Island Shops and certain equipment of the BNS, consigned for future negotiation all its structures,
buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit. This it did in
virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed on February 13, 1973. The
price was P52,000,000.00. As partial payment thereof, BASECO delivered to NASSCO a cash bond of
P11,400,000.00, convertible into cash within twenty-four (24) hours from completion of the inventory
undertaken pursuant to the contract. The balance of P41,600,000.00, with interest at seven percent
(7%) per annum, compounded semi-annually, was stipulated to be paid in equal semi-annual
74

installments over a term of nine (9) years, payment to commence after a grace period of two (2) years
from date of turnover of the shipyard to BASECO. 76
14.

Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00,
about eight (8) months later. A document to this effect was executed on October 9, 1973, entitled
"Memorandum Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of
the Board of Directors, and David R. Ines, as General Manager. 77 This agreement bore, at the top
right corner of the first page, the word "APPROVED" in the handwriting of President Marcos, followed
by his usual full signature. The document recited that a down payment of P5,862,310.00 had been
made by BASECO, and the balance of P19,449,240.00 was payable in equal semi-annual installments
over nine (9) years after a grace period of two (2) years, with interest at 7% per annum.
15.

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last
available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy equipment
(brand new)." 80 On September 3, 1975, it got another loan also from the NDC in the amount of
P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the GSIS, in the
sum of P12,400,000.00. 81 The claim has been made that not a single centavo has been paid on these
loans. 82
18.

Reports to President Marcos

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

Acquisition of 300 Hectares from Export Processing Zone Authority

a. BASECO President's Report

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the
Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the document
of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be payable in
installments. 78
16.

Acquisition of Other Assets of NASSCO; Intervention of Marcos

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

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no
orders or demands for ship construction" for some time and expressed the fear that if that state of
affairs persisted, BASECO would not be able to pay its debts to the Government, which at the time
stood at the not inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the
situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by an
entirely new corporation to be created;" and towards this end, he informed Marcos that BASECO was

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to BASECO
amounting to P341.165M and assuming and converting a portion of BASECO's shipbuilding loans from
REPACOM amounting to P52.2M or a total of P83.365M as NDC's equity contribution in the new
corporation. LUSTEVECO will participate by absorbing and converting a portion of the REPACOM loan
of Bay Shipyard and Drydock, Inc., amounting to P32.538M. 86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with the
following caption:
MEMORANDUM:
FOR : The President
SUBJECT:

17.

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

Loans Obtained
FROM: Capt. A.T. Romualdez.
75

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

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

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

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

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

An LOI may be issued to government agencies using floating equipment, that a linkage scheme be
applied to a certain percent of BASECO's net profit as part of BASECO's amortization payments to
make it justifiable for you, Sir. 91

2.

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

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

3.

We will owe no further favors from them. 87

19. Marcos' Response to Reports

He also transmitted to Marcos, together with the report, the following documents: 88
1.

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

2.

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

President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards
the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"

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

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

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";
5.
Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment
at Mariveles, Bataan;
6.
Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at
Engineer Island, Port Area Manila;

a.
Equity participation of government shall be through LUSTEVECO and NDC in the amount of
P115,903,000 consisting of the following obligations of BASECO which are hereby authorized to be
converted to equity of the said new corporation, to wit:
1.

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

2.

LUSTEVECO P32,538,000 (Reparation)

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

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

8.

List of BASECO's fixed assets;

For immediate compliance. 92

9.

Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;

10.

BASECO-REPACOM Agreement dated May 27, 1975;

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after
receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Farias and Geronimo
Z. Velasco, in representation of their respective corporations, executed a PRE-INCORPORATION
76

AGREEMENT dated October 20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be
known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was actually named
"Philippine Dockyard Corporation (PDC)." 94
b.

Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February
14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission REPACOM
the Philippine National Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the
National Development Company (NDC). What is commanded therein is summarized by the Solicitor
General, with pithy and not inaccurate observations as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to NDC
subject to reimbursement by NDC to BASECO (of) the amount of s allegedly representing the handling
and incidental expenses incurred by BASECO in the installation of said equipment (so instead of NDC
getting paid on its loan to BASECO, it was made to pay BASECO instead the amount of P18.285M); 2)
the shipbuilding equipment procured from reparations through EPZA, now in the possession of
BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred to LUSTEVECO through PNOC; and
3) the shipbuilding equipment (thus) transferred be invested by LUSTEVECO, acting through PNOC and
NDC, as the government's equity participation in a shipbuilding corporation to be established in
partnership with the private sector.
xxx

xxx

xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to NDC and
REPACOM * * in the total amount of P83.365M and BSD's REPACOM loan of P32.438M were wiped
out and converted into non-voting preferred shares. 95
20.

Evidence of Marcos'

Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the
control by President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that President Marcos not only
exercised control over BASECO, but also that he actually owns well nigh one hundred percent of its
outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of
stock outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these twenty are juridical
persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc.,

65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The
first three corporations, among themselves, own an aggregate of 209,664 shares of BASECO stock, or
95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found
in Malacanang shortly after the sudden flight of President Marcos, were certificates corresponding to
more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding shares of stock of the three
(3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the owners
thereof although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG) were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. which
supposedly owns as aforesaid 65,882 shares of BASECO stock;
2)
the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay
Drydock Corporation which allegedly owns 136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. which
allegedly owns 7,412 shares of BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of BASECO stock;
that is, all but 5 % all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the
BASECO stockholders were still in possession of their respective stock certificates and had "never
endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior and
subsequent recorded statements as a mere gesture of defiance rather than a verifiable factual
declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "to
SUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * * BASECO
as of April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension;
and in his motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in
the possession of third parties, among whom being the respondents themselves * * and petitioner is
still endeavoring to secure copies thereof from them." 102 On the same day he filed another motion
praying that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay
Drydock, Inc., and of all other Certificates, of Stock of petitioner's stockholders in possession of
respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that
counsel's aforestated motion to secure copies of the stock certificates "confirms the fact that
77

stockholders of petitioner corporation are not in possession of * * (their) certificates of stock," and the
reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in
Malacaang after the former President and his family fled the country." To this manifestation
BASECO's counsel replied on November 5, 1986, as already mentioned, Stubbornly insisting that the
firm's stockholders had not really assigned their stock. 105

the government had been taken over by BASECO; and the situation justified the sequestration as well
as the provisional takeover of the corporation in the public interest, in accordance with the terms of
Executive Orders No. 1 and 2, pending the filing of the requisite actions with the Sandiganbayan to
cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic pursuant
to Executive Order No. 14.

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

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

21.

23.

Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders
and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of
President Marcos; at any rate, that they are no longer owners of any shares of stock in the
corporation, the conclusion cannot be avoided that said stockholders and directors have no basis and
no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief
to BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and
business sequestered and taken over by the PCGG to persons who are "dummies," nominees or alter
egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the
private corporation known as BASECO was "owned or controlled by former President Ferdinand E.
Marcos * * during his administration, * * through nominees, by taking advantage of * * (his) public
office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of

22.

Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of attainder.
110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its
essence is the substitution of a legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as a determination or
declaration of guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it
perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be
handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and
prosecuted by the PCGG. In the second place, no punishment is inflicted by the executive orders, as
the merest glance at their provisions will immediately make apparent. In no sense, therefore, may the
executive orders be regarded as a bill of attainder.
No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and seizures
had been transgressed by the Order of April 18, 1986 which required it "to produce corporate records
from 1973 to 1986 under pain of contempt of the Commission if it fails to do so." The order was issued
upon the authority of Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue
subpoenas requiring * * the production of such books, papers, contracts, records, statements of
accounts and other documents as may be material to the investigation conducted by the Commission,
" and paragraph (3), Executive Order No. 2 dealing with its power to "require all persons in the
Philippines holding * * (alleged "ill-gotten") assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to make full disclosure of the same * *." The
contention lacks merit.
It is elementary that the right against self-incrimination has no application to juridical persons.
78

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

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

Relevant jurisprudence is also cited by the Solicitor General. 114

24.

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

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

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

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

a.

Scope and Extent of Powers of the PCGG

PCGG May Not Exercise Acts of Ownership

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

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

xxx

xxx

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

The PCGG may thus exercise only powers of administration over the property or business sequestered
or provisionally taken over, much like a court-appointed receiver, 115 such as to bring and defend
actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such
other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this
context, it may in addition enjoin or restrain any actual or threatened commission of acts by any
person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of
Court; and seek and secure the assistance of any office, agency or instrumentality of the government.
116 In the case of sequestered businesses generally (i.e., going concerns, businesses in current
operation), as in the case of sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an
owner.
79

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him;
Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been "taken over by
the government of the Marcos Administration or by entities or persons close to former President
Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally take (it)
over in the public interest or to prevent * * (its) disposal or dissipation;" and since the term is
obviously employed in reference to going concerns, or business enterprises in operation, something
more than mere physical custody is connoted; the PCGG may in this case exercise some measure of
control in the operation, running, or management of the business itself. But even in this special
situation, the intrusion into management should be restricted to the minimum degree necessary to
accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business
enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of viable establishments. In fact,
such a replacement or substitution should be avoided if at all possible, and undertaken only when
justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it
goes without saying that where replacement of management officers may be called for, the greatest
prudence, circumspection, care and attention - should accompany that undertaking to the end that
truly competent, experienced and honest managers may be recruited. There should be no role to be
played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said,
is paved with good intentions. The business is not to be experimented or played around with, not run
into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be lost sight of
the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once
judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business enterprises provisionally
taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly
exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of
the Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the
PCGG, "pending the outcome of proceedings to determine the ownership of * * (sequestered) shares
of stock," "to vote such shares of stock as it may have sequestered in corporations at all stockholders'
meetings called for the election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a manner as to be consistent with,
and not contradictory of the Executive Orders earlier promulgated on the same matter. There should
be no exercise of the right to vote simply because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate voting power. The stock is not to be
voted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial
changes in policy, program or practice of the corporation except for demonstrably weighty and
defensible grounds, and always in the context of the stated purposes of sequestration or provisional
takeover, i.e., to prevent the dispersion or undue disposal of the corporate assets. Directors are not to

be voted out simply because the power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if at an possible, and undertaken only when
essential to prevent disappearance or wastage of corporate property, and always under such
circumstances as assure that the replacements are truly possessed of competence, experience and
probity.
In the case at bar, there was adequate justification to vote the incumbent directors out of office and
elect others in their stead because the evidence showed prima facie that the former were just tools of
President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This is
why, in its Resolution of October 28, 1986; 118 this Court declared that
Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling
and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum
of the President * * (to the PCGG) dated June 26, 1986, particularly, where as in this case, the
government can, through its designated directors, properly exercise control and management over
what appear to be properties and assets owned and belonging to the government itself and over
which the persons who appear in this case on behalf of BASECO have failed to show any right or even
any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the
management of the company's affairs should henceforth be guided and governed by the norms herein
laid down. They should never for a moment allow themselves to forget that they are conservators, not
owners of the business; they are fiduciaries, trustees, of whom the highest degree of diligence and
rectitude is, in the premises, required.
25.

No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the
execution of certain contracts, inclusive of the termination of the employment of some of its
executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is
not necessary to do so. The issues arising therefrom may and will be left for initial determination in
the appropriate action. But the Court will state that absent any showing of any important cause
therefor, it will not normally substitute its judgment for that of the PCGG in these individual
transactions. It is clear however, that as things now stand, the petitioner cannot be said to have
established the correctness of its submission that the acts of the PCGG in question were done without
or in excess of its powers, or with grave abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14, 1986 is
lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

80

CORPORATE SOCIAL RESPONSIBILITY

PROFESSIONAL SERVICES, INC., Petitioner,
vs.
THE COURT OF APPEALS and NATIVIDAD and ENRIQUE AGANA, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 126467
NATIVIDAD [substituted by her children Marcelino Agana III, Enrique Agana, Jr., Emma Agana-Andaya,
Jesus Agana and Raymund Agana] and ENRIQUE AGANA, Petitioners,
vs.
THE COURT OF APPEALS and JUAN FUENTES, Respondents.

Due to paramount public interest, the Court en banc accepted the referral8 and heard the parties on
oral arguments on one particular issue: whether a hospital may be held liable for the negligence of
physicians-consultants allowed to practice in its premises.9
To recall the salient facts, PSI, together with Dr. Miguel Ampil (Dr. Ampil) and Dr. Juan Fuentes (Dr.
Fuentes), was impleaded by Enrique Agana and Natividad Agana (later substituted by her heirs), in a
complaint10 for damages filed in the Regional Trial Court (RTC) of Quezon City, Branch 96, for the
injuries suffered by Natividad when Dr. Ampil and Dr. Fuentes neglected to remove from her body two
gauzes11 which were used in the surgery they performed on her on April 11, 1984 at the Medical City
General Hospital. PSI was impleaded as owner, operator and manager of the hospital.
In a decision12 dated March 17, 1993, the RTC held PSI solidarily liable with Dr. Ampil and Dr. Fuentes
for damages.13 On appeal, the Court of Appeals (CA), absolved Dr. Fuentes but affirmed the liability of
Dr. Ampil and PSI, subject to the right of PSI to claim reimbursement from Dr. Ampil.141avvphi1

x - - - - - - - - - - - - - - - - - - - - - - -x

On petition for review, this Court, in its January 31, 2007 decision, affirmed the CA decision.15 PSI filed
a motion for reconsideration16 but the Court denied it in a resolution dated February 11, 2008.17

G.R. No. 127590

The Court premised the direct liability of PSI to the Aganas on the following facts and law:

MIGUEL AMPIL, Petitioner,

vs.
NATIVIDAD and ENRIQUE AGANA, Respondents.

First, there existed between PSI and Dr. Ampil an employer-employee relationship as contemplated in
the December 29, 1999 decision in Ramos v. Court of Appeals18 that "for purposes of allocating
responsibility in medical negligence cases, an employer-employee relationship exists between
hospitals and their consultants."19 Although the Court in Ramos later issued a Resolution dated April
11, 200220 reversing its earlier finding on the existence of an employment relationship between
hospital and doctor, a similar reversal was not warranted in the present case because the defense
raised by PSI consisted of a mere general denial of control or responsibility over the actions of Dr.
Ampil.21

RESOLUTION
CORONA, J.:
With prior leave of court,1 petitioner Professional Services, Inc. (PSI) filed a second motion for
reconsideration2 urging referral thereof to the Court en banc and seeking modification of the decision
dated January 31, 2007 and resolution dated February 11, 2008 which affirmed its vicarious and direct
liability for damages to respondents Enrique Agana and the heirs of Natividad Agana (Aganas).
Manila Medical Services, Inc. (MMSI),3 Asian Hospital, Inc. (AHI),4 and Private Hospital Association of
the Philippines (PHAP)5 all sought to intervene in these cases invoking the common ground that,
unless modified, the assailed decision and resolution will jeopardize the financial viability of private
hospitals and jack up the cost of health care.
The Special First Division of the Court granted the motions for intervention of MMSI, AHI and PHAP
(hereafter intervenors),6 and referred en consulta to the Court en banc the motion for prior leave of
court and the second motion for reconsideration of PSI.7

Second, by accrediting Dr. Ampil and advertising his qualifications, PSI created the public impression
that he was its agent.22 Enrique testified that it was on account of Dr. Ampil's accreditation with PSI
that he conferred with said doctor about his wife's (Natividad's) condition.23 After his meeting with
Dr. Ampil, Enrique asked Natividad to personally consult Dr. Ampil.24 In effect, when Enrigue and
Natividad engaged the services of Dr. Ampil, at the back of their minds was that the latter was a staff
member of a prestigious hospital. Thus, under the doctrine of apparent authority applied in Nogales,
et al. v. Capitol Medical Center, et al.,25 PSI was liable for the negligence of Dr. Ampil.
Finally, as owner and operator of Medical City General Hospital, PSI was bound by its duty to provide
comprehensive medical services to Natividad Agana, to exercise reasonable care to protect her from
harm,26 to oversee or supervise all persons who practiced medicine within its walls, and to take active
steps in fixing any form of negligence committed within its premises.27 PSI committed a serious
breach of its corporate duty when it failed to conduct an immediate investigation into the reported
missing gauzes.28
81

PSI is now asking this Court to reconsider the foregoing rulings for these reasons:
I
The declaration in the 31 January 2007 Decision vis-a-vis the 11 February 2009 Resolution that the
ruling in Ramos vs. Court of Appeals (G.R. No. 134354, December 29, 1999) that "an employeremployee relations exists between hospital and their consultants" stays should be set aside for being
inconsistent with or contrary to the import of the resolution granting the hospital's motion for
reconsideration in Ramos vs. Court of Appeals (G.R. No. 134354, April 11, 2002), which is applicable to
PSI since the Aganas failed to prove an employer-employee relationship between PSI and Dr. Ampil
and PSI proved that it has no control over Dr. Ampil. In fact, the trial court has found that there is no
employer-employee relationship in this case and that the doctor's are independent contractors.

treatment.33 Within that reality, three legal relationships crisscross: (1) between the hospital and the
doctor practicing within its premises; (2) between the hospital and the patient being treated or
examined within its premises and (3) between the patient and the doctor. The exact nature of each
relationship determines the basis and extent of the liability of the hospital for the negligence of the
doctor.
Where an employment relationship exists, the hospital may be held vicariously liable under Article
217634 in relation to Article 218035 of the Civil Code or the principle of respondeat superior. Even
when no employment relationship exists but it is shown that the hospital holds out to the patient that
the doctor is its agent, the hospital may still be vicariously liable under Article 2176 in relation to
Article 143136 and Article 186937 of the Civil Code or the principle of apparent authority.38
Moreover, regardless of its relationship with the doctor, the hospital may be held directly liable to the
patient for its own negligence or failure to follow established standard of conduct to which it should
conform as a corporation.39

II
Respondents Aganas engaged Dr. Miguel Ampil as their doctor and did not primarily and specifically
look to the Medical City Hospital (PSI) for medical care and support; otherwise stated, respondents
Aganas did not select Medical City Hospital (PSI) to provide medical care because of any apparent
authority of Dr. Miguel Ampil as its agent since the latter was chosen primarily and specifically based
on his qualifications and being friend and neighbor.

This Court still employs the "control test" to determine the existence of an employer-employee
relationship between hospital and doctor. In Calamba Medical Center, Inc. v. National Labor Relations
Commission, et al.40 it held:
Under the "control test", an employment relationship exists between a physician and a hospital if the
hospital controls both the means and the details of the process by which the physician is to
accomplish his task.

III
xxx
PSI cannot be liable under doctrine of corporate negligence since the proximate cause of Mrs. Agana's
injury was the negligence of Dr. Ampil, which is an element of the principle of corporate negligence.29
In their respective memoranda, intervenors raise parallel arguments that the Court's ruling on the
existence of an employer-employee relationship between private hospitals and consultants will force a
drastic and complex alteration in the long-established and currently prevailing relationships among
patient, physician and hospital, with burdensome operational and financial consequences and adverse
effects on all three parties.30
The Aganas comment that the arguments of PSI need no longer be entertained for they have all been
traversed in the assailed decision and resolution.31
After gathering its thoughts on the issues, this Court holds that PSI is liable to the Aganas, not under
the principle of respondeat superior for lack of evidence of an employment relationship with Dr. Ampil
but under the principle of ostensible agency for the negligence of Dr. Ampil and, pro hac vice, under
the principle of corporate negligence for its failure to perform its duties as a hospital.
While in theory a hospital as a juridical entity cannot practice medicine,32 in reality it utilizes doctors,
surgeons and medical practitioners in the conduct of its business of facilitating medical and surgical

xxx

xxx

As priorly stated, private respondents maintained specific work-schedules, as determined by

petitioner through its medical director, which consisted of 24-hour shifts totaling forty-eight hours
each week and which were strictly to be observed under pain of administrative sanctions.
That petitioner exercised control over respondents gains light from the undisputed fact that in the
emergency room, the operating room, or any department or ward for that matter, respondents' work
is monitored through its nursing supervisors, charge nurses and orderlies. Without the approval or
consent of petitioner or its medical director, no operations can be undertaken in those areas. For
control test to apply, it is not essential for the employer to actually supervise the performance of
duties of the employee, it being enough that it has the right to wield the power. (emphasis supplied)
Even in its December 29, 1999 decision41 and April 11, 2002 resolution42 in Ramos, the Court found
the control test decisive.
In the present case, it appears to have escaped the Court's attention that both the RTC and the CA
found no employment relationship between PSI and Dr. Ampil, and that the Aganas did not question
such finding. In its March 17, 1993 decision, the RTC found "that defendant doctors were not
employees of PSI in its hospital, they being merely consultants without any employer-employee
82

relationship and in the capacity of independent contractors."43 The Aganas never questioned such
finding.
PSI, Dr. Ampil and Dr. Fuentes appealed44 from the RTC decision but only on the issues of negligence,
agency and corporate liability. In its September 6, 1996 decision, the CA mistakenly referred to PSI and
Dr. Ampil as employer-employee, but it was clear in its discussion on the matter that it viewed their
relationship as one of mere apparent agency.45
The Aganas appealed from the CA decision, but only to question the exoneration of Dr. Fuentes.46 PSI
also appealed from the CA decision, and it was then that the issue of employment, though long
settled, was unwittingly resurrected.
In fine, as there was no dispute over the RTC finding that PSI and Dr. Ampil had no employer-employee
relationship, such finding became final and conclusive even to this Court.47 There was no reason for
PSI to have raised it as an issue in its petition. Thus, whatever discussion on the matter that may have
ensued was purely academic.
Nonetheless, to allay the anxiety of the intervenors, the Court holds that, in this particular instance,
the concurrent finding of the RTC and the CA that PSI was not the employer of Dr. Ampil is correct.
Control as a determinative factor in testing the employer-employee relationship between doctor and
hospital under which the hospital could be held vicariously liable to a patient in medical negligence
cases is a requisite fact to be established by preponderance of evidence. Here, there was insufficient
evidence that PSI exercised the power of control or wielded such power over the means and the
details of the specific process by which Dr. Ampil applied his skills in the treatment of Natividad.
Consequently, PSI cannot be held vicariously liable for the negligence of Dr. Ampil under the principle
of respondeat superior.
There is, however, ample evidence that the hospital (PSI) held out to the patient (Natividad)48 that
the doctor (Dr. Ampil) was its agent. Present are the two factors that determine apparent authority:
first, the hospital's implied manifestation to the patient which led the latter to conclude that the
doctor was the hospital's agent; and second, the patients reliance upon the conduct of the hospital
and the doctor, consistent with ordinary care and prudence.49
Enrique testified that on April 2, 1984, he consulted Dr. Ampil regarding the condition of his wife; that
after the meeting and as advised by Dr. Ampil, he "asked [his] wife to go to Medical City to be
examined by [Dr. Ampil]"; and that the next day, April 3, he told his daughter to take her mother to Dr.
Ampil.50 This timeline indicates that it was Enrique who actually made the decision on whom
Natividad should consult and where, and that the latter merely acceded to it. It explains the testimony
of Natividad that she consulted Dr. Ampil at the instigation of her daughter.51
Moreover, when asked what impelled him to choose Dr. Ampil, Enrique testified:

On that particular occasion, April 2, 1984, what was your reason for choosing Dr. Ampil to contact with
in connection with your wife's illness?
A. First, before that, I have known him to be a specialist on that part of the body as a surgeon, second,
I have known him to be a staff member of the Medical City which is a prominent and known hospital.
And third, because he is a neighbor, I expect more than the usual medical service to be given to us,
than his ordinary patients.52 (emphasis supplied)
Clearly, the decision made by Enrique for Natividad to consult Dr. Ampil was significantly influenced by
the impression that Dr. Ampil was a staff member of Medical City General Hospital, and that said
hospital was well known and prominent. Enrique looked upon Dr. Ampil not as independent of but as
integrally related to Medical City.
PSI's acts tended to confirm and reinforce, rather than negate, Enrique's view. It is of record that PSI
required a "consent for hospital care"53 to be signed preparatory to the surgery of Natividad. The
form reads:
Permission is hereby given to the medical, nursing and laboratory staff of the Medical City General
Hospital to perform such diagnostic procedures and to administer such medications and treatments as
may be deemed necessary or advisable by the physicians of this hospital for and during the
confinement of xxx. (emphasis supplied)
By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a physician of its
hospital, rather than one independently practicing in it; that the medications and treatments he
prescribed were necessary and desirable; and that the hospital staff was prepared to carry them
out.1avvphi1
PSI pointed out in its memorandum that Dr. Ampil's hospital affiliation was not the exclusive basis of
the Aganas decision to have Natividad treated in Medical City General Hospital, meaning that, had Dr.
Ampil been affiliated with another hospital, he would still have been chosen by the Aganas as
Natividad's surgeon.54
The Court cannot speculate on what could have been behind the Aganas decision but would rather
adhere strictly to the fact that, under the circumstances at that time, Enrique decided to consult Dr.
Ampil for he believed him to be a staff member of a prominent and known hospital. After his meeting
with Dr. Ampil, Enrique advised his wife Natividad to go to the Medical City General Hospital to be
examined by said doctor, and the hospital acted in a way that fortified Enrique's belief.
This Court must therefore maintain the ruling that PSI is vicariously liable for the negligence of Dr.
Ampil as its ostensible agent.

Atty. Agcaoili
83

Moving on to the next issue, the Court notes that PSI made the following admission in its Motion for
Reconsideration:
51. Clearly, not being an agent or employee of petitioner PSI, PSI [sic] is not liable for Dr. Ampil's acts
during the operation. Considering further that Dr. Ampil was personally engaged as a doctor by Mrs.
Agana, it is incumbent upon Dr. Ampil, as "Captain of the Ship", and as the Agana's doctor to advise
her on what to do with her situation vis-a-vis the two missing gauzes. In addition to noting the missing
gauzes, regular check-ups were made and no signs of complications were exhibited during her stay at
the hospital, which could have alerted petitioner PSI's hospital to render and provide post-operation
services to and tread on Dr. Ampil's role as the doctor of Mrs. Agana. The absence of negligence of PSI
from the patient's admission up to her discharge is borne by the finding of facts in this case. Likewise
evident therefrom is the absence of any complaint from Mrs. Agana after her discharge from the
hospital which had she brought to the hospital's attention, could have alerted petitioner PSI to act
accordingly and bring the matter to Dr. Ampil's attention. But this was not the case. Ms. Agana
complained ONLY to Drs. Ampil and Fuentes, not the hospital. How then could PSI possibly do
something to fix the negligence committed by Dr. Ampil when it was not informed about it at all.55
(emphasis supplied)
PSI reiterated its admission when it stated that had Natividad Agana "informed the hospital of her
discomfort and pain, the hospital would have been obliged to act on it."56
The significance of the foregoing statements is critical.
First, they constitute judicial admission by PSI that while it had no power to control the means or
method by which Dr. Ampil conducted the surgery on Natividad Agana, it had the power to review or
cause the review of what may have irregularly transpired within its walls strictly for the purpose of
determining whether some form of negligence may have attended any procedure done inside its
premises, with the ultimate end of protecting its patients.

missing gauzes and did not include "taking an active step in fixing the negligence committed."59 An
admission made in the pleading cannot be controverted by the party making such admission and is
conclusive as to him, and all proofs submitted by him contrary thereto or inconsistent therewith
should be ignored, whether or not objection is interposed by a party.60
Given the standard of conduct that PSI defined for itself, the next relevant inquiry is whether the
hospital measured up to it.
PSI excuses itself from fulfilling its corporate duty on the ground that Dr. Ampil assumed the personal
responsibility of informing Natividad about the two missing gauzes.61 Dr. Ricardo Jocson, who was
part of the group of doctors that attended to Natividad, testified that toward the end of the surgery,
their group talked about the missing gauzes but Dr. Ampil assured them that he would personally
notify the patient about it.62 Furthermore, PSI claimed that there was no reason for it to act on the
report on the two missing gauzes because Natividad Agana showed no signs of complications. She did
not even inform the hospital about her discomfort.63
The excuses proffered by PSI are totally unacceptable.
To begin with, PSI could not simply wave off the problem and nonchalantly delegate to Dr. Ampil the
duty to review what transpired during the operation. The purpose of such review would have been to
pinpoint when, how and by whom two surgical gauzes were mislaid so that necessary remedial
measures could be taken to avert any jeopardy to Natividads recovery. Certainly, PSI could not have
expected that purpose to be achieved by merely hoping that the person likely to have mislaid the
gauzes might be able to retrace his own steps. By its own standard of corporate conduct, PSI's duty to
initiate the review was non-delegable.

Second, it is a judicial admission that, by virtue of the nature of its business as well as its
prominence57 in the hospital industry, it assumed a duty to "tread on" the "captain of the ship" role
of any doctor rendering services within its premises for the purpose of ensuring the safety of the
patients availing themselves of its services and facilities.

While Dr. Ampil may have had the primary responsibility of notifying Natividad about the missing
gauzes, PSI imposed upon itself the separate and independent responsibility of initiating the inquiry
into the missing gauzes. The purpose of the first would have been to apprise Natividad of what
transpired during her surgery, while the purpose of the second would have been to pinpoint any lapse
in procedure that led to the gauze count discrepancy, so as to prevent a recurrence thereof and to
determine corrective measures that would ensure the safety of Natividad. That Dr. Ampil negligently
failed to notify Natividad did not release PSI from its self-imposed separate responsibility.

Third, by such admission, PSI defined the standards of its corporate conduct under the circumstances
of this case, specifically: (a) that it had a corporate duty to Natividad even after her operation to
ensure her safety as a patient; (b) that its corporate duty was not limited to having its nursing staff
note or record the two missing gauzes and (c) that its corporate duty extended to determining Dr.
Ampil's role in it, bringing the matter to his attention, and correcting his negligence.

Corollary to its non-delegable undertaking to review potential incidents of negligence committed

within its premises, PSI had the duty to take notice of medical records prepared by its own staff and
submitted to its custody, especially when these bear earmarks of a surgery gone awry. Thus, the
record taken during the operation of Natividad which reported a gauze count discrepancy should have
given PSI sufficient reason to initiate a review. It should not have waited for Natividad to complain.

And finally, by such admission, PSI barred itself from arguing in its second motion for reconsideration
that the concept of corporate responsibility was not yet in existence at the time Natividad underwent
treatment;58 and that if it had any corporate responsibility, the same was limited to reporting the

As it happened, PSI took no heed of the record of operation and consequently did not initiate a review
of what transpired during Natividads operation. Rather, it shirked its responsibility and passed it on to
others to Dr. Ampil whom it expected to inform Natividad, and to Natividad herself to complain
84

before it took any meaningful step. By its inaction, therefore, PSI failed its own standard of hospital
care. It committed corporate negligence.
It should be borne in mind that the corporate negligence ascribed to PSI is different from the medical
negligence attributed to Dr. Ampil. The duties of the hospital are distinct from those of the doctorconsultant practicing within its premises in relation to the patient; hence, the failure of PSI to fulfill its
duties as a hospital corporation gave rise to a direct liability to the Aganas distinct from that of Dr.
Ampil.

CRIMINAL LIABILITY IN THE CORPORATE SETTING

TIME, INC., petitioner,
vs.
HON. ANDRES REYES, as Judge of the Court of First Instance of Rizal, ELISEO S. ZARI, as Deputy Clerk of
Court, Branch VI, Court of First Instance of Rizal, ANTONIO J. VILLEGAS and JUAN PONCE ENRILE,
respondents.
Sycip, Salazar, Luna, Manalo & Feliciano for petitioner.

All this notwithstanding, we make it clear that PSIs hospital liability based on ostensible agency and
corporate negligence applies only to this case, pro hac vice. It is not intended to set a precedent and
should not serve as a basis to hold hospitals liable for every form of negligence of their doctorsconsultants under any and all circumstances. The ruling is unique to this case, for the liability of PSI
arose from an implied agency with Dr. Ampil and an admitted corporate duty to Natividad.64

Angel C. Cruz Law Office for respondents.

REYES, J.B.L., J.:

Other circumstances peculiar to this case warrant this ruling,65 not the least of which being that the
agony wrought upon the Aganas has gone on for 26 long years, with Natividad coming to the end of
her days racked in pain and agony. Such wretchedness could have been avoided had PSI simply done
what was logical: heed the report of a guaze count discrepancy, initiate a review of what went wrong
and take corrective measures to ensure the safety of Nativad. Rather, for 26 years, PSI hemmed and
hawed at every turn, disowning any such responsibility to its patient. Meanwhile, the options left to
the Aganas have all but dwindled, for the status of Dr. Ampil can no longer be ascertained.66
Therefore, taking all the equities of this case into consideration, this Court believes P15 million would
be a fair and reasonable liability of PSI, subject to 12% p.a. interest from the finality of this resolution
to full satisfaction.
WHEREFORE, the second motion for reconsideration is DENIED and the motions for intervention are
NOTED.
Professional Services, Inc. is ORDERED pro hac vice to pay Natividad (substituted by her children
Marcelino Agana III, Enrique Agana, Jr., Emma Agana-Andaya, Jesus Agana and Raymund Agana) and
Enrique Agana the total amount of P15 million, subject to 12% p.a. interest from the finality of this
resolution to full satisfaction.
No further pleadings by any party shall be entertained in this case.
Let the long-delayed entry of judgment be made in this case upon receipt by all concerned parties of
this resolution.
SO ORDERED.

Petition for certiorari and prohibition, with preliminary injunction, to annul certain orders of the
respondent Court of First Instance of Rizal, issued in its Civil Case No. 10403, entitled "Antonio J.
Villegas and Juan Ponce Enrile vs. Time, Inc., and Time-Life International, Publisher of 'Time' Magazine
(Asia Edition)", and to prohibit the said court from further proceeding with the said civil case.
Upon petitioner's posting a bond of P1,000.00, this Court, as prayed for, ordered, on 15 April 1968, the
issuance of a writ of preliminary injunction.
The petition alleges that petitioner Time, Inc., 1 is an American corporation with principal offices at
Rocketfeller Center, New York City, N. Y., and is the publisher of "Time", a weekly news magazine; the
petition, however, does not allege the petitioner's legal capacity to sue in the courts of the Philippine.
2
In the aforesaid Civil Case No. 10403, therein plaintiffs (herein respondents) Antonio J. Villegas and
Juan Ponce Enrile seek to recover from the herein petitioner damages upon an alleged libel arising
from a publication of Time (Asia Edition) magazine, in its issue of 18 August 1967, of an essay, entitled
"Corruption in Asia", which, in part, reads, as follows:
The problem of Manila's mayor, ANTONIO VILLEGAS, is a case in point. When it was discovered last
year that the mayor's coffers contained far more pesos than seemed reasonable in the light of his
income, an investigation was launched. Witnesses who had helped him out under curious
circumstance were asked to explain in court. One government official admitted lending Villegas
P30,000 pesos ($7,700) without interest because he was the mayor's compadre. An assistant declared
he had given Villegas loans without collateral because he regarded the boss as my own son. A wealthy
Manila businessman testified that he had lent Villegas' wife 15,000 pesos because the mayor was like
a brother to me. With that, Villegas denounced the investigation as an invasion of his family's privacy.
The case was dismissed on a technicality, and Villegas is still mayor. 3
85

More specifically, the plaintiffs' complaint alleges, inter alia that:

(4)
Defendants, conspiring and confederating, published a libelous article, publicly, falsely and
maliciously imputing to Plaintiffs the commission of the crimes of graft, corruption and nepotism; that
said publication particularly referred to Plaintiff Mayor Antonio J. Villegas as a case in point in
connection with graft, corruption and nepotism in Asia; that said publication without any doubt
referred to co-plaintiff Juan Ponce Enrile as the high government official who helped under curious
circumstances Plaintiff Mayor Antonio J. Villegas in lending the latter approximately P30,000.00
($7,700.00) without interest because he was the Mayor's compadre; that the purpose of said
Publications is to cause the dishonor, discredit and put in public contempt the Plaintiffs, particularly
Plaintiff Mayor Antonio J. Villegas.

There is no dispute that at the time of the publication of the allegedly offending essay, private
respondents Antonio Villegas and Juan Ponce Enrile were the Mayor Of the City of Manila and
Undersecretary of Finance and concurrently Acting Commissioner of Customs, respectively, with
offices in the City of Manila. The issues in this case are:
1.
Whether or not, under the provisions of Republic Act No. 4363 the respondent Court of First
Instance of Rizal has jurisdiction to take cognizance of the civil suit for damages arising from an
allegedly libelous publication, considering that the action was instituted by public officers whose
offices were in the City of Manila at the time of the publication; if it has no jurisdiction, whether or not
its erroneous assumption of jurisdiction may be challenged by a foreign corporation by writ of
certiorari or prohibition; and

On motion of the respondents-plaintiffs, the respondent judge, on 25 November 1967, granted them
leave to take the depositions "of Mr. Anthony Gonzales, Time-Life international", and "Mr. Cesar B.
Enriquez, Muller & Phipps (Manila) Ltd.", in connection with the activities and operations in the
Philippines of the petitioner, and, on 27 November 1967, issued a writ of attachment on the real and
personal estate of Time, Inc.

2.
Whether or not Republic Act 4363 is applicable to action against a foreign corporation or nonresident defendant.

Petitioner received the summons and a copy of the complaint at its offices in New York on 13
December 1967 and, on 27 December 1967, it filed a motion to dismiss the complaint for lack of
jurisdiction and improper venue, relying upon the provisions of Republic Act 4363. Private
respondents opposed the motion.

Section 1.
Article three hundred sixty of the Revised Penal Code, as amended by Republic Act
Numbered Twelve hundred and eighty-nine, is further amended to read as follows:

In an order dated 26 February 1968, respondent court deferred the determination of the motion to
dismiss until after trial of the case on the merits, the court having considered that the grounds relied
upon in the motion do not appear to be indubitable.
Petitioner moved for reconsideration of the deferment private respondents again opposed.
On 30 March 1968, respondent judge issued an order re-affirming the previous order of deferment for
the reason that "the rule laid down under Republic Act. No. 4363, amending Article 360 of the Revised
Penal Code, is not applicable to actions against non-resident defendants, and because questions
involving harassment and inconvenience, as well as disruption of public service do not appear
indubitable. ..."
Failing in its efforts to discontinue the taking of the depositions, previously adverted to, and to have
action taken, before trial, on its motion to dismiss, petitioner filed the instant petition for certiorari
and prohibition.
The orders for the taking of the said depositions, for deferring determination of the motion to dismiss,
and for reaffirming the deferment, and the writ of attachment are sought to be annulled in the
petition..

Provisions of Republic Act No. 4363, which are relevant to the resolution of the foregoing issues, read,
as follows:

'ART. 360.
Persons responsible. Any person who shall publish, exhibit, or cause the
publication or exhibition of any defamation in writing or by similar means, shall be responsible for the
same.
The author or editor of a book or pamphlet, or the editor or business manager of a daily newspaper,
magazine or serial publication, shall be responsible for the defamations contained therein to the
extent as if he were the author thereof.
The criminal and civil action for damages in cases of written defamations as provided for in this
chapter, shall be filed simultaneously or separately with the court of first instance of the province or
city where the libelous article is printed and first published or where any of the offended parties
actually resides at the time of the commission of the offense; Provided, however, That where one of
the offended parties is a public officer whose office is in the City of Manila at the time of the
commission of the offense, the action shall be filed in the Court of First Instance of the City of Manila
or of the city or province where the libelous article is printed and first published, and in case such
public officer does not hold office in the City of Manila, the action shall be filed in the Court of First
Instance of the province or city where he held office at the time of the commission of the offense or
where the libelous article is printed and first published and in case one of the offended parties is a
private individual, the action shall be filed in the Court of First Instance of the province or city where
he actually resides at the time of the commission of the offense or where the libelous matter is
printed and first published; Provided, further, That the civil action shall be filed in the same court
86

where the criminal action is filed and vice versa; Provided, furthermore, That the court where the
criminal action or civil action for damages is first filed, shall acquire jurisdiction to the exclusion of
other courts; And provided finally, That this amendment shall not apply to cases of written
defamations, the civil and/or criminal actions which have been filed in court at the time of the
effectivity of the law
xxx

xxx

xxx

xxx

xxx

xxx

Sec. 3. This Act shall take effect only if and when, within thirty days from its approval, the
newspapermen in the Philippines shall organize, and elect the members of, a Philippine Press Council,
a private agency of the said newspapermen, whose function shall be to promulgate a Code of Ethics
for them and the Philippine press investigate violations thereof, and censure any newspaperman or
newspaper guilty of any violation of the said Code, and the fact that such Philippine Press Council has
been organized and its members have been duly elected in accordance herewith shall be ascertained
and proclaimed by the President of the Philippines.
Under the first proviso in section 1, the venue of a civil action for damages in cases of written
defamations is localized upon the basis of, first, whether the offended party or plaintiff is a public
officer or a private individual; and second, if he is a public officer, whether his office is in Manila or not
in Manila, at the time of the commission of the offense. If the offended party is a public officer in the
office in the City of Manila, the proviso limits him to two (2) choices of venue, namely, in the Court of
First instance of the City of Manila or in the city or province where the libelous article is printed and
first published ..."
The complaint lodged in the court of Rizal by respondents does not allege that the libelous article was
printed and first published in the province of Rizal and, since the respondents-plaintiffs are public
officers with offices in Manila at the time of the commission of the alleged offense, it is clear that the
only place left for them wherein to file their action, is the Court of First Instance of Manila.
The limitation of the choices of venue, as introduced into the Penal Code through its amendments by
Republic Act 4363, was intended "to minimize or limit the filing of out-of-town libel suits" to protect
an alleged offender from "hardships, inconveniences and harassments" and, furthermore, to protect
"the interest of the public service" where one of the offended parties is a public officer." 4 The intent,
of the law is clear: a libeled public official might sue in the court of the locality where he holds office,
in order that the prosecution of the action should interfere as little as possible with the discharge of
his official duties and labors. The only alternative allowed him by law is to prosecute those responsible
for the libel in the place where the offending article was printed and first published. Here, the law
tolerates the interference with the libeled officer's duties only for the sake of avoiding unnecessary
harassment of the accused. Since the offending publication was not printed in the Philippines, the
alternative venue was not open to respondent Mayor Villegas of Manila and Undersecretary of
Finance Enrile, who were the offended parties.

But respondents-plaintiffs argue that Republic Act No. 4363 is not applicable where the action is
against non-existent defendant, as petitioner Time, Inc., for several reasons. They urge that, in
enacting Republic Act No. 4363, Congress did not intend to protect non-resident defendants as shown
by Section 3, which provides for the effectivity of the statute only if and when the "newspapermen in
the Philippines" have organized a "Philippine Press Council" whose function shall be to promulgate a
Code of Ethics for "them" and "the Philippine press"; and since a non-resident defendant is not in a
position to comply with the conditions imposed for the effectivity of the statute, such defendant may
not invoke its provisions; that a foreign corporation is not inconvenienced by an out-of-town libel suit;
that it would be absurd and incongruous, in the absence of an extradition treaty, for the law to give to
public officers with office in Manila the second option of filing a criminal case in the court of the place
where the libelous article is printed and first published if the defendant is a foreign corporation and
that, under the "single publication" rule which originated in the United States and imported into the
Philippines, the rule was understood to mean that publications in another state are not covered by
venue statutes of the forum.
The implication of respondents' argument is that the law would not take effect as to non-resident
defendants or accused. We see nothing in the text of the law that would sustain such unequal
protection to some of those who may be charged with libel. The official proclamation that a Philippine
Press Council has been organized is made a pre-condition to the effectivity of the entire Republic Act
No. 4363, and no terms are employed therein to indicate that the law can or will be effective only as
to some, but not all, of those that may be charged with libeling our public officers.
The assertion that a foreign corporation or a non-resident defendant is not inconvenienced by an outof-town suit is irrelevant and untenable, for venue and jurisdiction are not dependent upon
convenience or inconvenience to a party; and moreover, venue was fixed under Republic Act No.
4363, pursuant to the basic policy of the law that is, as previously stated, to protect the interest of the
public service when the offended party is a public officer, by minimizing as much as possible any
interference with the discharge of his duties.
That respondents-plaintiffs could not file a criminal case for libel against a non-resident defendant
does not make Republic Act No. 4363 incongruous of absurd, for such inability to file a criminal case
against a non-resident natural person equally exists in crimes other than libel. It is a fundamental rule
of international jurisdiction that no state can by its laws, and no court which is only a creature of the
state, can by its judgments or decrees, directly bind or affect property or persons beyond the limits of
the state. 5 Not only this, but if the accused is a corporation, no criminal action can lie against it, 6
whether such corporation or resident or non-resident. At any rate, the case filed by respondentsplaintiffs is case for damages.
50 Am. Jur. 2d 659 differentiates the "multiple publication" and "single publication" rules (invoked by
private respondents) to be as follows:

87

The common law as to causes of action for tort arising out of a single publication was to the effect that
each communication of written or printed matter was a distinct and separate publication of a libel
contained therein, giving rise to a separate cause of action. This rule ('multiple publication' rule) is still
followed in several American jurisdictions, and seems to be favored by the American Law Institute.
Other jurisdictions have adopted the 'single publication' rule which originated in New York, under
which any single integrated publication, such as one edition of a newspaper, book, or magazine, or
one broadcast, is treated as a unit, giving rise to only one cause of action, regardless of the number of
times it is exposed to different people. ...

suit, on the ground of want of jurisdiction in which jurisdiction is not bound by the ruling of the court
in which the suit was brought, on a motion to quash service of summons, that it has jurisdiction. 9

These rules are not pertinent in the present scheme because the number of causes of action that may
be available to the respondents-plaintiffs is not here in issue. We are here confronted by a specific
venue statute, conferring jurisdiction in cases of libel against Public officials to specified courts, and no
other. The rule is that where a statute creates a right and provides a remedy for its enforcement, the
remedy is exclusive; and where it confers jurisdiction upon a particular court, that jurisdiction is
likewise exclusive, unless otherwise provided. Hence, the venue provisions of Republic Act No. 4363
should be deemed mandatory for the party bringing the action, unless the question of venue should
be waived by the defendant, which was not the case here. Only thus can the policy of the Act be
upheld and maintained. Nor is there any reason why the inapplicability of one alternative venue
should result in rendering the other alternative, also inapplicable.

If the question of jurisdiction were not the main ground for this petition for review by certiorari, it
would be premature because it seeks to have a review of an interlocutory order. But as it would be
useless and futile to go ahead with the proceedings if the court below had no jurisdiction this petition
was given due course.' (San Beda vs. CIR, 51 O.G. 5636, 5638).

It is also advanced that the present petition is premature, since respondent court has not definitely
ruled on the motion to dismiss, nor held that it has jurisdiction, but only argument is untenable. The
motion to dismiss was predicated on the respondent court's lack of jurisdiction to entertain the action;
and the rulings of this Court are that writs of certiorari or prohibition, or both, may issue in case of a
denial or deferment of action on such a motion to dismiss for lack of jurisdiction.

'While it is true that action on a motion to dismiss may be deferred until the trial and an order to that
effect is interlocutory, still where it clearly appears that the trial judge or court is proceeding in excess
or outside of its jurisdiction, the remedy of prohibition would lie since it would be useless and a waste
of time to go ahead with the proceedings. (Philippine International Fair, Inc., et al. vs. Ibaez, et al., 50
Off. Gaz. 1036; Enrique v. Macadaeg, et al., 47 Off. Gaz. 1207; see also San Beda College vs. CIR, 51 Off.
Gaz. 5636.)' (University of Sto. Tomas v. Villanueva, L-13748, 30 October 1959.).

The dismissal of the present petition is asked on the ground that the petitioner foreign corporation
failed to allege its capacity to sue in the courts of the Philippines. Respondents rely on section 69 of
the Corporation law, which provides:

Similarly, in Edward J. Nell Co. vs. Cubacub, L-20843, 23 June 1965, 14 SCRA 419, this Court held:

SEC. 69. No foreign corporation or corporations formed, organized, or existing under any laws other
than those of the Philippines shall be permitted to ... maintain by itself or assignee any suit for the
recovery of any debt, claim, or demand whatever, unless it shall have the license prescribed in the
section immediately preceding. ..." ...;

'.......................................................... It is a settledrule that the jurisdiction of a court over the subjectmatter is determined by the allegations in the complaint; and when a motion to dismiss is filed for lack
of jurisdiction those allegations are deemed admitted for purposes of such motion, so that it may be
resolved without waiting for the trial. Thus it has been held that the consideration thereof may not be
postponed in the hope that the evidence may yield other qualifying or concurring data which would
bring the case under the court's jurisdiction.'

They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that no foreign corporation may
be permitted to maintain any suit in the local courts unless it shall have the license required by the
law, and the ruling in Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ... the
law denies to a foreign corporation the right to maintain suit unless it has previously complied with a
certain requirement, then such compliance or the fact that the suing corporation is exempt therefrom,
becomes a necessary averment in the complaint." We fail to see how these doctrines can be a propos
in the case at bar, since the petitioner is not "maintaining any suit" but is merely defending one
against itself; it did not file any complaint but only a corollary defensive petition to prohibit the lower
court from further proceeding with a suit that it had no jurisdiction to entertain.

To the same effect are the rulings in: Ruperto vs. Fernando, 83 Phil. 943; Administrator of Hacienda
Luisita Estate vs. Alberto, L-12133, 21 October 1958.
Summing up, We hold:

Petitioner's failure to aver its legal capacity to institute the present petition is not fatal, for ...

(1)
The under Article 360 of the Revised Penal Code, as amended by Republic Act No. 4363,
actions for damages by public officials for libelous publications against them can only be filed in the
courts of first instance ofthe city or province where the offended functionary held office at the time
ofthe commission of the offense, in case the libelous article was first printed or published outside the
Philippines.

A foreign corporation may, by writ of prohibition, seek relief against the wrongful assumption of
jurisdiction. And a foreign corporation seeking a writ of prohibition against further maintenance of a

(2)
That the action of a court in refusing to rule, or deferring its ruling, on a motion to dismiss for
lack of jurisdiction over the subject matter, or for improper venue, is in excess of jurisdiction and
88

correctable by writ of prohibition or certiorari sued out in the appellate Court, even before trial on the
merits is had.
WHEREFORE, the writs applied for are granted: the respondent Court of First Instance of Rizal is
declared without jurisdiction to take cognizance of its Civil Case No. 10403; and its orders issued in
connection therewith are hereby annulled and set aside,. Respondent court is further commanded to
desist from further proceedings in Civil case No. 10403 aforesaid. Costs against private respondents,
Antonio J. Villegas and Juan Ponce Enrile.

MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F. ESPIRITU, CARLO F. ESPIRITU, RAFAEL F. ESPIRITU,
ROLANDO M. MIRABUNA, HERMILYN A. MIRABUNA, KIM ROLAND A. MIRABUNA, KAYE ANN A.
MIRABUNA, KEN RYAN A. MIRABUNA, JUANITO P. DE CASTRO, GERONIMA A. ALMONITE and MANUEL
C. DEE, who are the officers and directors of BICOL GAS REFILLING PLANT CORPORATION, Petitioners,
vs.
PETRON CORPORATION and CARMEN J. DOLOIRAS, doing business under the name "KRISTINA
PATRICIA ENTERPRISES," Respondents.
DECISION

The writ of preliminary injunction heretofore issued by this Supreme Court is made permanent.
ABAD, J.:
This case is about the offense or offenses that arise from the reloading of the liquefied petroleum gas
cylinder container of one brand with the liquefied petroleum gas of another brand.
The Facts and the Case
Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas (LPG) in cylinder
tanks that carried its trademark "Gasul."1 Respondent Carmen J. Doloiras owned and operated
Kristina Patricia Enterprises (KPE), the exclusive distributor of Gasul LPGs in the whole of Sorsogon.2
Jose Nelson Doloiras (Jose) served as KPEs manager.
Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling and distributing LPGs
in Sorsogon but theirs carried the trademark "Bicol Savers Gas." Petitioner Audie Llona managed Bicol
Gas.
In the course of trade and competition, any given distributor of LPGs at times acquired possession of
LPG cylinder tanks belonging to other distributors operating in the same area. They called these
"captured cylinders." According to Jose, KPEs manager, in April 2001 Bicol Gas agreed with KPE for the
swapping of "captured cylinders" since one distributor could not refill captured cylinders with its own
brand of LPG. At one time, in the course of implementing this arrangement, KPEs Jose visited the Bicol
Gas refilling plant. While there, he noticed several Gasul tanks in Bicol Gas possession. He requested a
swap but Audie Llona of Bicol Gas replied that he first needed to ask the permission of the Bicol Gas
owners. That permission was given and they had a swap involving around 30 Gasul tanks held by Bicol
Gas in exchange for assorted tanks held by KPE.
KPEs Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its yard. He offered to
make a swap for these but Llona declined, saying the Bicol Gas owners wanted to send those tanks to
Batangas. Later Bicol Gas told Jose that it had no more Gasul tanks left in its possession. Jose observed
on almost a daily basis, however, that Bicol Gas trucks which plied the streets of the province carried
a load of Gasul tanks. He noted that KPEs volume of sales dropped significantly from June to July
2001.
89

On August 4, 2001 KPEs Jose saw a particular Bicol Gas truck on the Maharlika Highway. While the
truck carried mostly Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul tank and one 50-kg
Shellane tank. Jose followed the truck and when it stopped at a store, he asked the driver, Jun
Leorena, and the Bicol Gas sales representative, Jerome Misal, about the Gasul tank in their truck.
They said it was empty but, when Jose turned open its valve, he noted that it was not. Misal and
Leorena then admitted that the Gasul and Shellane tanks on their truck belonged to a customer who
had them filled up by Bicol Gas. Misal then mentioned that his manager was a certain Rolly Mirabena.
Because of the above incident, KPE filed a complaint3 for violations of Republic Act (R.A.) 623 (illegally
filling up registered cylinder tanks), as amended, and Sections 155 (infringement of trade marks) and
169.1 (unfair competition) of the Intellectual Property Code (R.A. 8293). The complaint charged the
following: Jerome Misal, Jun Leorena, Rolly Mirabena, Audie Llona, and several John and Jane Does,
described as the directors, officers, and stockholders of Bicol Gas. These directors, officers, and
stockholders were eventually identified during the preliminary investigation.
Subsequently, the provincial prosecutor ruled that there was probable cause only for violation of R.A.
623 (unlawfully filling up registered tanks) and that only the four Bicol Gas employees, Mirabena,
Misal, Leorena, and petitioner Llona, could be charged. The charge against the other petitioners who
were the stockholders and directors of the company was dismissed.
Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional State Prosecutor,
Region V, which initially denied the petition but partially granted it on motion for reconsideration. The
Office of the Regional State Prosecutor ordered the filing of additional informations against the four
employees of Bicol Gas for unfair competition. It ruled, however, that no case for trademark
infringement was present. The Secretary of Justice denied the appeal of Petron and KPE and their
motion for reconsideration.
Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of Appeals4 but the
Bicol Gas employees and stockholders concerned opposed it, assailing the inadequacy in its certificate
of non-forum shopping, given that only Atty. Joel Angelo C. Cruz signed it on behalf of Petron. In its
Decision5 dated October 17, 2005, the Court of Appeals ruled, however, that Atty. Cruzs certification
constituted sufficient compliance. As to the substantive aspect of the case, the Court of Appeals
reversed the Secretary of Justices ruling. It held that unfair competition does not necessarily absorb
trademark infringement. Consequently, the court ordered the filing of additional charges of trademark
infringement against the concerned Bicol Gas employees as well.
Since the Bicol Gas employees presumably acted under the direct order and control of its owners, the
Court of Appeals also ordered the inclusion of the stockholders of Bicol Gas in the various charges,
bringing to 16 the number of persons to be charged, now including petitioners Manuel C. Espiritu, Jr.,
Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim
Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de Castro, Geronima A.
Almonite, and Manuel C. Dee (together with Audie Llona), collectively, petitioners Espiritu, et al. The

court denied the motion for reconsideration of these employees and stockholders in its Resolution
dated January 6, 2006, hence, the present petition for review6 before this Court.
The Issues Presented
The petition presents the following issues:
1. Whether or not the certificate of non-forum shopping that accompanied the petition filed with the
Court of Appeals, signed only by Atty. Cruz on behalf of Petron, complied with what the rules require;
2. Whether or not the facts of the case warranted the filing of charges against the Bicol Gas people for:
a) Filling up the LPG tanks registered to another manufacturer without the latters consent in violation
of R.A. 623, as amended;
b) Trademark infringement consisting in Bicol Gas use of a trademark that is confusingly similar to
Petrons registered "Gasul" trademark in violation of section 155 also of R.A. 8293; and
c) Unfair competition consisting in passing off Bicol Gas-produced LPGs for Petron-produced Gasul LPG
in violation of Section 168.3 of R.A. 8293.
The Courts Rulings
First. Petitioners Espiritu, et al. point out that the certificate of non-forum shopping that respondents
KPE and Petron attached to the petition they filed with the Court of Appeals was inadequate, having
been signed only by Petron, through Atty. Cruz.
But, while procedural requirements such as that of submittal of a certificate of non-forum shopping
cannot be totally disregarded, they may be deemed substantially complied with under justifiable
circumstances.7 One of these circumstances is where the petitioners filed a collective action in which
they share a common interest in its subject matter or raise a common cause of action. In such a case,
the certification by one of the petitioners may be deemed sufficient.8
Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et al., namely, the
violation of their proprietary rights with respect to the use of Gasul tanks and trademark.
Furthermore, Atty. Cruz said in his certification that he was executing it "for and on behalf of the
Corporation, and co-petitioner Carmen J. Doloiras."9 Thus, the object of the requirement to ensure
that a party takes no recourse to multiple forums was substantially achieved. Besides, the failure of
KPE to sign the certificate of non-forum shopping does not render the petition defective with respect
to Petron which signed it through Atty. Cruz.10 The Court of Appeals, therefore, acted correctly in
giving due course to the petition before it.

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Second. The Court of Appeals held that under the facts of the case, there is probable cause that
petitioners Espiritu, et al. committed all three crimes: (a) illegally filling up an LPG tank registered to
Petron without the latters consent in violation of R.A. 623, as amended; (b) trademark infringement
which consists in Bicol Gas use of a trademark that is confusingly similar to Petrons registered "Gasul"
trademark in violation of Section 155 of R.A. 8293; and (c) unfair competition which consists in
petitioners Espiritu, et al. passing off Bicol Gas-produced LPGs for Petron-produced Gasul LPG in
violation of Section 168.3 of R.A. 8293.
Here, the complaint adduced at the preliminary investigation shows that the one 50-kg Petron Gasul
LPG tank found on the Bicol Gas truck "belonged to *a Bicol Gas+ customer who had the same filled up
by BICOL GAS."11 In other words, the customer had that one Gasul LPG tank brought to Bicol Gas for
refilling and the latter obliged.
R.A. 623, as amended,12 punishes any person who, without the written consent of the manufacturer
or seller of gases contained in duly registered steel cylinders or tanks, fills the steel cylinder or tank,
for the purpose of sale, disposal or trafficking, other than the purpose for which the manufacturer or
seller registered the same. This was what happened in this case, assuming the allegations of KPEs
manager to be true. Bicol Gas employees filled up with their firms gas the tank registered to Petron
and bearing its mark without the latters written authority. Consequently, they may be prosecuted for
that offense.
But, as for the crime of trademark infringement, Section 155 of R.A. 8293 (in relation to Section 17013
) provides that it is committed by any person who shall, without the consent of the owner of the
registered mark:
1. Use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered mark or
the same container or a dominant feature thereof in connection with the sale, offering for sale,
distribution, advertising of any goods or services including other preparatory steps necessary to carry
out the sale of any goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive; or
2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof
and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with
the sale, offering for sale, distribution, or advertising of goods or services on or in connection with
which such use is likely to cause confusion, or to cause mistake, or to deceive.
KPE and Petron have to show that the alleged infringer, the responsible officers and staff of Bicol Gas,
used Petrons Gasul trademark or a confusingly similar trademark on Bicol Gas tanks with intent to
deceive the public and defraud its competitor as to what it is selling.14 Examples of this would be the
acts of an underground shoe manufacturer in Malabon producing "Nike" branded rubber shoes or the
acts of a local shirt company with no connection to La Coste, producing and selling shirts that bear the
stitched logos of an open-jawed alligator.

Here, however, the allegations in the complaint do not show that Bicol Gas painted on its own tanks
Petrons Gasul trademark or a confusingly similar version of the same to deceive its customers and
cheat Petron. Indeed, in this case, the one tank bearing the mark of Petron Gasul found in a truck full
of Bicol Gas tanks was a genuine Petron Gasul tank, more of a captured cylinder belonging to
competition. No proof has been shown that Bicol Gas has gone into the business of distributing
imitation Petron Gasul LPGs.
As to the charge of unfair competition, Section 168.3 (a) of R.A. 8293 (also in relation to Section 170)
describes the acts constituting the offense as follows:
168.3. In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them the general appearance of goods of another
manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which
they are contained, or the devices or words thereon, or in any other feature of their appearance,
which would be likely to influence purchasers to believe that the goods offered are those of a
manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the
goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or
any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a
like purpose;
Essentially, what the law punishes is the act of giving ones goods the general appearance of the goods
of another, which would likely mislead the buyer into believing that such goods belong to the latter.
Examples of this would be the act of manufacturing or selling shirts bearing the logo of an alligator,
similar in design to the open-jawed alligator in La Coste shirts, except that the jaw of the alligator in
the former is closed, or the act of a producer or seller of tea bags with red tags showing the shadow of
a black dog when his competitor is producing or selling popular tea bags with red tags showing the
shadow of a black cat.
Here, there is no showing that Bicol Gas has been giving its LPG tanks the general appearance of the
tanks of Petrons Gasul. As already stated, the truckfull of Bicol Gas tanks that the KPE manager
arrested on a road in Sorsogon just happened to have mixed up with them one authentic Gasul tank
that belonged to Petron.
The only point left is the question of the liability of the stockholders and members of the board of
directors of Bicol Gas with respect to the charge of unlawfully filling up a steel cylinder or tank that
belonged to Petron. The Court of Appeals ruled that they should be charged along with the Bicol Gas
employees who were pointed to as directly involved in overt acts constituting the offense.1avvphi1
Bicol Gas is a corporation. As such, it is an entity separate and distinct from the persons of its officers,
directors, and stockholders. It has been held, however, that corporate officers or employees, through
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whose act, default or omission the corporation commits a crime, may themselves be individually held
answerable for the crime.15
Jose claimed in his affidavit that, when he negotiated the swapping of captured cylinders with Bicol
Gas, its manager, petitioner Audie Llona, claimed that he would be consulting with the owners of Bicol
Gas about it. Subsequently, Bicol Gas declined the offer to swap cylinders for the reason that the
owners wanted to send their captured cylinders to Batangas. The Court of Appeals seized on this as
evidence that the employees of Bicol Gas acted under the direct orders of its owners and that "the
owners of Bicol Gas have full control of the operations of the business."16

of the Office of the Provincial Prosecutor of Sorsogon in I.S. 2001-9231 (inadvertently referred in the
Resolution itself as I.S. 2001-9234), dated February 26, 2002. The names of petitioners Manuel C.
Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A.
Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. De
Castro, Geronima A. Almonite and Manuel C. Dee are ORDERED excluded from the charge.
SO ORDERED.

The "owners" of a corporate organization are its stockholders and they are to be distinguished from its
directors and officers. The petitioners here, with the exception of Audie Llona, are being charged in
their capacities as stockholders of Bicol Gas. But the Court of Appeals forgets that in a corporation, the
management of its business is generally vested in its board of directors, not its stockholders.17
Stockholders are basically investors in a corporation. They do not have a hand in running the day-today business operations of the corporation unless they are at the same time directors or officers of
the corporation. Before a stockholder may be held criminally liable for acts committed by the
corporation, therefore, it must be shown that he had knowledge of the criminal act committed in the
name of the corporation and that he took part in the same or gave his consent to its commission,
whether by action or inaction.
The finding of the Court of Appeals that the employees "could not have committed the crimes without
the consent, [abetment], permission, or participation of the owners of Bicol Gas"18 is a sweeping
speculation especially since, as demonstrated above, what was involved was just one Petron Gasul
tank found in a truck filled with Bicol Gas tanks. Although the KPE manager heard petitioner Llona say
that he was going to consult the owners of Bicol Gas regarding the offer to swap additional captured
cylinders, no indication was given as to which Bicol Gas stockholders Llona consulted. It would be
unfair to charge all the stockholders involved, some of whom were proved to be minors.19 No
evidence was presented establishing the names of the stockholders who were charged with running
the operations of Bicol Gas. The complaint even failed to allege who among the stockholders sat in the
board of directors of the company or served as its officers.
The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C. Espiritu, Jr. as
the registered owner of the truck that the KPE manager brought to the police for investigation
because that truck carried a tank of Petron Gasul. But the act that R.A. 623 punishes is the unlawful
filling up of registered tanks of another. It does not punish the act of transporting such tanks. And the
complaint did not allege that the truck owner connived with those responsible for filling up that Gasul
tank with Bicol Gas LPG.
WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of Appeals in CA-G.R. SP
87711 dated October 17, 2005 as well as its Resolution dated January 6, 2006, the Resolutions of the
Secretary of Justice dated March 11, 2004 and August 31, 2004, and the Order of the Office of the
Regional State Prosecutor, Region V, dated February 19, 2003. The Court REINSTATES the Resolution
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